From setbacks to solutions: Forecasting new demand in the voluntary carbon market

As climate change speeds up, finding effective solutions is more urgent than ever. When it comes to financing systemic solutions, the Voluntary Carbon Market (VCM) has emerged as a powerful tool for mobilizing financing for projects ranging from restoring forests to advancing carbon capture and storage solutions. High-quality carbon projects are essential not only in our journey to net-zero emissions but for supporting a just transition as well.

And yet, building a new market isn’t easy. The past few years have shown just how volatile and challenging this market can be. The VCM began the decade with remarkable growth, hitting a record $2 billion in 2021 — four times the previous year's total. Then came last year’s declines, with year-over-year volume dropping by 56 percent, and total reported transaction value shrinking 61 percent, to $723 million.   

The market also faced reputational challenges. Concerns regarding the quality and integrity of particular carbon credits, along with media coverage of unethical or ineffective carbon projects, eroded public trust. Meanwhile, watchdogs questioned the accuracy of certain carbon methodologies in measuring actual emissions reductions.

Talk about a reality check. Despite these challenges, significant opportunities for growth and innovation have appeared on the horizon. Here, we share our VCM forecast for 2024 and beyond.

New guidelines reshaping the carbon market landscape

Market credibility is already improving due to new guidelines and evolving corporate expectations regarding high-quality carbon credits.

The Integrity Council for the Voluntary Carbon Market (ICVCM) has rolled out its Core Carbon Principles (CCPs) and recently labeled the first carbon credits under these guidelines. Built on three pillars — effective governance, emissions impact and sustainable development — these principles are designed to help market participants to identify high-quality credits more easily.

Additionally, the Voluntary Carbon Market Initiative (VCMI)'s Claims Code of Practice has significantly boosted buyer confidence in the voluntary market’s quality and integrity. The Claims Code provides a clear and verifiable way for companies to make credible claims about their voluntary use of carbon credits. To make these claims, companies must comply with VCMI's foundational criteria, meet quality thresholds set by ICVCM’s CCPs, and follow the VCMI Monitoring Reporting and Assurance (MRA) Framework for disclosure requirements and third-party verification.

The US Government's recent VCM guidelines have also added to the growing confidence in the markets. Although not legally binding, these guidelines reflect the current administration’s belief that high-integrity voluntary carbon markets are crucial for achieving global net-zero emissions. The seven principles they outline address various facets of the VCM, including supply, demand and transactions, laying the groundwork for the development of further legislative action in this area. 

Growing demand for high-quality carbon credits

These positive developments couldn't come at a better time. The demand for quality in the VCM is more pressing than ever. To meet the Paris Agreement targets, nearly 200 countries have pledged work to limit global temperature rise to 1.5 degrees Celsius. To achieve their ambitious goals, these countries are implementing policies that push companies to reduce their carbon footprints. 

Many businesses, in turn, are setting their own ambitious climate targets. While direct emissions reductions are crucial, many companies find they cannot fully eliminate their carbon footprint in the short term. This is where the VCM plays a vital role, allowing companies to bridge the gap between their current emissions and their net-zero goals. 

Innovative government initiatives and advance market commitments from groups such as Frontier and Symbiosis are also working to scale the VCM. Earlier this year, the U.S. Department of Energy (DOE) launched its carbon removal (CDR) purchase program, inviting organizations working to reduce their carbon footprint to make larger purchase commitments in the VCM. Google was the first company to match the DOE's pilot effort, buying $35 million in CDR credits, using both nature-based and technology-based solutions over the next 12 months. 

VCM's vital role in achieving net-zero goals

After a slow year in 2023, analysts now project the VCM to grow significantly, with estimates ranging from $10 billion to $250 billion by 2030. A survey by the Science Based Target Initiative (SBTi) reports that 65 percent of companies plan to increase their purchase and retirement of carbon credits in the next five years, indicating a growing corporate commitment to credible carbon credits.

Having faced its share of challenges, the future of the VCM looks bright. Now is the time to channel more finance to more projects, producing more high integrity credits buyers can trust.

That will require increasingly stronger guidelines from both governmental and industry bodies. Governments will further need to support VCM actors in aligning their activities with domestic policies by clarifying the rules of engagement in the VCM in their country and indicating where VCM finance can best complement public policy. 

The goal must be to provide stable investment environments that assure VCM developers, investors and beneficiaries of the permanence of climate and socio-environmental outcomes. Such steadfast focus on quality and stringent monitoring will ensure that only high-integrity carbon credits contribute to the market, rebuilding trust and ensuring that the VCM delivers on its promise of real and measurable climate action.

As more companies seek credible carbon compensation solutions as part of their holistic net-zero strategies, a strong VCM will continue to expand and evolve. Continued collaboration and adherence to high standards are vital. By each of us playing our part, we can significantly impact global climate goals. 

The road ahead is challenging, but with the right measures in place, the VCM can emerge stronger, more resilient,and better equipped to support the global transition to a sustainable, net-zero future.