VCM 3.0: how the market is maturing to overcome challenges

The voluntary carbon market (VCM) has had a tough couple of years. Following multiple high-profile academic papers and articles questioning the integrity of carbon credit projects, prices and trading activity have plummeted. 

Criticism dampens the market’s growth each time it seems poised to take off. Yet, the market has no one to blame but itself. To truly evolve and unlock its potential, the VCM must return to its original purpose: serving as a financing mechanism to channel funds toward projects that make a measurable positive impact on the environment.

This article explores how the market has developed, where it stands today, and how it can evolve to fulfill its foundational mission.

A VCM recap

The VCM’s origins date back decades; in that time, it’s been characterized by periods of increased activity and excitement, followed by a crash in confidence. Its most recent boom-bust cycle was in the 2010s. This was driven by the inclusion and subsequent removal of the UN’s Clean Development Mechanism projects from the EU’s Emissions Trading System. During this period, projects in the market were primarily large-scale renewable energy initiatives.

The years that followed saw the emergence of new standards and project types, culminating in the market’s accelerated activity leading into 2020. High-profile initiatives like REDD+ and clean cookstoves captured attention by offering both environmental benefits and marketing appeal. 

The marketing benefits were instrumental in helping the market increase its reach and attract new buyers. By offering both social and environmental benefits, the VCM could help companies make compelling claims about their social and environmental bonafides. However, these projects inherited systemic flaws from earlier iterations of the VCM: generous estimates of emissions reductions led to overcrediting, with all stakeholders (projects, buyers, intermediaries, standards) incentivized to maximize the issuance of credits. The overcrediting fueled the most recent criticisms, starting in late 2022 – brands relying on these credits to offset emissions were alleged to be covering only a fraction of their pollution.

Currently, the VCM is dominated by renewable energy, REDD+, and clean cookstove projects, which accounted for 60% of retirements in 2024 (see chart below). These projects are typically located in lower- and middle-income countries, while buyers are based in high-income nations. As a result, the social and environmental benefits are often far removed from the consumers funding the credits.

In sum, the market is plagued by several critical shortcomings, including:

1. Overcrediting has eroded trust in the market’s integrity

2. Social co-benefits are sometimes prioritized over environmental effectiveness

3. Buyers incur the costs of credits but rarely experience direct benefits

These issues are beginning to be addressed as the market transitions into a new phase.

How VCM projects will evolve

The future of the market lies in returning to its roots: financing cost-effective emissions reductions. Below are three trends shaping the VCM’s evolution.

1. Prioritizing emissions reductions over co-benefits

While co-benefits like improved health, education opportunities, and gender equality are great for carbon projects, they cannot substitute for measurable emissions reductions — which are the market’s raison d’etre. In the past, the marketing appeal of co-benefits often overshadowed environmental effectiveness, especially when funding came from corporates’ marketing budgets. Projects were selected for their photogenic qualities rather than their ability to verifiably reduce carbon emissions.

This focus is shifting. Buyers now face mounting pressure to avoid accusations of greenwashing, with the media scrutinizing whether projects meet their stated environmental goals. As a result, demand is rising for projects that prioritize verifiable emissions reductions or removals, such as direct air capture (DAC). While these projects may lack extensive co-benefits, they align closely with buyers' core objectives — ensuring that one ton of credits represents one ton of carbon removed or avoided. 

2. Expanding geographic diversity

Legacy VCM projects were often designed to channel funds from high-income to emerging markets, in line with the Kyoto Protocol’s mission. However, the Paris Agreement’s broader climate goals require emissions reductions across all geographies. This has led to the development of projects closer to where credit buyers and their customers are located.

For example, agriculture projects in Europe, peatland restoration in the UK, and engineered removal projects in the US showcase the benefits of localized initiatives. These projects not only address emissions reductions but can also create new businesses and jobs, helping rebuild trust in the VCM. Indeed, many new carbon removal projects in the US have been built in Republican states, ensuring that the industry is creating new employment opportunities in areas that may have otherwise been politically hostile constituencies. This shows that there is a tangible benefit for the VCM to expand geographically.

There are other promising examples of the VCM having a tangible benefit to consumers. Consider projects focused on insulating homes and replacing old boilers with heat pumps in England. These initiatives demonstrate how carbon finance can create immediate, relatable benefits, showcasing the VCM’s potential to positively impact consumers directly.

3. Embracing transparency

Advances in digital monitoring, reporting, and verification are transforming the VCM. Tools like remote sensing for afforestation projects and lifecycle emissions assessments for carbon credits are increasing transparency, allowing buyers to track project effectiveness in near real-time. New standards like Isometric, for example, mandate projects to include detailed information about their emissions as part of their registration process.

On the corporate side, more and more companies are also embracing transparency by documenting their emissions. And once companies report their emissions, a natural next step is for companies to determine how to lower them. This has also improved understanding of the costs associated with reducing emissions — whether through internal operations, supply chain, or offsetting projects. 

By understanding their abatement cost curves, companies can identify the most cost-effective solutions for emissions reductions. In some cases, those reductions come from lowering their own footprints, but in other cases, it’s cheapest to reduce emissions via third party projects. The key is that the emissions reductions need to be real and represent a ton of carbon reduced or removed from the atmosphere: without the ability to accurately quantify emissions reductions, the market cannot fulfill its mission and will fail. 

Building the VCM’s future

The trends described above mark a promising shift toward a more effective and trustworthy VCM. However, one critical challenge remains: addressing the oversupply of legacy credits. Currently, over a billion tons of credits are available for purchase, with many credits coming from projects that would not be able to get onto a registry today. Reducing this oversupply is essential to creating a market that prioritizes quality over quantity.

Initiatives like ICVCM are helping by certifying credits that meet rigorous standards while phasing out less scrupulous methodologies. As the market moves forward, such measures will be critical to ensuring that the VCM fulfills its potential as a robust tool for climate action.

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.