The Voluntary Carbon Market (VCM) is currently facing an existential threat.
To ensure it remains a credible tool for carbon reduction, we should regulate it.
The VCM has been growing very fast, and is estimated to grow to anywhere between $10-40 billion in value by 2030. Its appeal lies in the ability to direct climate finance to areas it would not otherwise reach, complementing national and international efforts to combat climate change.
However, one of the most glaring issues is VCM’s credibility and transparency, especially regarding claims of how much carbon has been reduced or removed from the earth’s atmosphere. Just as nutritional labels on food products provide us with relatively transparent and easy-to-understand information, so too should carbon credits. But without a clear regulatory framework, these claims will rightfully be subject to scepticism, which undermines the market’s integrity.
We need confidence that claims made alongside carbon credits are verified, accurate, and reliable.
The VCM operates through a complex network of registries, auditors, consultants, and project developers, all of which currently function outside of regulatory oversight. It is difficult to pinpoint where liability might lie in the case of false claims. As of now, legal repercussions related to the misuse of the VCM are vague and have not been thoroughly tested in courts. Both the VCM and Article 6 should apply the same set of acceptable minimum standards.
Pricing in the VCM is unstable and volatile. Today, the cost of carbon credits can vary significantly, and this inconsistency will deter participation and distort the market. A degree of regulatory intervention can help standardise pricing, making the market more predictable.
Areas such as taxation, insurance and accounting for carbon credits also need to be addressed. Without clear guidelines, organisations may be hesitant to engage with the VCM due to uncertainties about tax implications and how to account for carbon credits in their financial statements.
Without regulation, the long-term sustainability of the VCM is uncertain. The US Commodity Futures Trading Commission (CFTC) has announced it will convene a meeting in July to inform future guidance related to the agency’s authority over the market. New Zealand is considering splitting the market into reductions and removals. National regulation could complicate this inherently cross-border market. The UK has an opportunity to lead the way in setting the direction for international regulation. By doing so, it could draw upon the lessons from the Clean Development Mechanism (CDM) failure, paving the way for a more effective, reliable, and impactful VCM.
Lord Sarfraz is a Conservative peer and the Prime Minister’s Trade Envoy to Singapore