The Voluntary Carbon Market Explained

The VCM is where private individuals, corporations and other actors issue, buy and sell carbon credits outside of regulated or mandatory carbon pricing instruments. The VCM aims to mitigate climate change by creating space for private actors to finance activities that remove greenhouse gas (GHG) emissions from the atmosphere or reduce GHG emissions associated with industry, transportation, energy, buildings, agriculture, deforestation, or any other aspect of human life.

Governments engage with the VCM by instituting policies, regulations, and safeguards that influence VCM activities, creating enabling environments that facilitate VCM projects or programs, and sponsoring VCM projects or programs within their territories.

The VCM is governed by private standards and not by international or national regulatory bodies. However, projects and programs developed under the VCM may support countries in achieving their commitments under the Paris Agreement. To do so, VCM activities will need to comply with the Paris Agreement Article 6 rules that were finalized in November 2021.

Transparent and comparable greenhouse gas (GHG) accounting is essential to ensure the credibility of VCM activities. Robust GHG accounting follows common principles and is supported by credible and robust standards. GHG emission reductions and removals from VCM projects are accounted for at the activity level and used to meet climate (e.g., net zero or carbon neutrality) targets of companies. Governments that engage in jurisdictional programs, in particular in Reducing Emissions from Deforestation and Degradation Plus (REDD+), account for GHG emission reductions and removals associated with land use change in a certain area.

A carbon credit is a tradable unit that represents one ton of greenhouse gas (GHG) emissions reductions or removals. Carbon credits in the VCM are generated by the activities of projects and programs that are certified by standards. The credits are purchased by companies, individuals, and other entities to offset GHG emissions or otherwise contribute to emissions abatement. The prices of carbon credits are determined by the types and quality of VCM activities and the demand for credits from those activities.

A high-quality carbon credit accurately or conservatively represents greenhouse gas (GHG) emission reductions or removals achieved through VCM activities. VCM projects and programs that generate high-quality carbon credits maximize climate, socio-economic and ecological benefits for local communities and ecosystems as appropriate to the project type and sector. Thus, high-quality carbon credits are the result of well-informed decisions made during project design and development following guidance from reputable carbon standards and in alignment with host country regulations.

Carbon standards are central to the operation of the VCM. Carbon standard organizations provide and administer the rules and requirements for VCM projects and programs, certify and issue carbon credits, and facilitate the trade in carbon credits.

Carbon credits are tradable, certified greenhouse gas (GHG) emission reductions or removals. Carbon standards issue carbon credits to registry accounts. Each VCM carbon credit represents one ton of GHG emissions removed from the atmosphere or one ton of GHG that has not been emitted, as compared to a baseline.

Carbon credits in the VCM are used to voluntarily offset greenhouse gas (GHG) emissions beyond any offsetting or GHG reductions and removals mandated by policy. Carbon credits may also be purchased and retired without offsetting, which drives reductions in overall GHG emissions and may enable buyers to claim other social and environmental contributions.

Carbon rights are important in the VCM because they determine who can participate or benefit from VCM activities. Carbon rights are assigned based on control of an asset or control of a mitigation activity. The recognition of carbon rights is particularly important for Indigenous Peoples and local communities (IPLCs) who are the statuary or customary owners of many landscapes where VCM activities are developed. IPLCs may exercise their rights in the VCM as project proponents or partners, through benefit sharing arrangements, and through consultation processes.

Local communities, Indigenous Peoples, landowners, and other stakeholders involved in carbon projects or programs may receive benefits directly from the sale of carbon credits or through benefit sharing arrangements. Benefit sharing arrangements identify how monetary and non-monetary benefits will be allocated to which stakeholders and how the distribution will take place.

Nature-based solutions (NbS) are actions to protect, sustainably manage, and restore ecosystems with their benefits for humans and nature. Identified as one of the most important and cost-effective tools to mitigate climate change while providing important social, economic, and ecological benefits, NbS could deliver about one-third of the emission reductions and removals needed to keep warming below 1.5°C.

The VCM incorporates Reducing Emissions from Deforestation and Degradation plus (REDD+) through the certification and trade of carbon credits that are generated by projects and programs that seek to reduce deforestation. Carbon standards have developed methodologies to certify certain types of REDD+ activities, including standards focused specifically on the certification of jurisdictional-scale REDD+.

Countries may want to integrate Reducing Emissions from Deforestation and Degradation (REDD+) activities across different scales in order to support jurisdictional programs and Voluntary Carbon Market (VCM) projects. ‘Nesting’ provides countries with a toolbox for harmonizing and supporting REDD+ at different investment and governance levels.