What does the report say?
The Ecosystem Marketplace's "State of the Voluntary Carbon Market (SOVCM) 2024" report draws readers' attention to several significant changes. Firstly, the weight of emission avoidance projects based on renewable energy and forestry projects has decreased significantly compared to previous years, although these have traditionally been the two main carbon market product categories. However, I think the most important finding of the report is that market players are increasingly focusing on quality and integrity. As a result, a silent revolution is taking place in the carbon market, largely under the media radar: carbon removal projects are rapidly taking the lead over avoidance-based reductions. I will try to explain the significance of this in plain language.
Quick guide to the voluntary carbon market
To understand the whole story, you need a quick primer. A brief overview of the carbon market is that it is divided into mandatory and voluntary markets. The former is a market for legally binding emission reductions organized by the state or supranationally (e.g. the EU ETS). The voluntary carbon market[3] is a self-regulating global marketplace where companies, organizations and even individuals voluntarily participate, i.e. not under legal constraints, by creating or purchasing carbon credits. They do so to voluntarily reduce their own greenhouse gas emissions or beyond their carbon footprint, or if they cannot reduce them to the required extent for some objective reason, at least partially neutralise them. The former represents the supply side of the voluntary market, while the latter represent the demand side.
The settlement unit for the voluntary market is the carbon credit, which represents the potential to offset emissions measured in tonnes of carbon dioxide equivalent (tCO2e), and the amount of greenhouse gas that has either been avoided or captured and stored for the long term. The former are known as Verified Emissions Reductions (VER), the latter is Carbon-Dioxide Removals (CDR), while the owner of the green investment is known as the issuer of carbon credit (like issuers in the securities market). The way the market works is that project developers (by analogy, investment banks that organize the issuance of securities) organize the issuance of carbon credits based on the clearly measured climate change impact of emission reduction or carbon sequestration projects – certified by an independent verifier – which are then recorded in a carbon registry (analogous to a custodian in the financial market) with a unique serial number.
This is the pivotal moment: the result achieved by the green project now becomes a "transferable" item in the form of a certificate, which can then be traded. If a buyer uses it to neutralise its own emissions, the carbon credit is permanently retired. This is called offsetting, i.e. the buyer accounts for the result of the carbon emission reductions that someone else (the issuer of the credits) has allowed it to make in return for financial consideration. Since this is not a transparent stock market but rather a fragmented structure, the voluntary carbon market's turnover and average prices are measured by Ecosystem Marketplace and similar analysts through regularly requesting data from credible carbon registries about transactions conducted on their platforms.
The emissions reduction crisis
In recent years, the voluntary carbon market has faced accusations of credibility, integrity and greenwashing. A typical example is the Verra scandal, which erupted in January 2023, in which the largest player in the market was found to have up to 90 percent of the carbon credits from rainforest offset projects in its global portfolio to be phantom credits, i.e. based on unreal results. This has hit companies such as Disney, Shell, Apple and VW, which had made significant carbon neutrality commitments and benefited from phantom credits. The scheme had problems with both methodology and verification, and as a result Verra rewrote its standards and brought in and obtained the most rigorous accreditations from external independent experts. However, its excellent pedigree is gone for good, and its market share is shrinking significantly.
Of course, the media jumped on the juicy scandal and immediately dubbed the whole voluntary carbon market a "farewell ticket" business, which has caused a lot of damage to the honest majority, and the market seems to have stalled in the last two years as a result, even though long-term breakthrough of the carbon market is vital for the success of the green transition. And indeed, at first glance, the SOVCM annual report shows that the voluntary carbon market did indeed appear to have suffered a significant decline in transaction volumes globally last year, down by around 25% on the previous year, while overall prices were little changed (-5.5%), which most experts see as a decline, or at best a 'sideways shift', in the carbon market.
