A Beginner’s Guide to Navigating Carbon Markets

As we explored in our last blog post, businesses often offset their residual and unavoidable emissions by investing in projects that reduce or remove CO2 from the atmosphere.

Getting to grips with carbon markets and offsetting projects and how to best approach them can be overwhelming at first. In this blog post, we aim to make carbon markets more approachable by exploring the history of these markets and the important role they play in allowing businesses to offset their residual emissions.

Understanding the origins of carbon markets

In 1997, the Kyoto Protocol was founded by a group of developed countries that pledged to reduce and limit their greenhouse gas (GHG) emissions as an early means of combating irreversible climate change. This led to the creation of three separate schemes, including the Clean Development Mechanism (CDM). The CDM is an example of a compliance carbon market, where countries that failed to meet mandatory emission reduction targets could purchase emissions from projects in developing countries that reduce or remove emissions.

What is the difference between the compliance and voluntary carbon market?

Compliance markets are used by companies that are legally mandated to adhere to government emission trading schemes to drive emission reductions. For example, The EU Emission Trading System is one of the largest schemes in the world, and it is based on emission allowances which are traded on exchanges. It is important to note that these allowances do not represent any emission reduction or removal.

In contrast, the voluntary carbon market (VCM) brings together projects that reduce or remove emissions with companies that want to support these projects as a way to mitigate their carbon footprint. It is important to note that companies choose to purchase carbon offsets from the VCM willingly. They are not legally bound to do so (unlike in compliance schemes).

The importance of the voluntary carbon market

Companies tend to purchase offsets from the voluntary carbon market to address their residual emissions or to achieve other sustainability objectives such as carbon neutrality. But it’s important to be aware that offsetting is not a ‘free pass’ to emit. You should view it as a tool to address those emissions that cannot be reduced. If you’re undergoing your own decarbonisation efforts, it’s also a useful way to complement existing efforts.

VCMs are an important way of providing funding to climate and sustainability projects. Beyond the obvious climate benefit, there are a host of other positive outcomes for local communities, typically in emerging economies, including improved employment and biodiversity protection. More recently, the market has also become a catalyst for the development of new carbon removal technologies such as concrete mineralisation, as these projects can secure demand which enables them to develop and scale their technology.

What makes an environmental project viable for offsetting business emissions?

The voluntary carbon market is not overseen by a single overarching body; however there are a number of globally recognised standards including Verra, an organisation building better quality assurance across VCMs, and Gold Standard, a body founded by WWF and other NGOs to ensure offsetting projects featured environmental integrity while contributing to sustainable development. Investing in projects under the watchful eye of standards like Verra, The Gold Standard and others are ultimately more likely to be successful in reducing or removing emissions.

A compliance market which is mandated by governments.

When it comes to delving into the efficacy of offsetting projects, it’s important to understand key areas of diligence, including but not limited to additionality, leakage, and permanence. If a project doesn’t meet stringent criteria surrounding these characteristics, it cannot be verified, or registered as a source of offsets.

A project is additional if it would not have gone ahead without the revenue from the sale of carbon offsets. Leakage, in contrast, refers to whether a project would simply shift emissions elsewhere, while permanence explores how long carbon remains out of the atmosphere as a result of the project.

There are many other factors which may influence which offsetting projects businesses choose to invest in. Check out our previous blog post to learn more about this topic.

Where do we go from here?

When used properly, high quality carbon offsets are an essential tool if you’re a business looking to address residual emissions as part of a net-zero target under the Science Based Targets. Offsetting can also be used on the path to net-zero to address emissions whilst decarbonisation efforts are underway, as outlined in the ‘High Ambition Path to Net-Zero’.

The voluntary carbon market helps fund carbon offsetting projects that are having a positive impact on carbon levels in the atmosphere, yet the marketplace still has room to evolve into something more transparent and effective than the way it currently operates today. Modern discourse surrounding offsetting should no longer revolve around whether offsets are a viable weapon in the war against climate change, but rather how we can improve accountability, effectiveness and permanence.

With VCM projects varying considerably in quality and impact, working alongside offsetting experts can help to create confidence that any investments are made to pre-vetted high-quality offsetting projects.

Next: We break down types of carbon project

In our next blog post, we’ll cover the types of carbon offsetting projects that can be purchased on carbon marketplaces to address the impact of any residual business emissions.