The voluntary carbon credit market – what is it and how does it work?

Ritvars Podziņš

Ritvars Podziņš

Thursday, February 1, 2024

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Voluntary Carbon Credit Market
Voluntary Carbon Credit Market
Voluntary Carbon Credit Market

The carbon (CO2) credit market is growing rapidly around the world, thanks to increasing environmental demands. As more and more companies seek to reduce their environmental impact, both the supply and demand for carbon credits continue to grow. The voluntary carbon market system has become popular not only in agriculture but also in forestry. In this article, you will learn about what the voluntary carbon market is and how it works.

What is a carbon market?

It is important to emphasise from the very beginning that there are two types of carbon markets. The voluntary carbon market should not be confused with the mandatory or compliance carbon market, which is an internationally regulated carbon trading system.

Carbon markets are systems that are linked to reducing carbon emissions. They facilitate trade between buyers and sellers in the form of certificates or credits that reduce, avoid or accumulate emissions. Carbon markets are created by governments or private organisations to support environmental, sustainability, and climate change targets that include the reduction and removal of CO2 or other greenhouse gas (methane, nitrous oxide) emissions. 

Carbon market trends worldwide

The carbon market has seen a marked increase since 2016, with the adoption of the Paris Agreement, which sets out an action plan to limit global warming by keeping average temperatures to 1.5 degrees Celsius, and is therefore binding on us. In 2021, it was reported that the value of the global carbon market surged to a record $ 851 billion and is expected to grow even more in the next decade. The European Union (EU) is also close to introducing a carbon farming system in the region that would standardise carbon credit sequestration processes and incentivise the achievement of climate targets.

The value of the voluntary carbon market continues to grow rapidly. It has increased by 48% since 2021 and is expected to reach a value of around $ 50 billion in 2030.

Development of the voluntary carbon market (USD billion)

Source: A blueprint for scaling voluntary carbon markets to meet the climate challenge

Mandatory or compliance carbon market

Compliance carbon markets, also referred to as mandatory or regulatory markets, are structured around national, regional, or international requirements for greenhouse gas emission limitations. This is regulated by individual countries or international regulations and is designed to have major emitters, such as various factories, gradually reduce their emissions. The EU Emissions Trading System (ETS) is the best-known example. In it, emission allowances are traded in emissions trading schemes between countries. The main objective of this market is to limit emissions.

Some examples of regulatory compliance markets are:

What is the voluntary carbon market?

The voluntary carbon market is a system for trading carbon credits – units for reducing or avoiding greenhouse gas emissions. The voluntary market involves private organisations, where one side of the market develops project to remove or reduce GHG emissions and generate carbon credits, and the other funds the decarbonization projects by buying the credits with the intention to offset its emissions. This market operates outside the regulatory regime and, using a voluntary market mechanism, organisations can generate carbon credits through various environmental projects, and large corporations can buy these offsets. Many large companies participate in the voluntary carbon market because they consider it a socially responsible decision.

The voluntary carbon market operates independently of the mandatory carbon market.

Where did the voluntary carbon credit market originate? 

The origins of the free carbon market lie in the United States (US) in the late 1980s, where the first transaction was between the US energy company AES, on whose behalf the Guatemalan NGO CARE organised a project providing finance for local farmers to plant trees. This was followed by the creation in the mid-1990s of the Environmental Resources Fund (later renamed the American Carbon Registry), the first private registry of voluntary offsets in the US. Carbon offsets under compliance mechanisms then began with the Kyoto Protocol, which also opened the way for the gradual development of a free carbon market.

The Kyoto Protocol is one of the most important international legal instruments for combatting climate change. It includes commitments by industrialised countries to reduce their GHG emissions that cause global warming.

What is a carbon credit?

At this point, it is important to remember what a carbon credit is. A carbon credit is an offset or offsetting unit purchased by companies as one of the options to reduce their environmental impact. The EU regulation, the European Green Deal, represents a major commitment to drastically reduce our carbon footprint by 2050. Companies are therefore willing to buy CO2 credits to implement environmental changes that go beyond their current capabilities. 

One carbon credit is equivalent to the reduction or the removal of one metric tonne of carbon dioxide. Measurement, reporting and certified verification procedures are required to determine the specific number of carbon credits generated.

