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they generate, can have a transformative impact on the health of some of the poorest rural communities. And as many of these projects are based in less economically developed countries, the VCM can have a significant developmental impact by facilitating the flow of capital from high emitting companies directly to poorer local economies – contributing towards a more just energy transition. The issues with the VCM, however, are numerous. Firstly, it is unregulated, meaning that the methodologies used to calculate the amount of carbon avoided, removed or captured are rightly subject to challenge and continual improvement. There are independent registries, rating agencies and integrity standards which aim to provide buyers and the public with indications of veracity and quality, but for many doubts remain. Secondly, carbon credits from the VCM have not consistently been used by companies to offset emissions which were hard to abate, but instead used to offset emissions which could have been reduced or avoided and to position companies, brands and products as more sustainable than they are – greenwashing. Lastly, many of these projects directly impact vulnerable communities, and are based in countries with difficult working environments from a political perspective, leading to a host of social, operational and financial risks. The lack of regulation and high potential margins make the VCM an interesting proposition for investors and developers depending on one’s risk appetite and has attracted a small but not insignificant number of fraudulent actors. As a result, public confidence in the VCM is at an all-time low, with many potential corporate buyers feeling that the uncertainty and reputational risk posed by the VCM outweighs the potential benefit. Around 10,000 companies have made science-based net zero commitments in recent years (Science Based Targets, 2024), but an increasingly small proportion of these companies, namely Alphabet, Microsoft, Salesforce and Netflix continue to buy large volumes of carbon credits to offset (primarily scope 3 ) emissions and to deliver against their social and environmental impact or ESG strategies. Despite this, without the reputational benefit, the business case for purchasing voluntary credits is difficult to make, and as a consequence the VCM shrank by 61% in 2023 (Allied Offsets, 2024) and only covered 200MT or 0.5% of global emissions last year. For context, the International Energy Agency has forecast the global demand for low carbon hydrogen and carbon capture and storage will avoid or reduce emissions by 15MT and 192MT respectively by 2035. These projects are incredibly capital intensive and will take ten years to have the same impact on reducing carbon emissions as the VCM has today (International Energy Agency, 2024). The VCM has its faults and vocal detractors; at its current size, it is not the answer to the climate crisis, but nor is it in anyway a barrier to progress.

Concordia Winter 2024

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Interestingly, some ETSs and compliance schemes (namely the Carbon Offsetting and Reduction Scheme for International Aviation and Article 6 of the Paris Agreement which sets out how countries can pursue voluntary cooperation to reach their climate (NDC) targets) allow for certain VCM credits to be used to meet compliance. As such, the two sides of the carbon market are beginning to merge, and many hope that this will help to drive standards across the VCM, drastically increase demand, and as a consequence, accelerate the positive co-benefits which are inherent to the projects themselves. So where does this leave us? The severity of the climate crisis demands a step change in our approach to almost everything (most notably energy generation, manufacturing, agriculture and transport), and the carbon markets are only one small element of this transformation. Investments in low-carbon technologies, services, processes and products which allow society to avoid or reduce emissions must be made; ETSs must grow in scope and scale; and the VCM must evolve so that more organisations feel able to engage with this relatively nascent but potentially hugely impactful market. Time is of the essence, but 1.5 o C is still in touching distance, and I very much hope we will meet this global challenge with the help of the next generation of smart, inquisitive and driven OMTs; if you will allow it, this is the homework I would like to set for you.