Concerns over effectiveness, transparency and greenwashing have seen the credibility of credits tied to emissions plummet in the past decade. We look at how public and private stakeholders are working to safeguard integrity.
With rising concerns that climate targets will be missed, carbon markets are set to play an integral role in accelerating efforts towards reaching net zero. Carbon markets function as both mandatory ‘compliance’ emissions trading schemes, regulated by national or regional carbon reduction, and as voluntary programmes – where participants purchase carbon credits to help them reach mitigation targets, such as carbon neutrality or net zero.
Despite the voluntary trading of carbon credits increasing significantly in recent years, both the objectives of voluntary carbon markets [VCMs] and their ability to deliver promised carbon savings have equal numbers of supporters and detractors. The former argue VCMs are essential for increasing investment in a wide range of environmental projects and represent the only realistic way organisations can reach net zero. Detractors raise red flags over opaqueness and greenwashing schemes, which distract from more beneficial carbon reduction measures. As compliance markets and VCMs begin to converge, international efforts to boost confidence in the market are gathering traction.
The future growth of VCMs, characterised by integrity, confidence and effectiveness, is reliant on the use and awareness among all market players of governance tools and approaches that promote quality and accountability. Accredited conformity assessment, which already underpins compliance carbon markets, will therefore play a critical role in the development and scaling up of trusted and impactful voluntary carbon trading.
Regulated carbon trading
Emissions trading markets (aka ‘cap and trade’ schemes) came to prominence in 1997 with the signing of the Kyoto Protocol by 192 nations. Recognising that developed nations are largely responsible for increased greenhouse gas [GHG] emissions levels, the Kyoto protocol extended the 1992 United Nations Framework on Climate Change by setting binding emissions reduction targets for 37 industrialised countries and economies in transition.
Article 17 of the Kyoto Protocol introduced flexible mechanisms for carbon to be traded between nations. Due to a number of evolving economic, environmental and political challenges, it took eight years of development before the world’s first carbon market was born with the launch of the European Union Emissions Trading System [EU ETS] in 2005.
This was followed by adoption of carbon trading schemes in several US states and Canadian territories, including the Regional Greenhouse Gas Initiative and the cross-border Western Climate Initiative. Both the UK Emissions Trading Scheme and the Chinese National Emission Trading System came online in 2021, creating a global network of emissions trading schemes. Utilising a ‘cap and trade’ system, these compliance carbon markets are mandatory for sectors under a specific regulatory regime.
Carbon markets are big business, with a report by The London Stock Exchange Group putting the value of the globally traded carbon dioxide at 881 billion Euros for 2023, representing around 12.5 billion metric tons of carbon permits. The EU ETS remains the world’s most valuable carbon market, accounting for over 85% of the global total . Governments and economic analysts recognise these markets have the potential to grow significantly as nations strive to reach net zero and other environmental goals .
Additional voluntary avenues
Initially viewed as a measure to plug an investment gap, VCMs came to the fore following the near collapse of the United Nation’s Clean Development Mechanism [CDM, part of the Kyoto Protocol] in 2012 . Despite attracting $215billion of investment in more than 45,000 projects in 75 countries and lowering carbon emissions by one billion tonnes, the value of carbon credits traded under the CDM plunged from $20 to less than $3 per unit.
Recognising the importance that voluntary measures play in contributing towards environmental goals across all economies, Article 6 of 2016’s Paris Agreement was ratified by nearly 200 countries at COP29 in November 2024, following several years of negotiations. The rules for a centralised carbon market are contained in Article 6.4, with Article 6.2 offering clarity over how the country-to-country trading of carbon credits will be authorised, registered and tracked.
Together these provide a mechanism for countries, companies and individuals to trade carbon credits voluntarily to help them meet emissions reduction targets. And today VCMs can be considered a valuable tool for companies to develop and implement net zero and climate transition plans in a way that reflects their decarbonisation journey, understanding, capabilities and industry context. They are also key to securing investment in developing and emerging nations, who historically may have otherwise struggled to attract private investment.
In Europe, approximately half of GHG emissions are regulated, with companies using VCMs to manage their residual emissions. The shift towards voluntary measures looks set to increase, with Citi Group identifying that 70% of all finance needed to plug the $1.7 trillion dollar climate investment gap needs to come from the private sector .
Scaling voluntary trading
The Taskforce on Scaling Voluntary Carbon Markets estimates that the volume of carbon credits traded on VCMs needs to grow to 1.5-2.0 billion tonnes of carbon dioxide per year by 2030, rising to between 7-13billion tonnes of carbon dioxide by 2050. In financial terms, Morgan Stanley predicted in 2023 that the annual VCM market has the potential to expand to $100billion by 2030 and could reach $250billion by 2050.
