As businesses work to decarbonise, carbon credits offer a flexible, immediate and critical mechanism that can help to compensate for greenhouse gas emissions at scale.
“Carbon credits and the voluntary carbon market enable businesses to make an impact today, compensating for emissions that can’t yet be avoided,” says Nick Osborne, General Manager of Carbon and Environmental Products Trading at Shell.
While carbon credits should not be seen as a replacement for avoidance or reduction measures, they are an essential decarbonisation lever for the world to achieve the goals of the Paris Agreement. For many, carbon credits will be a necessary tool to offset emissions they cannot get rid of by other means.
Demand for carbon credits is estimated to increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050, according to estimates by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) with knowledge support from McKinsey. Overall, the market for carbon credits could be worth upward of $50 billion in 2030.(1)
Yet in recent years, growth has slowed down and the VCM has been rocked by controversies that have created a crisis of confidence.
Last year, the global carbon credit market plateaued at around US$1.4 billion. Retirements of carbon credits, or credit demand, was flat to 2023 figures, while average spot prices fell by 20%.(2)
Trust is critical
One of the most challenging facets of the VCM is that it is fragmented and does not have to comply to uniform global standards.
This has led to three levels of concern, sums up Andrea Abrahams, Managing Director of Voluntary Carbon Markets at the International Emissions Trading Association (IETA).
“There are concerns of integrity - that a credit is a credit -; concerns over the use of that credit; and then challenges over legal claims which impact reputation,” she explains. “You must be able to trust the seller when they say it is a high-quality carbon credit; how to use this credit and the contracts being drawn.”
Certification standards are key to the credibility of the sector, agrees Osborne. “You have to be assured that carbon credits have the value and the impact you say they do.”
Being able to understand the layers of quality assurance in the market is one of the most fundamental steps.
At a program, project and methodology level there are global standard-setting bodies such as Verra and Gold Standard that set rules and requirements, as well as auditing procedures, for carbon credit projects to ensure quality.
In addition, over the past few years, several initiatives have been created to address concerns over carbon-project integrity. The Integrity Council for the Voluntary Carbon Market, or ICVCM, is a non-profit, independent governance body, that focuses on top level methodology-level assessments. In 2023, it launched its Core Carbon Principles, which are a set of 10 principles that define what is required for a carbon credit to be of high integrity, with a focus on its governance, emissions impact and sustainable development.
Within the aviation industry, there is the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), developed by a UN agency designed to offset any emissions from international aviation that are above 85% of their 2019 levels. To ensure the environmental integrity of CORSIA, the International Civil Aviation Organisation has established criteria for Eligible Emissions Units. These units must meet rigorous environmental criteria including requirements for additionality, permanence, accurate quantification, tracking and auditing. These principles are guided by existing trading mechanisms and carbon offset certification standards.
Meanwhile, Verra has also made a series of enhancements to a number of their methodologies to enhance trust in the carbon credits it issues.
A handful of carbon project ratings agencies have also sprung up in recent years. Ratings are helpful to companies as they involve highly technical calculations that span many different sectors, explains Donna Lee, Co-Founder at carbon credit ratings agency Calyx Global. “From oxidation factors in landfills to non-renewable biomass for cookstoves or geospatial expertise for forestry projects, the level of expertise and variability can be very high,” she says.
“What companies need to do is to get educated to understand what these different organisations are about,” continues Calyx’s Lee. “The worst thing in my mind is inaction.”
It is heartening to know that there are early signs pointing towards a trend of increasing integrity in carbon credits. According to a study by MSCI Carbon Markets from September 2024, there has been a gradual shift in retired credits moving towards higher-integrity projects. Furthermore, new projects that are being developed also appear to be, on average, of higher integrity.(3)
“Despite the challenges, what we see is constant progress,” says Osborne. “We see improvements in terms of quality assessments; in the ability to use credits and increasingly regulators looking to the VCM to use potentially in the future.”
What is also encouraging is that companies seem keen to participate in the VCM. In a recent study conducted by Shell, some 65% of companies polled viewed voluntary carbon offsets as a necessary lever to reach their emission targets.
“I really think corporates don’t want to get left behind,” says IETA’s Abrahams. “It’s better to take some risk, get your toes in the water, work out how to do this, than find yourself outside looking in.”
Taking action
To be sure, the past few years have proven that the VCM is not perfect. However, these setbacks have offered a great opportunity for the market to reassess and reset.
“A lot of this market correction is actually healthy,” says Calyx’s Lee. “It's what we needed for this market to mature — to improve the market and help it grow.”
In some ways, the challenges have spurred innovation, says IETA’s Abrahams.
“If we were all complacent, it doesn’t really drive innovation to the same extent,” she says citing examples such as insurance products; blockchain; drones and LiDAR (Light Detection and Ranging).
2025 is going to be a critical year as countries will be publishing their nationally determined contributions and will be judged on their progress from the last round in 2020.
Furthermore, as countries start to voluntarily cooperate to reduce greenhouse gas emissions, under Article 6 of the Paris Agreement, this also could lead to stronger regulatory alignment and more scrutiny in the voluntary carbon market.
As the voluntary carbon market develops and continually strives to maximise its impact, while upholding integrity, there exists a great potential to achieve the scale needed to help make the transition.
“If you look at the ability to take action today, carbon credits are the thing that you can do right now,” says Shell’s Osborne. “The potential for action today is enormous.”