Reimagining the Voluntary Carbon Market

Introduction

Global emissions of carbon dioxide are on the rise and are creating lasting impacts on the planet. Action is required if the world wants to mitigate the damage caused by global warming, and the time we have to take steps towards resolution is running out. This article takes a look at a possible solution to reducing the amount of greenhouse gas emissions in the atmosphere by strengthening the voluntary carbon market. Innovative carbon capture industries are creating the technology to combat climate change, and the market they participate in should be strengthened in order to foster the necessary growth, which will lead to a cleaner, healthier, and safer future.

Establishing Climate Change Goals

In 2015, the United Nations ratified an essential piece of international legislation to advance the seventeen Sustainable Development Goals, precisely “climate action” and “sustainable cities and communities.” This critical piece of legislation is the well-known Paris Agreement. The primary scope was the heating of Earth, and the goal was, and still is, to prevent the average temperature increase from exceeding one and a half degrees celsius. Since the agreement, there has been a widespread effort to reduce carbon emissions.[1] However, a recent report by the United Nations Climate Change sector stated that “these efforts remain insufficient” in meeting the goal of halting the rising average temperature by the end of the century. The progress of the net-zero emissions target is insufficient in keeping pace with the Paris Agreement, which has led to the creation of an industry in and carbon capture. Carbon capture is the process of pulling carbon dioxide out of the atmosphere. This industry has a role in the voluntary carbon market, and changes need to be made to improve the market, which will foster growth and scale the industry to place the world back on track with the Paris Agreement.[2]

The world currently sits in an industrial era that has developed with carbon and fossil fuels as driving energy sources.

Among the top carbon-producing countries is the United States, producing about 5,222 million metric tons of emissions in 2020.[4] Dividing this number by the total population of the United States is about 25 tons per person. To combat the worst effects of global warming, the number produced would need to be around two tons per person. It is highly improbable that every American will completely switch lifestyles overnight to adjust to an average of two tons per person. Furthermore, there exist industries, such as steel and cement, where it is significantly more challenging to avoid producing emissions.[5] Hence, the concept of pulling carbon out of the atmosphere is essential to combat the continual production of carbon emissions.

Carbon Capture and the Market

In recent years, there has been a wave of innovation and growth in the carbon capture industry, with various technological and natural solutions being presented. However, it has proven difficult for these companies, as well as the industry as a whole, to scale up their processes due to high costs from new and developing technology and the valuation of the emission credits, an indicator of how many tons of carbon a company can produce, which are exchanged in the voluntary carbon market. Most direct-air capture companies face the cost of several hundred dollars per ton of carbon captured. To be appealing to investors and more effective, that number needs to drop below at least one-hundred dollars to be effective in the voluntary carbon market.[6]

A voluntary carbon market is a system of buying, selling, and trading emission credits among companies, some of which are net-positive and some net-negative in their emissions production. Voluntary carbon markets date back to the early 2000s, following the ratification of the Kyoto protocol, and have been used since to put a price on carbon.[8] Putting a price on carbon is essential because it is a negative externality — a byproduct of production and consumption that has a negative impact (cost) on society and the environment — and establishing a price would make companies privately take on these costs themselves or “feel” the cost through their pockets.

Prices within the voluntary carbon market in the United States are crucial in signaling how much the cost of emissions is worth in terms of monetary value. Yet, the federal government does not determine them. The federal government of the U.S. solely determines how much one ton of carbon should cost and then sets the emission goals for the country that companies must abide by as part of America’s climate initiatives. This approach by the government is considered laissez-faire — there is limited regulation, and the market interacts relatively freely — making it easier for a price to be set rather than having to come up with their own price through a more direct manner, such as a carbon tax.[9]  Although price-setting is easier through this method, changes need to be made to the market, which requires more general regulation from the federal government to foster the necessary growth of carbon-reducing firms.

Information

The first significant change that must be made within the voluntary carbon market is the information in the market. Carbon is challenging to price because it is frequently asked, “Well, how much is one ton of carbon worth?” The market can become better informed by providing sufficient and coherent definitions surrounding the topic, allowing it to grow from these definitions. Defining also means differentiating between different types of carbon capture based on the permanence and durability of carbon removal. For example, a mechanical solution that sequesters carbon dioxide from the atmosphere and stores it may be able to store that carbon for longer than a short-term natural solution. These two methods are quite different in their risk, effectiveness, and permanence, and they should not be valued as the same within the market.[10]

Information and clear-cut definitions also regulate the quality of carbon solutions entering the market. As previously mentioned, durability and effectiveness vary among carbon dioxide removal methods. A quality standard to join the market ensures that criteria are being met on all fronts of the varying methods. From the definitions, buyers can purchase credits that fit their preferences regarding climate impact, whether buying many short-term solutions over a long-term solution, a long-term solution over many short-term solutions, or a combination of both.[11] These pieces of clear information that should be known in the market, such as data and net-zero offsets, should also be transparent to the public. The report will provide more robust climate solutions, and buyers and sellers can be held accountable.

