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A thought experiment to fix the VCM

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By Roger Cohen

· 7 min read

The Voluntary Carbon Market (VCM) is severely flawed, marked by scandals, questionable practices, ineffective offsets, and instances of wrongdoing. The risk of unintentional greenwashing is high, and the actual impact of many offsets is uncertain. Each new problem diminishes trust, leading to calls for improved standards, transparency, and accountability, but these efforts usually result in only small improvements until the next issue arises and the process repeats. We need a radical overhaul to fix the system and restore confidence.

A new VCM system can be constructed, supported by strong, easily tradable offsets with unquestionable quality and integrity. This will bring back confidence and numerous other benefits, hastening the transition to sustainability.

While it may seem like a significant challenge, it is entirely achievable if, instead of making incremental changes after each system failure, we recognise that the system is broken beyond repair. It's time for a fundamental redesign. This doesn't have to be complex, but it needs to be comprehensive.

A new VCM

The current approach in the Voluntary Carbon Market revolves around projects where the priority is to create and deliver offsets. This is its fundamental flaw – delivering offsets – ahead of delivering positive impact. The result is a fragmented and opaque marketplace, in an unregulated environment with little transparency, low confidence in the certification process and ultimately delivery of a suboptimal product. The pursuit of quick gains leads some to compromise integrity which further damages an already weak system. Although there are exceptions, the VCM lacks mechanisms for self-correction, enabling scandals to surface and persist.

To address this, a fundamental shift is needed. The focus should move away from maximising offset delivery and instead prioritise two key goals:

  1. funding high-integrity projects globally that provide positive environmental benefits and
  2. creating a market with standardised, tradable offset instruments.

In the current framework, this does not work. In this article, we concentrate on changing the system to create the latter. From this, the former would follow.

A ‘perfect’ offset should represent:

  • One tonne of CO2e prevented, avoided, or sequestered.
  • Be standardised, listed, and openly traded on one or more exchanges.
  • Subject to a primary market mechanism for issuance within a well-regulated framework (via auction or bookbuild).
  • Governed by a regulatory framework controlling issuance and directing funds to the ‘best’ projects.

By generating offsets ‘at the chimney’ rather than through a project-led approach, it becomes theoretically possible to create perfect standardised offsets, addressing many pitfalls of the current VCM.

The impact of these standardised fungible offsets is conceptually measurable, universal, and transparent. The current connection between price (tied to a project) and tons of carbon can be severed. This linkage has been a major contributor to the shortcomings of the VCM in its current form, encouraging projects to maximise delivered carbon tons ahead of impact and integrity. This approach does not align with establishing a stable and transparent market. Instead, it incentivises behaviours that cut corners, obscure information, and allow certain participants to gain disproportionate returns at the expense of others. A system that prioritises positive impact over tons of carbon will yield much better results.

Another crucial element missing from the current VCM is a genuine marketplace. Such a marketplace would facilitate price discovery by participants rather than having it dictated by parties who have created ‘pseudo marketplaces,’ as outlets for their products. These are more akin to supermarkets – providing access to a range of products – rather than a place where price discovery and trading take place. A true marketplace would encourage liquidity. It would be indifferent as to whether participants are buyers or sellers and for what purpose they are participating. Its sole purpose would be to enable buyers and sellers to meet as efficiently as possible. With standardised fungible offsets, the market would establish forward curves, allowing participants with different goals (covering emissions, managing risk, speculating, etc.) to transfer spot and forward risk at 'fair' prices. Properly regulated, this would result in a functional VCM that is robust, stable, and less susceptible to misuse and misconduct than the current one.

Scepticism and mistrust around the VCM would diminish if participants had confidence in the underlying instruments and their pricing in the marketplace. Primary flows into this market (from issuance of offsets) would raise funds and enable the establishment of a framework for investing in projects focused on combating climate change rather than maximising the number of carbon credits created.

Without a direct linkage between price and tonnes of carbon, money from offset issuance can be recycled towards projects on the basis of merit. Project developers can focus less on maximising the number of offsets they produce and more on positive outcomes. A diverse range of projects, which vary by type, geography and scale can be funded. Fragmentation of the market with the creation of small tranches of non-fungible offsets will no longer be a problem. 

However, managing funds from ‘chimney-led’ offset issuance introduces new complexities and potential abuses. Assuming that the challenges around project selection, funding, verification, and monitoring have been adequately addressed, we focus on the market. This big assumption will be the subject of further exploration and discussion elsewhere.

A fungible ‘chimney-led’ offset system can address many current VCM deficiencies. This will mitigate risks related to offset selection, transparency, fair pricing, and impact:

  • Transparency from project origination to offset consumption will increase, reducing behaviours like price gouging and misreporting.
  • Funding projects for impact makes opaque pricing and outsized profits more challenging.
  • Secondary trading of fungible offsets on an independent market reduces information asymmetries and promotes efficient price discovery and market integrity.
  • End consumers, often small to medium businesses, benefit as they face less risk when projects go awry. They can use offsets confident that they are ‘true to label’.
  • The current VCM's inherent instability due to lack of transparency can be mitigated by continuous information disclosures, enabled and enforced within a robust regulatory framework.
  • In a system where the price isn't directly tied to ‘tons of carbon’, money generated from primary offset issuance can be redirected based on the merit of projects. This portfolio approach encourages project developers to prioritize positive outcomes over maximizing the number of offsets, supporting a diverse range of projects in terms of type, geography, and scale. The current issue of fragmentation caused by small, non-fungible offset tranches would cease to be a problem.
  • Shifting the focus from creating as many offsets as possible to facilitating sustainability at scale, regardless of rising carbon prices, would lead to a more sustainable and balanced market framework. This framework would encourage investment in projects that prioritize large-scale carbon reduction rather than profiting from offset creation in a rising market.

Voluntary vs. compliance markets

There are similarities between fungible standardised voluntary offsets and the emissions allowances which underpin emissions trading schemes (ETSs) in regulated compliance markets (such as the EU, the UK, New Zealand and more). Their environmental impact will be almost identical. This means that the market will be able to benchmark voluntary offsets with reference to ETS instruments. This will aid the price discovery process by allowing the market to price the similarities and differences between the two categories of instruments. It will also generate trading opportunities around the [rice spreads between the instruments. Overall, this should increase prices of VCM instruments (towards their compliance counterparts) and increase liquidity across the whole of the carbon markets.

Concluding remarks

In summary, while the significant challenge of managing funds for projects supporting offset issuance must be addressed, decoupling offsets from these projects can pave the way for an efficient voluntary carbon market. This market can embody the positive attributes of counterpart markets such as for stocks and commodities These include transparency, price discovery, liquidity, and broad participant access. A robust regulatory framework will mitigate inconsistencies and instabilities that currently exist.

The envisioned outcome will be a trusted, robust, and transparent offset market with a fair risk-reward paradigm. It will serve as a channel for directing funds to projects that prioritise decarbonisation and positive environmental impact over merely maximising offset delivery in the current flawed marketplace. 

It is time to fix the voluntary carbon market system.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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About the author

Roger Cohen is the founder and CEO of C2Zero, a for-purpose company providing businesses and consumers with access to the compliance carbon markets. He is also a co-founder of, the world's first family of physical carbon indices.

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