VCM will play an essential role in unlocking corporates' increased climate ambitions, but not without risk.
There has been an exponential increase in climate finance flowing into the voluntary carbon market, with transacted value estimated to have reached more than $1.2bn in 2022, according to Trove Research. McKinsey estimates that demand for carbon credits in the VCM could increase by a factor of 15 or more by 2030, and by a factor of up to 100 by 2050.
Companies are not required to participate in the VCM by law, but do so on a voluntary basis, often in furtherance of their net zero or other form of climate change mitigation targets.
The VCM has been met with controversy in recent years, for two main reasons. Firstly, the environmental integrity of certain types of carbon credits has been called into question. This is due in particular to concerns around permanence, additionality, over-issuance, double-counting and leakage. Issues of this nature cast doubt on whether carbon credits represent the greenhouse gas mitigation benefits that they purport to do. Secondly, certain stakeholders have raised concerns regarding the end-use of carbon credits: they argue that companies may be relying on carbon credits in place of direct GHG reductions within their value chain. Concerns around integrity and end-use increase legal and reputational risk for companies, in particular the risk of greenwashing allegations.
To mitigate some of these identified risks, companies may wish to consider only purchasing carbon credits that are issued in accordance with reputable, up-to-date methodologies, and that any statements made by companies in their corporate disclosures or marketing materials in reliance on carbon credits are clear, transparent, well-substantiated and supported by the best available scientific evidence.
It is recommended that companies learn to distinguish high-quality from low-quality carbon credits. The level of integrity risk associated with credits traded on the VCM will depend on certain factors, including the jurisdiction, project phase (i.e., pilot phase, more mature lifecycle) and type of the underlying carbon offsetting project. Older vintage credits generally present higher integrity risks than newer vintage credits. And, generally speaking, the cheaper the carbon credit, the more likely it is to pose an integrity risk.
As for end-use of carbon credits, companies may wish to consult guidance published by various organisations, which stress that companies should address direct GHG emissions in their value chain as a first order priority and use carbon credits as a secondary means to mitigate GHG emissions.
Finally, companies purchasing carbon credits could exercise caution as to the impact that the underlying projects may have on the environment and human rights. Companies may consider conducting due diligence to ensure that such adverse impacts do not, and have not, taken place, and contractual safeguards may be built into sale and purchase agreements to offer further protections.
The regulation and governance of the VCM is evolving rapidly. The Integrity Council for the Voluntary Carbon Market has published a set of core carbon principles and assessment framework for ensuring the environmental integrity of carbon credits that seeks to bring greater uniformity to standards within the VCM. Several exchanges globally, including the London Stock Exchange, now offer the ability to list and trade carbon credit-related products. And national regulators are considering ways of bringing the VCM within the scope of regulatory frameworks.
Companies purchasing carbon credits are advised to monitor these developments closely to ensure that their approach is in line with international best practice and regulation.
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