Entry and Trust

Another significant change that should be made to the voluntary carbon market is the accessibility to enter the market and promoting all industries to enter into the market. There are two primary sides: the carbon removal and carbon producing. Each must build in the market together in order to scale the industry effectively. By having those already in the market work together repetitively, it builds mutual trust between the two sides. The trust can then grow into further interaction that increases the social benefit, and be an example for those considering entering the market.

Trust can also be established before any entry is made into the market on the carbon reduction side. Verifying the efficacy of the methods entering the market increases the efficacy of the market itself. This can be accomplished by streamlining the verification through a trusted third party. The third party should make public its verification process and the standards that need to be met. The parties looking to buy the credits can analyze this method and determine if it is something they want to buy into.[11] An immediate evaluation and creation of trust is crucial to enacting change rapidly because the window to take action is closing and waiting for the market to build by itself will miss the window.

One last improvement that can be made to the voluntary carbon market in progressing the offset of carbon emissions is gaining the support of policymakers and becoming recognized globally. Bringing awareness to the existence of this voluntary market brings in more participants looking to push forward innovation and abate emissions. It is also crucial for those leading governments around the world to be conscious of the market so as to generate policy that supports offsetting emissions and the growth of carbon capture. In the United States specifically, gaining bipartisan support can be difficult in the process of creating legislation, but the market is open to a wide variety of methods where almost all members of congress can back a capture method that is effective and is popular among their constituents.

Action to improve the market can play a massive role in altering the current path to a warmer, more dangerous Earth. Using this market as a tool among other solutions to reduce and capture emissions will provide a cooler future to all populations on the planet.

Citations

[1] “Paris Agreement | Department of Economic and Social Affairs.” United Nations, United Nations, https://sdgs.un.org/frameworks/parisagreement.

[2] Hook, Leslie, and Camilla Hodgson. “Carbon Removal 'Unavoidable' as Climate Change Alarm Bells Ring.” Subscribe to Read | Financial Times, Financial Times, 6 Apr. 2022, https://www.ft.com/content/3df3f408-57a0-4718-b8d6-f8629118b7eb.

[3] Ritchie, Hannah, et al. “CO2 Emissions.” Our World in Data, 11 May 2020, https://ourworldindata.org/co2-emissions.

[4] “Inventory of U.S. Greenhouse Gas Emissions and Sinks.” EPA, Environmental Protection Agency, 2020, https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks.

[5] Shannon, Noah Gallagher. “What Does Sustainable Living Look like? Maybe like Uruguay.” The New York Times, The New York Times, 5 Oct. 2022, https://www.nytimes.com/2022/10/05/magazine/uruguay-renewable-energy.html.

[6] Thorne, James. “Carbon Capture Is All the Rage. Can These Startups Make It Profitable?” PitchBook, 29 Mar. 2021, https://pitchbook.com/news/articles/carbon-capture-is-all-the-rage-can-these-startups-make-it-profitable.

[7]Cavala, Klaudija. “Sundsvalls Största Industrisatsning Går Vidare in I Nästa Fas.” Liquid Wind - EMPowering Our Future., Liquid Wind - EMPowering Our Future., 28 Oct. 2022, https://www.liquidwind.se/news/sundsvalls-storsta-industrisatsning-gar-vidare-in-i-nasta-fas.

[8] Favasuli, Silvia, and Vandana Sebastian. “Voluntary Carbon Markets: How They Work, How They're Priced and Who's Involved.” S&P Global Commodity Insights, S&P Global Commodity Insights, 10 June 2021, https://www.spglobal.com/commodityinsights/en/market-insights/blogs/energy-transition/061021-voluntary-carbon-markets-pricing-participants-trading-corsia-credits.

[9] “Cap-and-Trade.” Legal Information Institute, Legal Information Institute, 2022, https://www.law.cornell.edu/wex/cap-and-trade

[10] Rubin, Ben, and Jennifer Brown. “State of the Science.” Institute for Carbon Removal Law & Policy - American University, 2021, https://www.american.edu/sis/centers/carbon-removal/.

[11] Moolgavkar, Radhika, et al. “Unlocking Carbon Dioxide Removal with Voluntary Carbon Markets.” Carbonbusinesscouncil.org, Sept. 2022, https://static1.squarespace.com/static/6054db4efc6c3622f12682fe/t/63299dd2cd504e71bb2e7d64/1663671763033/unlocking+carbon+dioxide+removal+with+voluntary+carbon+markets.pdf.