Why the voluntary carbon market is key to scaling carbon dioxide removal and delivering net-zero

Sep 6, 2024

The voluntary carbon market is key to scaling carbon dioxide removal. Image: Getty Images/iStockphoto.

Nasim Pour

Lead, Carbon Removals and Market Innovation, World Economic Forum

Leila Toplic

Chief Communications and Trust Officer, Carbonfuture

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The voluntary carbon market (VCM) is one of the few transitional finance options that addresses the urgent need for large-scale CO2 removal.
Lack of guidance, transparency, and risk within the VCM have discouraged corporate participation in carbon dioxide removal.
A robust trust infrastructure and incentives are essential to strengthen the credibility of the VCM and help deliver net-zero.

The urgency to cut emissions, protect ecosystems, and deploy scalable carbon removal technologies is at an all-time high. Without immediate action, climate change – like more frequent extreme weather and rising sea levels – could reduce global GDP by up to 14% and displace 1.2 billion people as climate refugees by 2050.

Alongside urgent emission reductions, addressing historical and residual emissions through carbon dioxide removal (CDR) is imperative. Despite over 3,4 00 companies committing to net-zero, only 188 invested in CDR in 2023, with just 14 at over 10,000 tonnes of CO2 according to CDR.fyi. This gap highlights the challenge of turning pledges into real climate action.

Scaling carbon dioxide removal

The voluntary carbon market (VCM) plays a critical role in scaling CDR to meet global targets: up to 10 gigatonnes annually by 2050. It serves as a key mechanism for mobilizing private capital towards carbon removal projects. The VCM is one of the few transitional finance options capable of addressing the urgent need for large-scale emissions reductions. Investing in the VCM today is not just about immediate carbon mitigation; it’s about laying the groundwork for future scalability and impact. With 50% of net-zero emissions reductions projected to come from emerging technologies by 2050, early market demand by 2030 is essential. Corporations should view the VCM as a pre-compliance market, starting with CDR now to adapt ahead of future regulations.

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Support for the VCM is growing in some countries. In May, high-level public officials from various US Federal departments endorsed the VCM as a critical tool to combat climate change, emphasizing high-integrity carbon credits as the cornerstone for an effective VCM at scale.

Boosting carbon dioxide removal investment and impact

While VCM has existed for over two decades, it remains in its early stages, marked by controversy and uncertainty for corporate entrants. Companies active in the VCM have invested in managing these risks, but broader adoption requires clearer rules, lower entry barriers, and a stronger business case.

The VCM faces significant challenges that hinder its growth and credibility:

Transparency issues: A major critique of carbon markets is the lack of transparency. Often, detailed information about carbon projects is scarce, making it difficult for buyers to assess how their investments translate into real climate action.
Credibility of carbon credits: The credibility of carbon credits is frequently questioned due to unreliable information about carbon removal projects, often resulting from the inconsistent application and lack of rigorous monitoring, reporting, and verification (MRV) practices.
Environmental and social impacts: The actual environmental and social impacts of carbon projects are often under-examined. This oversight can lead to scepticism regarding the efficacy and fairness of these initiatives, especially in their effects on local communities and biodiversity.
Increasing public criticism of greenwashing: Public criticism and legal action over greenwashing claims deter companies from participating, even when acting in good faith.
Lack of clear guidance: The specific role that the VCM will play in achieving net-zero targets remains uncertain. Lack of guidance from internationally recognized market initiatives such as the Science Based Targets initiative (SBTi) on how companies could effectively incorporate CDR into their net-zero strategies has created additional uncertainty in the market.

These challenges create complexity and risk within the VCM, discouraging corporate participation in CDR and stalling CDR market growth. If unaddressed, climate action beyond corporate value chains may remain limited, jeopardizing the achievement of global net-zero goals.

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How is the World Economic Forum fighting the climate crisis?

The Global Risks Report 2023 ranked failure to mitigate climate change as one of the most severe threats in the next two years, while climate- and nature- related risks lead the rankings by severity over the long term.