Illustrating the rapidly expanding potential of VCMs, later the same year Barclays estimated that the $250billion per year level could be met by 2030, growing to £1.5trillion annually by 2050 . However, despite more than tripling in volume since 2017, to 164 million tonnes of equivalent carbon dioxide, the use of VCMs largely stagnated in 2023. This is partly owing to a lack of clarity as to how they will dovetail with compliance markets, and partly due to significant integrity and credibility concerns.
Credibility concerns and integrity considerations
Whereas mandatory and compliance carbon markets are regulated by government policies, VCMs provide organisations with a platform for purchasing carbon credits through their own initiative and evaluation, often making performance claims. Whilst the lack of centralisation has the advantages of flexibility and speed of development, the fragmented and complex nature of VCMs, on both the demand and the supply side (like carbon credit generating projects and programmes) means quality and integrity issues are affecting the entire market.
The historically varying standards and methodologies used globally to evaluate and certify projects has made it difficult to gauge whether the credits on offer are a true reflection of emissions reduced. Concerns over the legitimacy of offsets have been further exacerbated by a lack of guidance, and in some cases transparency, on how carbon credits contribute to the achievement of environmental goals, and in some cases, the lack of robustness and transparency of the claims that organisations make. Together this has contributed to a rise in climate-related litigation, with LSE identifying over 80 cases of ‘climate washing’ filed against companies globally between 2015-2022.
Some of the reforms and actions needed to increase the adoption, integrity and potential impact of VCMs were discussed by a range of stakeholders at the inaugural Voluntary Carbon Market Day, part of Climate Week 2024 in New York. US Deputy Treasury Secretary Wally Adeyemo highlighted the potential of VCMs ‘to create both economic and climate opportunities by channelling private capital to high-impact and cost-effective climate projects across technologies, ecosystems and geographies’.
Adeyemo also emphasised ‘the importance of supply integrity – the idea that credits should represent real emissions reductions or removals and avoid harm’ as well as the need to improve a currently fragmented market with more transparency, particularly around pricing and transaction data. Recent announcements at COP29, like the UK Government’s Principles for voluntary carbon and nature market integrity, are a positive sign that the integrity imperative is being recognised by both state and non-state actors.
Integrity frameworks
Whilst the UN community worked to finalise the rules and methodologies of Article 6.4, leading VCM stakeholders unveiled a commitment to create an end-to-end VCM integrity framework at COP28. Aimed at tackling integrity issues and scaling the use of VCMs, the undertaking sees the Voluntary Carbon Markets Integrity Initiative [VCMI], the Science Based Targets Initiative [SBTi] and the Integrity Council for the Voluntary Carbon Market [ICVCM] join forces to establish consistent standards and approaches to quantification, project/programme and claims evaluation across the VCM.
Under this framework, organisations are expected to measure and report their GHG emissions against a recognised benchmark, with the GHG Protocol being the world’s most widely used GHG accounting standard. The SBTi provides standards, tools and guidance to help those organisations set science-based reduction targets, which are then validated by SBTi. Guidance contained in VCMI’s Claims Codes of Practice, supported by its Monitoring, Reporting and Assurance Framework, seeks to increase transparency on the demand side.
Together they aim to ensure that voluntary carbon credits are used in addition to decarbonisation efforts, thereby avoiding greenwashing and providing assurance over claims. On the supply side, ICVCM’s Ten Core Carbon Principles safeguard that carbon credits represent both real and verified GHG removals, enabling finance to be channelled into high quality carbon reduction and nature projects.
Supporting these efforts to increase security, mitigate greenwashing and enforce higher standards on the financial side, the Global Carbon Market Utility is in the process of establishing the infrastructure to scale a trustworthy carbon marketplace. Similarly, in a move designed to provide reassurance to US financial markets, the Commodity Futures Trading Commission issued its first set of guidelines for the trading of voluntary carbon credit derivatives contracts in September 2024.
Building trust in carbon markets through accreditation
All systems of trade require a recognised and measurable unit of currency, with the Kyoto Protocol defining one carbon credit as the equivalent of one metric tonne of carbon dioxide either prevented from being emitted or removed from the atmosphere. In order to build confidence in the integrity of carbon credits, all GHG emissions, related data and claims need to be accurately measured, verified and validated.
The consistency and accuracy of those measurements and the integrity of verification and validation processes is ensured through the application of metrology, standards, conformity assessment and accreditation. Collectively these tools form the pillars of what is known as Quality Infrastructure [QI] system, which the INetQI defines as: ‘the system comprising the organisations (public and private) together with the policies, relevant legal and regulatory framework, and practices needed to support and enhance the quality, safety and environmental soundness of goods, services and processes.’