Carbon credits are produced in the market under a specific carbon standard – they are assigned an individual serial number and certified to a common standard. These standards are developed by private international organisations that prepare and monitor the implementation principles of the projects developed by companies whose business is the generation of carbon credits like eAgronom.

In total, there are currently 4 different standards in the world:

What determines the price of a carbon credit?

The price of carbon credits is determined based on supply and demand dynamics. The price per credit is closely linked to the overall development of the carbon market, meaning that as the size of the market increases, so does the price per tonne of CO2 sequestered. Market forecasts show that this will only increase further in the coming years. However, it should be borne in mind that when the European Commission develops specific requirements for the certification process, the price of carbon credits will be regulated, so as the market develops, more and more companies are being set up that are engaged in so-called “greenwashing” and have not implemented certification methods in line with international standards. Often these companies promise a higher “yield” of carbon credits, and therefore a higher profit per hectare, and call them “certificates” rather than credits.

How do carbon credits help fight climate change?

The basic principle of how carbon credits work is quite simple. If one party, such as a large company, cannot emit less CO2 but needs to comply with the terms of the EU Green Deal, it can finance GHG emission reductions and removals implemented by another organization by purchasing carbon credits and in doing so lower its net carbon footprint. As a result of the GHG emissions reductions and removals achieved by the other organization, the total amount of carbon in the atmosphere decreases. This is where farmers come in, as through the activities implemented as part of eAgronom´s Carbon Program, they can sequester carbon from the atmosphere and generate carbon credits from their farms.

The less greenhouse gases are emitted, and the more carbon dioxide in the soil is absorbed from the atmosphere, the slower global temperatures will rise. Reducing global warming is part of the Paris Agreement and by generating carbon credits, carbon offsets help us achieve this goal.

What is the purpose of carbon farming programmes?

Carbon sequestration programmes aim to ensure that farmers around the world follow sustainable agricultural practices. Carbon credits ensure successful emission reductions through agricultural practices that sequester carbon in the soil. In order to receive carbon credits in agriculture, changes to current farming practices are required. The actions taken reduce emissions from the farm and build up organic matter in the soil, of which carbon is a component. Choosing to participate in carbon credit schemes and sequester carbon also provides an opportunity to expand income potential. The revenue is calculated per tonne of carbon sequestered in the soil. 

More and more farmers are engaging in carbon farming to generate income, improve soils and reduce carbon in the atmosphere. More and more companies are also looking for conservation-orientated projects to work together towards emission reduction targets. An agricultural carbon programme connects both market players to meet their needs and requirements for the best possible outcome in carbon markets for farmers and more.

Why is this relevant for farmers? 

Soil is the largest carbon absorber after oceans, so farmers have the opportunity to contribute to sustainable land management by sequestering carbon from the atmosphere and storing it in the soil on a large scale. Each carbon programme, prepared in accordance with the rules, must start with a detailed audit of the farming practices carried out on the farm over the last 3–5 years. In agriculture, generating carbon credits is a process that begins with measuring the carbon sequestration potential of the farm. Once calculated, suitable farming practices must be adopted to safeguard soil carbon accrual over time. 

By replacing traditional and less environmentally friendly practices with ones that are more valuable for the soil, farmers can directly contribute to the fight against climate change. For example, by leaving more biomass on the field, sowing follow-on crops, choosing less intensive tillage and more precise fertilisation, which reduces fuel consumption and other production-related inputs.

All of this not only reduces carbon dioxide levels in the atmosphere but also improves farm profitability and soil quality. Each additional change in practice has an impact on carbon sequestration in the soil and contributes to the generation of carbon credits.

To find out how to start carbon farming, read: A 6-step guide for farmers to get carbon credits in agriculture

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Project is financed by the Republic of Estonia

The project was funded by the Entrepreneurs Support Program for Applied Research and Product Development (RUP).

Project name:

Software Technology and Applications Competence Centre (STACC)

Project is financed by the Republic of Estonia

The project was funded by the Entrepreneurs Support Program for Applied Research and Product Development (RUP).

Project name:

Software Technology and Applications Competence Centre (STACC)

Project is financed by the Republic of Estonia

The project was funded by the Entrepreneurs Support Program for Applied Research and Product Development (RUP).

Project name:

Software Technology and Applications Competence Centre (STACC)

Project is financed by the Republic of Estonia

The project was funded by the Entrepreneurs Support Program for Applied Research and Product Development (RUP).

Project name:

Software Technology and Applications Competence Centre (STACC)

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