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Scaling up green technologies: Through a partnership with the US Special Presidential Envoy for Climate, John Kerry, and over 65 global businesses, the First Movers Coalition has committed $12 billion in purchase commitments for green technologies to decarbonize the cement and concrete industry.
1 trillion trees: Over 90 global companies have committed to conserve, restore and grow more than 8 billion trees in 65 countries through the 1t.org initiative – which aims to achieve 1 trillion trees by 2030.
Sustainable food production: Our Food Action Alliance is engaging 40 partners who are working on 29 flagship initiatives to provide healthy, nutritious, and safe foods in ways that safeguard our planet. In Vietnam, it supported the upskilling of 2.2 million farmers and aims to provide 20 million farmers with the skills to learn and adapt to new agricultural standards.
Eliminating plastic pollution: Our Global Plastic Action Partnership is bringing together governments, businesses and civil society to shape a more sustainable world through the eradication of plastic pollution. In Ghana, more than 2,000 waste pickers are making an impact cleaning up beaches, drains and other sites.
Protecting the ocean: Our 2030 Water Resources Group has facilitated almost $1 billion to finance water-related programmes, growing into a network of more than 1,000 partners and operating in 14 countries/states.
Circular economy: Our SCALE 360 initiative is reducing the environmental impacts of value chains within the fashion, food, plastics and electronics industries, positively impacting over 100,000 people in 60 circular economy interventions globally.

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Building trust in the voluntary carbon market

To overcome these obstacles and strengthen the credibility of the VCM, a robust trust infrastructure and “incentives” are essential.

Infrastructure

While early adopters of CDR have made significant investments to navigate this complex landscape, the next wave of companies requires a more scalable and efficient market infrastructure. Fortunately, the necessary infrastructure including independent digital MRV (dMRV) systems, standards, and insurance options is already in place. These tools help de-risk purchases through rigorous due diligence, meticulous tracking of carbon project data, and independent third-party verification and certification. Additionally, leveraging digital and automation technologies can further enhance efficiency and accuracy in the VCM. For instance, Internet of Things can provide real-time data to dMRV systems, improving the accuracy of carbon removal projects and speeding up verification and credit issuance.

Incentives

Without a clear linkage between VCM participation and net-zero targets, corporates struggle to establish the link between the rationale for action on a macro level and the tangible mitigation outcomes on a micro level. Companies should be incentivized to adopt beyond-value-chain mitigation (BVCM) activities in addition to deep in-value-chain decarbonization. Market initiatives like SBTi should define how CDR credits contribute to corporate net-zero targets, offering clear guidelines on permanent removals and setting interim CDR targets to guide companies toward their net-zero goals.Governments are a powerful force for moving markets.Through regulation, policy and the direct purchase of technologies or credits, government action brings clarity and stability to industries and help move CDR innovations from the lab to the market. This would also create the confidence and certainty needed to encourage private-sector investors to fund CDR projects. A few governments have started to send demand signals through following mechanism:

Public procurement can create demand: In the US a $35 billion Regional DAC HUBs programme, is a first-of-a-kind government procurement programme – the CDR Purchase Pilot Prize. The Danish government's recent deal to purchase 1.1 million tonnes of CDR which is the second-largest CDR deal ever signed and the largest direct purchase by a government.
Inclusion in Emissions Trading Systems (ETS) can offer financial incentives: The Japanese government announced in April 2024 that it will allow CDR credits, in its GX League emissions trading scheme (GX-ETS). The UK Emissions Trading Scheme Authority has proposed extending the current carbon pricing system to encompass carbon removal, still pending final consultation.
Tax credits can reduce development costs: in the US the 2022 Inflation Reduction Act expands and extends the 45Q tax credit to a maximum of USD180 per tonne CO2 utilized or stored after capture from the atmosphere.

Early government signals have already begun to drive private-sector investment, essential for scaling the industry.

Committing to net-zero means committing to carbon dioxide removal

To rapidly innovate, implement, and scale up CDR technologies to match growing climate risks, companies and governments must invest in carbon removal solutions today to ensure cost-effective deployment at scale tomorrow. For companies, investing in CDR via the VCM is essential for translating net-zero commitments into tangible climate action.

Companies should:

Invest in durable CDR technologies as part of their net-zero strategy.
Require use of independent MRV for transparency on credit integrity.
Join industry consortia such as the World Economic Forum’s First Movers Coalition to share and learn.

By taking these steps, companies can make meaningful progress towards their net-zero goals and contribute to global climate resilience.

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