The UK’s national QI is largely delivered by the British Standards Institution [BSI], the National Physical Laboratory [NPL] and the United Kingdom Accreditation Service [UKAS]. QI organisations and tools already play a significant role in compliance carbon markets, with accredited validation and verification providing confidence that the requirements of robust GHG emission standards, schemes, frameworks and regulations are being met.
For example, the UK ETS requires emission reports to be independently verified by a UKAS-accredited body. The implementation and operation of the upcoming UK Carbon Border Adjustment Mechanism, linked to the UK ETS, is also set to rely on accredited validation and verification.
Although VCMs are largely decentralised and self-regulated, they are built around similar rules, standards and methodologies as centralised and compliance markets. So national and global QI organisations and tools are already playing a key role in these markets, providing the ultimate assurance of the credibility of VCM actors and their activities.
For example, UKAS accreditation already underpins the International Civil Aviation Organisation [ICAO] Carbon Offsetting and Reduction Scheme for International Aviation [CORSIA] – a voluntary scheme for verification of GHG emissions from the aviation sector. In turn, CORSIA-eligible emissions unit programmes are deemed as meeting several criteria of the ICVCM’s Carbon Credit Program [CCP], providing a shorter CCP assessment process for CORSIA-eligible applicants, without compromising integrity, transparency and independent verification requirements.
The increasing demand and use of carbon credits on a voluntary basis highlights the need for transparent and scalable VCMs. For VCMs to gain widespread acceptance and fulfil their potential, stakeholders and market players need to be able to have trust in how these markets operate and the impacts they deliver. Specifically, concerns that carbon credits are not genuine and earned, and above all do not create real and verifiable environmental and social impacts need to be addressed.
Carbon trading ‘the natural way’
One of the UK Government’s key announcements at COP29 was the introduction of its Principles for voluntary carbon and nature market integrity. In addition to better aligning VCMs and Voluntary Nature Markets [VNMs], Principles are intended to ensure credits are used responsibly and effectively for climate and environmental goals. This will build trust and confidence in the market and support organisations with their transition to net-zero and nature-positive goals.
A close relative of carbon markets, evolving VNMs offer organisations a path to engage with trading of nature-based carbon credits, and/or invest in projects that deliver nature restoration, improve land or coastal management and create biodiversity benefits.
Nature-focused environmental initiatives are becoming increasingly popular, with COP28 seeing $2.5billion committed globally to restore and protect nature, followed by a further $186million of additional financing committed towards forests, mangroves and the oceans. Recognising that natural mechanisms such as biodiversity and carbon sequestration have been traditionally undervalued globally, the UK Government set out its nature market framework in 2023. Operating on units of ecosystem services, the framework aims to increase UK private investment in nature-based climate solutions to over £1 billion annually by 2030.
The Woodland Carbon Code [WCC] and the Peatland Code [PC] are the most established government backed schemes in the UK nature market, and both saw significant growth in recent years, annually validating units to 1million and 500,000 tonnes of carbon dioxide equivalent respectively. Both the WCC and the PC require UKAS accreditation from participating validation and verification bodies, and Downing Street expects similar existing and emerging unit/credit issuance schemes to follow suit.
In support of ongoing effort to build credibility and trust in the evolving UK nature market, UKAS is contributing to BSI’s Nature Investments Standards [NIS] programme. Building on the invaluable experience gained through the WCC and the PC, the programme is setting out the overarching Principles for UK nature markets and incorporates a suite of market-specific standards covering nature-based carbon removals, biodiversity uplift and nutrient mitigation. UKAS is also contributing to the governance workstream of the policy-shaping UK Nature Markets Dialogue initiative.
As with carbon markets, ensuring trust, integrity and transparency in VNMs is key to informing and scaling climate and broader sustainability action and attracting investment. Integrity review and accreditation against schemes developed in line with the standards from BSI’s NIS programme will in the future ensure the uptake and successful implementation of these standards and therefore the successful delivery of related government policy.
The future of assurance
The independent assurance offered by accredited conformity assessment is key to building confidence in the integrity, transparency and effectiveness of carbon credits and claims. The high-level of trust and integrity that accreditation delivers is therefore going to be critical in establishing the credibility of VCMs, frameworks and initiatives, as well as in scaling up efforts on both the supply and demand sides of the market.
Accredited conformity assessment already underpins the pursuit of mandated and voluntarily-set environmental targets and outcomes, increasing confidence in the veracity of commitments, actions, processes and claims. Going forward, it will continue to provide invaluable support in the development of high-integrity, well-functioning carbon and nature markets.
Maria Varbeva-Daley is the sector specialist for energy, environment and sustainability at the United Kingdom Accreditation Service (UKAS).
Image: Adam Śmigielski / Unsplash
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