This parallels the observation that legal enforcement of emission reductions now seems to be easing considerably. Traditional industries are suffering (and lobbying well) because of the significant costs of emission reductions, which has forced policy makers to partially abandon coercive green policies: the US has withdrawn from the Paris Climate Agreement, the EU has backed down from ESG pressures through the omnibus regulation and then carbon taxes (CBAM), and the launch of the ETS2 mechanism for emissions compensation for cooling-heating buildings and for fuel consumption, is now also very much in question. All these factors together signal to the attentive reader an acute crisis in emissions reduction efforts.
Dawn of a new era
So it is fair to ask: how does this become a green transition at the end? The pace of emission reductions is expected to slow down, and the results have not been sufficient in the past: last year, global carbon emissions still increased by nearly 1% (+0.8%) year-on-year. So, there is really no other choice but to move forward: to remove large quantities of already emitted carbon dioxide from the atmosphere and store it in long-term carbon sinks, which could be afforestation or reforestation, underground storages, the oceans or even durable industrial goods.
Recognising this, the carbon market as a whole is "undergoing a major reboot", marked by a clear shift towards carbon removals — associated with higher added value and perceived quality. However, supply is still tight: the share of high-quality removal credits in 2024 is still just over 10% of contracted market volume according to Allied Offsets' annual report, but in absolute terms it is nevertheless almost three times the average of previous years. Similar findings from climate solutions specialist Patch, in their latest report, say that despite countries' climate failures, companies remain stable participants in the voluntary carbon market, which is encouraging. They have found that global corporations, which are step up as credit buyers, are increasingly preferring high quality removal credits, which are only available in smaller volumes yet, and are willing to pay many times the average price per ton of reduction credits. At the same time, avoidance or reduction credits from high volume, cheaper projects with lower perceived environmental impact (in carbon market parlance: lower additionality perception), which were previously purchased in larger quantities, are being squeezed out of the market.
The voluntary carbon market revolution
As the amount of high-quality removal credits is still scarce, CDRs from such groundbreaking CO₂ removal projects need to be “secured” many years in advance, requiring a new strategy. According to Patch, the system is therefore clearly moving away from traditional "offsetting" strategies towards contribution-based models, where the focus is shifting towards separate, long-term financing of meaningful, high value-added climate action projects in the form of individual carbon offtake agreements. Thus, this 'new wave' of direct contracted flows is in most cases not even reflected in the traditional carbon registry flows, and cannot be detected by the analytical houses using existing measurement methods.
The carbon market revolution is happening before our eyes, but we are not yet seeing it, as it is becoming a trend that instead of loud green marketing and CSR communication - and of course as a self-defensive reflex due to the previous accusations of greenwashing - companies often prefer "greenhushing" about these projects. Barely visible in the news, Microsoft and Meta have advanced more than 1.3 million tCO2e of carbon credits through the purchase of high-quality reforestation (ARR) and improved forest management (IFM) projects; and JPMorgan Chase and Microsoft are financing historic scale, multi-million-ton, long-term technology-based carbon removal projects. But there is much to be proud of: last year, officially announced offtake agreements (also using the financial market analogy of forward deals) already amounted to 74 million tons, and this year this figure is set to grow exponentially further, while the volume of traditional carbon offsetting transactions through carbon registries is expected to stagnate.
Martin Luther takes to the stage
As Ikarus Janzen, Commercial Director of Varaha wrote in a powerful LinkedIn post recently, "we have to see that the rules of the voluntary carbon market are tightening, and as a consequence, real business with tangible impact is just starting to happen". The dawn of carbon removal projects has arrived, which will replace traditional market structures based on offsetting at an accelerating pace in the coming years. This market shift is based on a product that is easy to understand, transparent and likeable for everyone: CDRs, or with other words removal credits.
So Martin Luther has already taken up his history-shaping hammer and is approaching the church wall: the Reformation is at hand. I believe that this change is humanity's real chance against climate change, turning climate protection into a truly global, fast-growing industry.
This article was first published on the 16th June, by Levente Tóth, CEO of mitigia, on their personal LinkedIn profile.
Cover picture: Alci Alliata, Unsplash