Industry insiders reveal key trends in Voluntary Carbon Markets: New report

While there is much debate about the use of carbon credits to address corporate greenhouse gas emissions, the workings of the market remain a mystery to many. To provide much-needed clarity, a new report from the Institute for Sustainable Finance, CPA Canada and the International Federation of Accountants brings together the insights of practitioners working across the Voluntary Carbon Market value chain.

The study, titled “Not all carbon credits are created equal: Ecosystem views on quality credits and the future of the voluntary carbon market" is a vital resource for anyone who wants to understand how the market functions and the keys to ensuring quality credits, avoiding reputational risks, and contributing to real-world emissions reductions.

Download the report here.

“Given how opaque and fragmented the market still is, these insider perspectives were instrumental to shaping our research,” said ISF Senior Research Associate Yingzhi Tang. “Across our interviews with market participants, it became clear that, for many, the days of checking a box are over, buyers are seeking quality and developers are responding.”

What are carbon credit buyers looking for?

In-depth interviews with key actors, including buyers, project developers, crediting programs and Validation and Verification Bodies (VVBs) revealed important industry trends:

• Buyers prioritize quality. They are ramping up due diligence efforts and choosing more direct purchases over standardized contracts given the increasing focus on transparency.
• Some purchasers have shifted towards removal credits, over abatement credits, due to their verifiability and long-lasting benefits. These credits support nature-based solutions such as afforestation or technology-based projects such as carbon capture and storage.
• Buyers in Canada also prefer to offset near where their assets are located to balance negative impacts of their operations.
• Reputational risk is one of the top concerns for developers and buyers, with controversies of any kind harming the reputation of all parties and eroding market confidence.
• Developers are working to assess risks early and manage them through diligent project preparation and structuring.

A job for accountants

Professional accountants are crucial to enhancing the quality and transparency of the VCM. With their expertise in risk management, internal controls, financial reporting, and auditing, they can:

• Improve verification processes and enhance the credibility of carbon credit projects.
• Conduct rigorous audits to assess the reliability and transparency of VCM transactions.
• Inform better purchasing decisions for organizations looking to offset their carbon footprint.
• Inform improved guardrails to ensure quality credits.

What’s next?

The VCM’s future is shaped by tailwinds and headwinds. Several developments could impact the market:

• Global regimes such as the Carbon Offsetting and Reduction Scheme for International Aviation and Article 6 of the Paris Agreement could create steady and predictable demand for high-quality VCM credits.
• The U.S. and China are adopting divergent approaches to climate policy creating uncertainty. But if China recognizes high-quality credits in its domestic compliance scheme it will significantly boost demand.
• Some jurisdictions already allow limited use of high-quality offsets under their compliance schemes, a growing trend that could accelerate demand.
• Although it is a voluntary market, many would welcome regulatory oversight and agreed standards to bring some clarity to address integrity issues and buyers’ concerns.
• The industry is watching influential bodies such as the Science Based Targets Initiative and Voluntary Carbon Markets Integrity Initiative. While there is some debate about their use, the possible recognition of VCM credits for companies to offset Scope 3 emissions could create significant tailwinds for the market by increasing demand.
• Technology such as drones, satellite imagery and artificial intelligence is revolutionizing carbon credit measurement, verification, and reporting by improving accuracy, transparency, and efficiency.
• The development of alternative market designs (e.g., biodiversity credit markets) is still evolving. Many VCM projects already benefit nature, creating opportunity, but also potential complexity for buyers and developers.

About this series

To better understand the VCM and associated challenges, Chartered Professional Accountants of Canada (CPA Canada), the International Federation of Accountants (IFAC) and the Institute for Sustainable Finance (ISF) at Smith School of Business, Queen’s University, collaborated on this series:

• The first report offers foundational knowledge of the VCM, covering the nature of carbon credits, differences from compliance markets, key market participants, the carbon credit life cycle, prevalent risks, and valuation and pricing considerations.
• The second report takes a deep dive into the use of voluntary carbon credits in Canada and globally, along with a discussion on the related accounting and disclosure considerations.

The Institute for Sustainable Finance was launched in 2019 as the first-ever cross-cutting and collaborative hub in Canada that fuses academia, the private sector, and government with the singular focus of increasing Canada’s sustainable finance capacity. The institute's mission is to align mainstream financial markets with Canada’s transition to a prosperous sustainable economy.

About CPA Canada

Chartered Professional Accountants of Canada (CPA Canada) works collaboratively with the provincial, territorial and Bermudian CPA bodies, as it represents the Canadian accounting profession, both nationally and internationally. This collaboration allows the Canadian profession to champion best practices that benefit business and society, as well as prepare its members for an ever-evolving operating environment featuring unprecedented change. Representing more than 220,000 members, CPA Canada is one of the largest national accounting bodies worldwide. cpacanada.ca

About IFAC

The International Federation of Accountants (IFAC), by connecting and uniting its members, makes the accountancy profession truly global. IFAC member organizations are champions of integrity and professional quality, and proudly carry their membership as a badge of international recognition. IFAC and its members work together to shape the future of the profession through learning, innovation, a collective voice, and commitment to the public interest.