A (brief) history of the voluntary carbon market

The world is in the early stages of a multi-decade transformation. Reaching net zero by 2050 is crucial to the survival of the planet. It’s also an incredibly tight deadline by which to save it.

The first and most important priority — decarbonisation — could take decades. For a world that has, according to The Economist, already sailed past the totemic 1.5°C target, ‘decades’ is not affordable. Nor, however, is phasing out entire industries on which society depends.

The terms of the Paris Agreement require a reduction of six gigatons of CO2 reduction annually. That’s the weight of all petroleum produced today. If society and the economy are to continue functioning — hospitals and homes and schools, to keep their lights on — carbon offsetting has an “unavoidable” place in transition plans, according to the IPCC.

Recent criticism threatens to do more than undermine two decades of market progress. The prospect of net zero hangs in the balance.

 

Growing a Market

The first and most important priority — decarbonisation — could take decades. For a world that has, according to The Economist, already sailed past the totemic 1.5°C target, ‘decades’ is not affordable. Nor, however, is phasing out entire industries on which society depends.

Seeds from the 1970s (or, early market formation and innovation)

Carbon credits have their roots in carbon neutrality, which gained ground in the 1970s. Human-induced global warming was just beginning to dawn on the public. Seeking to mitigate what negative climate impact they could, companies and individuals turned to ‘offsetting’ (as it was then known) as a promising solution. The concept was simple — and compelling. If an increase in harmful emissions in one place could be offset by equivalent removal or reduction in another, then net additional global greenhouse gas (GHG) emissions would be kept to zero. The first carbon offset project by a private company was documented in 1989. US power company Applied Energy Services planted 52 million trees in Guatemala to mitigate emissions generated by a plant in Connecticut, over 3,000 miles away. Seeing the potential power for market mechanisms in the fight against climate change, it wasn’t long until policymakers entered the fray. In 1997, over 150 member nations of the UN Framework Convention on Climate Change (UNFCCC) signed the landmark Kyoto Protocol. The treaty introduced per-country emissions caps, embedding government climate action within a framework of international collaboration. Just as important as why was how. Instead of regulating carbon emissions, negotiators made a marketplace out of them. The idea was to make decarbonisation cost-effective and efficient by creating financial flexibility and incentive, respectively. Compliance carbon markets — so called because participation is mandated — had two mechanisms:

• Under emissions trading or so-called cap and trade schemes, a country with excess permits could trade with a country exceeding its emissions targets.
• Under offsetting, a country exceeding its emissions targets could purchase a compensatory credit from an emissions-reducing project.

It wasn’t without precedent. In 1994, the US introduced sulfur and nitrous oxide markets in an attempt to reduce acid rain. Pollution came down along with the cost of reduction, proving that cap and trade could be the win-win solution policymakers had hoped for. In 2005, the Kyoto Protocol was ratified and the EU Emissions Trading System established. Meanwhile, the voluntary carbon market (VCM) – so called because, well, you guessed it — was just getting started.  

Sprouts from the 2000s (or, consolidation and strengthening)

Unlike the compliance carbon market, which is designed for and regulated by (supra) national carbon reduction regimes, the VCM caters to private sector companies seeking to meet emission reduction targets with offsets or credits. In the two decades following Applied Energy Services, their volume, type, and buyer grew gradually. Despite being a different type of market — and notwithstanding its failures — the Kyoto Protocol catalyzed two private-market developments that would fuel VCM growth. First, its programs proved that there could be serious demand for carbon credits beyond regulated countries. Second, it amplified the gravity of climate change to a global audience. And investors were listening. The term ‘environmental, social, and governance (ESG) investing’ was coined in 2005. In 2006, the United Nations launched the six Principles for Responsible Investment framework to guide investors on how to “incorporate ESG issues into investment practice.” From there, it took two decades for ESG to not only enter but define the mainstream. Catering to this new breed of shareholder were a growing number of Corporate Social Responsibility (CSR) programs and emission reduction commitments among publicly listed companies. They needed to offset their carbon footprints to meet their targets, and the VCM evolved to comply. Governed by standards rather than governments, a market framework was coming into focus. Between the 1990s and 2000s, four credit registries emerged. The American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard (GS), and Verified Carbon Standard still dominate the market today. It wasn’t until 2016, however, that the market really took off. Enter: The Paris Agreement.  

Sapling from the 2010s (or, mainstreaming)

The Paris Agreement catapulted the VCM into the heart of the 21st Century economy, marking the final chapter in its transition from green niche to global necessity. Next week, we chart the passage from landmark treaty to net zero.