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Hills Sustainability
THEME: SUSTAINABILITY
26 February 2025 Research Reports

Enhancing the Voluntary Carbon Market: Gaps and Solutions

  1. Winnie Mak

The report explores solutions to enhance the Voluntary Carbon Market (VCM), emphasizing harmonized standards and unified carbon pricing. A stronger VCM can facilitate investment in carbon reduction and removal technologies and bolster sustainability efforts in developing countries.

Enhancing the Voluntary Carbon Market: Gaps and Solutions View PDF
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Report Overview

The Voluntary Carbon Market (VCM) plays a crucial role in addressing global climate challenges by supporting carbon reduction and removal projects, particularly in developing countries. The VCM channels investments into innovative carbon technologies and sustainability initiatives, complementing Compliance Carbon Markets (CCMs) — regulated systems designed to facilitate market-based carbon pricing within a cap-and-trade mechanism for covered entities. Significant barriers hinder the VCM’s effectiveness, however. These include mistrust in the integrity of voluntary carbon credits (VCCs) — tradable units representing the reduction or removal of carbon dioxide from the atmosphere — the lack of contract standardization, transaction opacity, greenwashing concerns, and price gaps with CCMs.

The objective of “Enhancing the Voluntary Carbon Market: Gaps and Solutions” is to explore actionable solutions for stakeholders to improve the VCM as a tool to support sustainability initiatives in developing countries, finance novel technologies, and complement compliance regimes. Companies and financial institutions play a key role, actively investing in VCMs to achieve positive environmental outcomes and financial returns.

This report calls for harmonizing standards internationally, improving trade reporting and aligning risk assessment methodologies to ensure high-integrity projects. Better aligning VCMs with CCMs could create a unified carbon pricing system, incentivizing carbon removal and bridging the price gap between emissions allowances and offsets. Further, leveraging technologies such as blockchain and registries could improve the traceability of transactions, restoring trust in the market.

Challenges to the VCM

Despite its potential, the VCM is struggling to gain the credibility and efficiency needed to make a substantial impact. Fragmented standards and inconsistent risk assessments weaken the market’s ability to attract investment. In addition, two-thirds of transactions remain private, limiting transparency and fueling skepticism. Policymakers and market participants must collaborate to address these challenges.

The VCM’s Growth Potential

The VCM has substantial potential for growth. Market projections suggest its value could rise from $2 billion in 2022 to $250 billion by 2050 if integrity concerns are resolved. The report explains that addressing these issues requires robust policies, consistent demand, and widespread adoption of technologies that enhance transparency and accountability. Improved market practices could significantly increase the demand and value of high-quality VCCs.

The VCM's evolution underscores the importance of collective action. Lessons from past frameworks, such as the Kyoto Protocol (an international treaty adopted in 1997 under the United Nations Framework Convention on Climate Change), show the limitations of fragmented approaches. A unified and transparent VCM can effectively channel resources to developing countries, fostering innovations such as low-emission hydrogen and sustainable aviation fuels. These technologies are vital for achieving net-zero emissions.

The VCM must also function to ensure that benefits extend to local communities and address their unique needs. As the VCM grows, reforms and innovations should prioritize tangible results, fostering trust and participation from diverse stakeholders. A well-functioning VCM can play a key role in global climate finance, helping to scale clean technologies and bridge the gap between ambition and action.

Key Takeaways:

  • Significant Challenges — The VCM faces issues such as mistrust, fragmented standards, and lack of transparency, undermining its effectiveness.
  • Market Integration — More unified carbon pricing systems across voluntary and compliance markets can better incentivize carbon removal projects.
  • Standardization Needs — Harmonizing integrity standards and risk methodologies can reduce fragmentation and boost credibility.
  • Transparency and Technology — Blockchain and enhanced registries can improve transaction clarity and rebuild trust in the VCM.
  • Corporate Role — Companies and financial institutions are critical investors, seeking both financial returns and environmental impact through VCMs.
  • Future Potential — Addressing barriers can unlock significant growth, supporting global sustainability efforts.