Cloud over the voluntary carbon market's survival

When it comes to carbon pricing, the two most talked about instruments are the emissions trading scheme (ETS) and the carbon tax.

- Somit Dasgupta

What is not equally known is the voluntary carbon market (VCM), though it has been around since sometime in the late 1980s. VCM allows carbon emitters to offset their avoidable emissions by purchasing carbon credits that are generated by projects targeted to remove all or a part of the former's greenhouse gas (GHG) emissions.

Though VCM has grown in size over the last five years, it is still a fraction of the ETS market. In 2024, the total value of ETS was about $113 billion whereas VCM adds up to only about $1.7 billion.

How does VCM work? Many players are involved: The project developer constitutes the supply side of the market by generating carbon credits whereas the demand comes from organisations and even individuals who would like to buy the credits to offset their own emissions.

The other major player is the entity (the carbon standard) that frames the rules under which the entire system operates. VCM projects are registered with such entities. Others include certifiers who vouch for the genuineness of a project in terms of emissions actually offset, and the traders and brokers who link the buyers and the sellers.

Incidentally, the supply side of VCM is largely concentrated in developing countries (including India) whereas the demand comes almost entirely from the developed world.