Strengthening governance to unlock the potential of carbon markets
New meta-standards have emerged as independent governance bodies to set the quality bar on supply and demand in the voluntary carbon market
CLIMATE action remains an urgent priority.
A stark warning from the United Nations Environment Programme: Even if nations fully implement their updated nationally determined contributions, a massive emissions gap of 19 gigatonnes of carbon dioxide equivalent will persist in 2030. This gap, equal to one-third of last year’s global emissions, threatens to derail the 1.5 deg C climate target.
Financing the solutions needed to close this gap will be no mean feat. The Climate Policy Initiative estimates about US$6.2 trillion is needed annually between now and 2030, and US$7.3 trillion annually from 2031 to 2050, to deliver net-zero emissions.
This gap cannot be closed by public funding alone. This is where the voluntary carbon market (VCM) could be a crucial tool in closing the financing gap by mobilising private capital to combat climate change. However, heightened scrutiny over the environmental integrity of carbon markets and fears of “greenshaming” have stunted the growth of the VCM over the past couple of years.
Demand for voluntary carbon credits has also stagnated due to uncertainty around standards and verification processes, and what counts (and will stay counted) towards corporate decarbonisation pathways.
This state of climate inaction is just as, if not more, dangerous.
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Greater governance needed to overcome market paralysis
Industry players increasingly acknowledge that stronger governance and regulatory oversight will be needed for the VCM to re-establish confidence and credibility.
While the VCM has largely been self-regulated, there have been several critical developments in recent years aimed at addressing the trust deficit and responding to the quality concerns raised by both the supply and demand sides of the market.
Standard-setting bodies such as Verra, Gold Standard, and the American Carbon Registry have traditionally provided frameworks for validating, verifying, and issuing carbon credits based on specific methodologies. These organisations, while instrumental in growing the market, have themselves faced criticisms around the robustness of their methodologies and their ability to address environmental and social integrity.
Whether warranted or not, these criticisms tend to capture headlines more easily than the technical intricacies and complexities that underpin developing and maintaining these standards and methodologies.
In response, new meta-standards have emerged as independent governance bodies to set the quality bar on both VCM supply and demand. For instance, the Integrity Council for the Voluntary Carbon Market and Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) bring wider oversight by assessing these standards and the methodologies they use.
Their quality labels set a benchmark for “high-quality” carbon credits. On the demand side, the Voluntary Carbon Markets Integrity Initiative brings legitimacy to corporate claims on credit use through its claims code.
Separately, regulatory interventions – such as those by the Commodities and Futures Trading Commission – have also provided useful guidance on carbon credit derivatives in the United States, setting baselines for market operations, promoting liquidity, pricing efficiency, and fostering greater buyer confidence.
Convergence of voluntary and compliance markets
The convergence of the voluntary and compliance carbon markets may help to move the needle towards enhancing governance and encouraging harmonisation – and this future could soon be a reality.
The lines between voluntary and compliance carbon markets are blurring. International schemes such as Corsia and Article 6, as well as carbon-pricing schemes like Singapore’s carbon tax, are recognising credits certified by VCM standards including the Verified Carbon Standard and Gold Standard.
This move towards fungibility – except where accounting elements such as corresponding adjustments differ – opens doors to greater alignment between voluntary and compliance markets.
By harmonising standards and reporting requirements, global carbon markets can achieve greater consistency, credibility, transparency – and hopefully acceptance from a broader spectrum of corporate buyers.
Policymakers will need to consider how the VCM can augment their climate strategies, how stringent the approach should be, and at which stage across the value chain regulatory oversight needs to be introduced.
A balanced approach is key
It is, however, important to recognise that stronger oversight alone does not automatically equate to a better market. While rigorous standards and clear guidelines are invaluable, quality emerges from frameworks and regulations that strike a balance – encouraging ambition, fostering innovation, and remaining practical.
Thoughtful governance can help to rebuild confidence in an industry that is beginning to scale and mature. Perhaps this can break the “greenhushing” trend and catalyse real corporate climate action and leadership as we try to achieve a Paris-aligned future.
The writer is director, policy and analytics, at GenZero
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