Currently, a massive portion of the Voluntary Carbon Market (VCM) is comprised of carbon credits generated from renewable energy investments. However, the issuance of internationally recognized, high-integrity carbon credits for such projects has recently come under scrutiny due to concerns about their lack of additionality. An innovative approach is needed to ensure that renewable energy projects regain their recognition in the carbon market. Renewable energy is a cornerstone of the electrification process, which is critical for the green transition of the global economy and, therefore, must continue to receive dedicated support.
The Necessity of Supporting Renewable Energy Production
Electrification is fundamental to the success of the green transition for the global economy. It provides two main advantages: improved energy efficiency on the consumption side and green energy generation on the production side. Electrification reduces overall energy demand while achieving the same outcomes, resulting in lower carbon emissions. Additionally, electricity can be produced from renewable, carbon-free energy sources, positioning it as a key component of sustainable energy systems.
The rapid expansion of renewable energy production is, therefore, both a national and international priority. The European Union (EU) aims to increase the share of renewable energy in electricity production from 44% in 2023 to 67% by 2030. Similarly, Hungary’s National Energy and Climate Plan (NECP) aims to grow its share from 26% to 42% within the same period. Achieving these goals requires effective policy frameworks and a strong push to stimulate investment in renewable energy generation.
Carbon pricing remains the primary economic tool for financing green investments. By embedding the cost of carbon offsets into the financial model of carbon-emitting activities, it reallocates resources to support climate-friendly projects. Different carbon pricing mechanisms, however, treat renewable energy projects in varying ways. Instruments like carbon taxes and emissions trading schemes (such as the EU ETS) continue to recognize renewable energy projects as eligible for carbon reduction obligations. In contrast, the VCM has adopted a more restrictive approach on renewable energy projects.
Questioning Additionality: Does Renewable Energy Still Add Value?
Renewable energy projects have historically been a major source of carbon credits, contributing 30% of all credits issued and 36% of withdrawals for offsetting purposes. However, their future in the VCM is now uncertain. Recently, the Integrity Council for the Voluntary Carbon Market (ICVCM) suspended the issuance of high-integrity carbon credits for renewable energy investments. This decision was based on concerns about the additionality of these projects — whether they deliver climate benefits that would not occur without the incentive of carbon credit financing.
The rationale for the decision is that many renewable energy projects would proceed regardless of carbon market funding. While this is true in general, the ICVCM’s definition of additionality fails to account for the nuances of all green investments, particularly in the capital-intensive energy sector.
Addressing Quality Concerns in the Voluntary Carbon Market
VCM has faced a crisis of confidence in recent years due to issues like over-crediting and accusations of greenwashing. In response, the IC-VCM was established in 2021 to enhance market standards, culminating in the release of the Core Carbon Principles (CCP) in 2023 as the new standard for generating high-integrity carbon credits. Among these principles, the recognition of additionality plays a critical role.
Analysts often measure carbon credit quality using the Offset Achievement Ratio (OAR), which assesses the percentage of issued carbon credits that correspond to actual, additional emissions reductions achieved by the underlying project:
OAR (%) = (A × I) ÷ C × 100
In this formula, "A" represents the additionality factor, "I" is the actual reduction in greenhouse gas emissions achieved (measured in tons of CO2 equivalent, or tCO2e), and "C" is the total number of carbon credits issued. A low OAR indicates poor-quality credits, suggesting that the reduction of emissions achieved are far below the number of credits issued.
Most past scandals in the VCM involved nature-based projects, such as agriculture or forestry, where the reductions ("I") often fell short of the number of credits issued ("C"), leading to accusations of greenwashing. Renewable energy projects, by contrast, show a strong alignment between "I" and "C," reflecting real and measurable emissions reductions.
Despite this, renewable energy projects now face exclusion from the CCP-accredited and thus internationally recognized segment of the VCM due to the overly rigid application of additionality criteria. This risks unfairly penalizing projects that are essential to the green transition such as green energy production.
Why the Rigid Definition of Additionality Needs Revision?
The current definition of additionality works well for carbon projects that rely heavily on the funding provided by the Voluntary Carbon Market, such as nature-based solutions or experimental carbon capture technologies. However, it is unsuitable for capital-intensive green investments like renewable energy projects, which are based on robust business models. Green investors in these projects typically require long-term financial stability and cannot base their multi-million-dollar decisions solely on the uncertain returns from carbon credits. While these projects deliver huge and crucial emissions reductions, they should be awarded on the VCM similarly to other carbon pricing schemes. Otherwise, the VCM will unnecessarily limit itself and thus fail to fulfil the role for which it was created.
A New Framework for Additionality Suggested
To address these challenges, additionality criteria must evolve to reflect the unique dynamics of capital-intensive green investments. A revised approach should ensure basically that carbon credit revenues are integrated into the financial planning of green projects when making the decision around them, demonstrating their role in improving long-term return on investment.
Equally important is a commitment from project developers to reinvest proceeds from carbon credit sales into new climate-friendly initiatives. Transparent reporting mechanisms can ensure that this reinvestment directly supports additional green investments, creating measurable and ongoing climate benefits. By improving the return on investment and thus fostering green reinvestment, this new additionality framework strengthens the link between the VCM and the green transition of the global economy.
Supporting renewable energy investments through issuing high-integrity carbon credits can significantly accelerate the project deployment, shorten the payback period for green investors, and generate funds for additional green investments. This new additionality approach creates a multiplier effect, driving both electrification and renewable energy adoption, which are critical for achieving climate goals.
The future of renewable energy investments and the Voluntary Carbon Market are intertwined
The current approach to additionality in the VCM risks undermining renewable energy investments at a time when they are most needed. Revising the definition to better reflect the realities of capital-intensive green projects can restore renewable energy’s position in the VCM while ensuring the continued growth of clean energy production. This new framework has the potential to create a virtuous cycle of investment and reinvestment, supporting both the electrification of the economy and the long-term development of the VCM.
