The Potential and Challenges of Voluntary Carbon Markets

The world is facing numerous environmental and social challenges, especially climate change. The financial sector represents a key actor to address these challenges by driving sustainable investments regarding climate resiliency and green finance. As an MPA graduate, with a concentration in Energy & Environment and International Finance & Economic Policy, I wanted to have a tangible impact by working on sustainable finance regarding climate change, biodiversity and UN Sustainable Development Goals. That’s what drawn me to Caroline Flammer’s class.

Our group is working with [a client] that seeks to enhance performance on environmental, social, and corporate governance issues and encourage sustainable investment. We are conducting a study on Voluntary Carbon Markets (VCMs) to understand how the [client] can provide a multistakeholder platform regarding sustainable finance.

One of [the client’s] key insights remains the potential of stock exchanges to advance climate resiliency. Through green finance products, as a testament of increasing sustainable investments demand, they target UN Sustainable Development Goal n°13.3 “Improve education, awareness raising and human and institutional capacity on climate change mitigation, adaptation, impact reduction, and early warning.”

Article 6 of Paris Agreement provided an international carbon market to meet countries nationally determined contribution. VCMs works outside of regulated schemes, enabling buying and selling of emission credits for projects that reduce, avoid or remove harmful GHG emissions. Due to their recent record-breaking growth, the [client’s] Carbon Markets Advisory Group was launched during COP27 in November 2022 to review them.

As these markets only relies on verification and certification of projects to provide confidence for prospective buyers, their integrity became primordial. With high standards and transparency, [the client] believes they possess huge potential to unlock financing for investments and infrastructure while providing co-benefits for a just transition, such as social upliftment or biodiversity benefits.

Stock exchanges represent a crucial role to play in the growth of VCMs. By offering or collaborating with trading platforms, listing futures contracts based on carbon credits, facilitating project financing, and providing registry services, they can extend VCMs’ scope, provide them maximum liquidity, offer capital-raising opportunities for emissions reductions projects and facilitate capacity-building and stakeholder collaboration. As well, VCMs can offer a pipeline to transfer money from developed countries to developing countries for climate action.

However, VCMs face challenges. A Guardian article demonstrated that 90% of rainforest carbon forest provided by the biggest provider, Verra, are worthless and that avoided deforestation doesn’t increase carbon stock capacity. VCMs need to be reinforced to guarantee credibility and tangible emission reductions. The biggest concern remains the certification of projects but other issues regarding double counting, overreliance on carbon offsets and natural monopoly in VCMs have been raised.

Our team will assess effectiveness of VCMs regarding sustainable investments and UN Sustainable Development Goals investing, their roles in advancing climate resiliency, and identify areas for improvement to provide recommendations.