The voluntary carbon market is in serious trouble, which casts doubt on its role in helping to decarbonize the global economy. Although the voluntary carbon market is relatively small today, a 2021 analysis from McKinsey & Company estimated that the market could grow by a factor of 100 by 2050, supporting activities that amount to avoidance or removal of some 13 billion tons of carbon emissions from atmosphere per year—a substantial fraction of the carbon emissions the world needs to eliminate. Today, however, a combination of scandal, inflation, and slowing economic growth has collapsed investor confidence in the voluntary carbon market, and prices for carbon offsets have fallen precipitously since summer 2022. New international standards for the voluntary carbon market are beginning to come into force, but investors and environmental groups apparently are unsatisfied with the standards. More important, future demand for carbon offsets may be impossible to satisfy without major advances in technology for carbon removal.
Voluntary carbon markets allow entities to offset their carbon emissions by purchasing other entities' promises to avoid, reduce, or remove carbon emissions. Third parties certify and verify these promises, which resemble financial securities and trade on various private markets. Although the voluntary carbon market has a history going back decades, the market has grown rapidly during recent years as companies have increasingly pursued carbon-neutrality goals. By purchasing carbon offsets, companies can claim to be carbon neutral despite otherwise making little or no progress in reducing their own carbon emissions.
Companies' overreliance on carbon offsets to achieve carbon-neutrality goals has become an important reason why many environmental groups have come to believe that the voluntary carbon market does more harm than good. Environmental groups, investors, and other stakeholders have also complained that voluntary carbon markets are opaque and untrustworthy. Meanwhile, proponents of the voluntary carbon market claim that the growing demand for carbon offsets creates financial incentives for preserving natural carbon sinks and avoiding further carbon emissions. In addition, the voluntary carbon market helps spur innovation in carbon-removal technologies.
In January 2023, the Guardian published an investigation of Verra, which is by far the world's largest certifier of carbon offsets that trade in voluntary carbon markets. The investigation concluded that some 90% of the most popular category of offsets that Verra certifies are likely to be fraudulent (Verra disputed these findings). In February 2023, Carbon Market Watch and the NewClimate Institute published a report that evaluated the carbon-neutrality strategies of 24 of the largest companies in the world that have adopted net-zero pledges. According to the report, the companies will likely achieve only a 36% effective reduction of their greenhouse‑gas emissions, falling far short of carbon neutrality. The report found that the companies overly rely on poor-quality carbon offsets that involve dubious promises relating to afforestation, avoided deforestation, and other land‑use methods and fail to rely sufficiently on efforts to reduce their own emissions. These devastating revelations came at a time when voluntary carbon offsets were already under increasing scrutiny from consumer-protection regulators, private litigants, and environmental groups—all of which have been challenging offset users' carbon-neutrality claims.
Carbon offsets that involve promises relating to land use have been among the most popular in the current market, but they have also generated substantial controversy. Such offsets can be easier to measure and verify than are other forms of offsets that involve activities that are more complex or subtle. More important, land‑use-based offsets have been readily available in the voluntary carbon market, whereas other forms of offsets have been in short supply.
The practices that prevail in the existing voluntary carbon market fall far short of meeting experts' recommendations for assuring that land‑use-offset claims will actually deliver permanent carbon-offset benefits. The delivery of such benefits requires a sufficient level of certainty that the land in question will not eventually release its carbon. Accordingly, estimates about permanence must somehow account for political or economic changes that could one day affect land use in unpredictable ways. Moreover, global warming's effects will alter all the world's ecosystems dramatically; accordingly, a particular piece of land's value as a carbon offset could vary greatly according to the methodology in use to evaluate the local ecosystem's stability in future climates. Disputes about such methodology—and related data and assumptions—have been major factors in recent controversies surrounding carbon-offset certification.
International efforts to standardize voluntary carbon markets are underway alongside efforts to motivate companies to reduce their reliance on carbon offsets in meeting net-zero targets. Carbon markets have had many competing private and public standards, but the Integrity Council for the Voluntary Carbon Market (ICVCM) has been attempting to establish international standards for carbon markets. In March 2023, the ICVCM issued a comprehensive set of operating principles for carbon-market participants; however, stakeholders' have complained that the principles fail to address market-integrity issues sufficiently. In another international effort, the VCMI (Voluntary Carbon Market Initiative) in June 2023 launched standards that focus on evaluating companies' carbon-neutrality claims. The standards evaluate companies' internal efforts to reduce their own emissions and the quality of carbon offsets that the companies purchase.
The new standardization efforts could help restore some credibility to the voluntary carbon market, but they could also inadvertently devastate the market. Requirements for more rigorous, science-based evaluation of carbon-offset quality could reveal that insufficient amounts of land-based carbon offsets exist to satisfy future market demand, leaving companies without cost-effective options to meet offset targets until and unless speculative new technologies emerge that enable large-scale carbon removal.