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Voluntary Carbon Market

A marketplace for purchasing carbon offsets

What is the Voluntary Carbon Market?

The voluntary carbon market allows private investors, governments, non-governmental organizations, and businesses to voluntarily purchase carbon offsets to offset their emissions. The largest category of buyers comprises private firms that purchase carbon offsets for resale or investment.

 

Voluntary Carbon Market

 

Companies that are unable to reduce their emissions can purchase carbon offsets from verified suppliers to offset their emissions. The revenues collected are used to finance the carbon reduction project. Voluntary offset buyers are often driven by certain considerations such as safeguarding their reputation, ethics, and corporate social responsibility (CSR).

 

Participants in the Voluntary Carbon Market

There are various participants who are involved in the voluntary carbon market. The main participants include consumers who purchase the offsets from providers, providers (both domestic and international) of several types of offsets, suppliers who may include universities and colleges, governments, and non-governmental organizations, as well as third-party verifiers and developers of quality assurance programs.

 

What is a Carbon Offset?

A carbon offset refers to the units earned by firms that have implemented a greenhouse gases reduction project. It is issued by a board or government authority, and one offset credit is given for every ton of greenhouse gas that is reduced, stored or avoided. The offset is then sold to an investor, government, or NGO to offset their emissions or for investment purposes.

Typically, carbon offsets are measured in tons of greenhouse gases, which comprises carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons.

The various types of carbon offsetting may include:

  • Capture of greenhouse gases for use or destruction
  • Reduction of greenhouse gases by reducing the amount of fuel or electricity needed to perform various activities
  • Capture and storage of greenhouse gases
  • Reduction of carbon emissions by moving from fossils fuels to renewable sources of energy such as solar and wind energy

 

Importance of Voluntary Carbon Offsets Market

The voluntary carbon markets are promoted as one of the best solutions to the problem of climate change that is affecting the world, due to their effectiveness in environmental protection and economic empowerment. Here are some of the benefits of voluntary carbon offsets:

 

1. Source of experimentation and innovation

The voluntary carbon markets are a source of experimenting with new technologies and systems since they lack the regulation, oversight, and bureaucracy that exists in the regulated markets. It allows it to reach the poor and smaller communities in developing countries because project developers enjoy the freedom to implement projects that might be too small or not viable for the compliance markets. In the process, the developers might design prototype technologies that can be implemented in the regulated markets.

 

2. Operates in harmony with the compliance market

Another benefit of the voluntary carbon offset market is that it works in harmony with domestic compliance markets. It complements the regulatory market by providing an avenue where projects that are not achievable in the regulatory market can be achieved. Also, it allows governments, NGOs, and private companies to implement projects that go beyond what they are required to do in compliance markets.

 

3. Offers a platform to engage corporate goodwill

Communities can also benefit from the CSR activities of large companies that involve voluntary reduction, storage, and avoidance of greenhouse gases. It offers the potential to strengthen climate change policies and address the inequalities that exist between the rich and the poor.

 

4. Allows expansion of the number of participants

The voluntary carbon market allows private firms, individuals, governments, and NGOs to volunteer freely, and gain experience with carbon inventories, avoidance, reductions, storage, and carbon markets. The exposure allows growing companies to gain experience with carbon markets, even as they prepare to enter the regulated compliance markets.

 

4. Allows the reduction of greenhouse gas emissions without compromising equity

The voluntary offset market offers an opportunity to achieve global greenhouse emission reductions while addressing the development needs of the developing countries. Involving poor nations in climate protection allows them to achieve carbon emission reduction and avoidance while earning revenues from selling their offsets. They can then use the revenues to finance development projects for the poor communities in their countries.

 

Voluntary Carbon Market vs. Compliance Market

The compliance market, also known as the regulatory market, allows governments, private companies, and other entities to purchase carbon offsets in order to comply with caps on the amount of greenhouse gases they are allowed to emit. The markets are created by national and international treaties such as the Kyoto Protocol and the EU Emissions Trading Scheme.

On the other hand, the voluntary carbon markets allow participants to purchase carbon offsets to mitigate their greenhouse emissions resulting from manufacturing processes, electricity use, transportation, etc. Both types of carbon markets can complement each other, and work towards the overall goal of reducing, avoiding and storing greenhouse gases from the atmosphere.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • ESG (Environmental, Social and Governance)
  • Greenwashing
  • Indemnification
  • Pigouvian Tax

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