Introduction
In other blog posts we’ve noted that higher quality projects tend to command higher credit prices on the Voluntary Carbon Market (VCM), and explained that today’s VCM project proponents and investors desperately need better project design and management tools to help them deliver that quality. This post summarizes the estimated current size and value of the VCM, explores industry analysts’ growth forecasts for the VCM, and evaluates the precursors required if the true potential value of the VCM is to be realized.
Industry watchers believe the VCM will grow ~25% a year through 2032…
More than half of the world’s largest companies have announced net zero targets. As the number of these extant commitments continue to increase, the VCM’s carbon market’s value has also been growing. According to Polaris Market Research & Consulting LLP, the global voluntary carbon credit market was estimated to be $1.9 billion in 2023, and is projected to hit USD 14.56 billion by 2032. The same research found that the market is likely to record a compound annual growth rate (CAGR) of 25.3% from 2024-2032.
… But climate experts believe the VCM needs to grow much faster to meet goals
While the abovementioned growth expectation signifies a remarkable opportunity, the Taskforce on Scaling Voluntary Carbon Markets estimates that the voluntary market must continue to grow at least as fast as it has been – i.e., grow to 15x its current size – through 2030 if society is to meet the goals of the Paris Agreement. By that point, McKinsey believes the market could be worth upward of $50 billion, with up to two-thirds directed towards nature-based solutions.
Source: A Thriving Market Solution for Emissions May be on The Way, McKinsey & Company
Nature-based Solutions projects must proliferate faster still
Within this market, demand for NbS projects such as afforestation, reforestation, wetland restoration, and sustainable agriculture is accelerating and will need to accelerate even faster to meet the demands of climate change. In the last three years, only 1.2% of the annual cost effective potential of NbS has been unlocked by the voluntary carbon market. According to a UN report entitled the “State of Finance for Nature”, overall investments into NbS projects will have to rise to more than double their current levels by 2025 and to $674 billion by 2050 in order to significantly confront the global crises of climate change, biodiversity loss and land degradation.
Billions in capital are searching for high-quality offset investments today…
Even after a turbulent year full of accusations of fraudulent carbon offset projects, company commitments to meet their net-zero goals continue, with companies purchasing and retiring a record 164 million offsets in 2023.
In a recent report MSCI Carbon Markets predicts that half of this demand will be from “nature-based solutions, creating a potential source of capital for these projects of up to 12 billion USD in 2030 and 100 billion USD by 2050.” Nevertheless there is currently a limited supply of the high-quality projects these buyers demand.
…But to achieve forecasted, let alone hoped-for growth, the VCM must solve its “Lemon’s Market” problem
George Akerlof shared the Nobel Prize in Economics in 2001 for his explanation of a “lemon’s market“, wherein one party to a transaction has far superior information to the other (“asymmetric information”) and defects are not obvious. The term “lemon” – describing a new car with numerous unseen problems – led to Akerlof’s name for this type of market.
A “lemon’s market” is inherently inefficient, because buyers and reputable sellers of high quality goods are harmed by buyers’ inability to distinguish superior goods. Frauds – i.e., those who sell poor quality projects by misrepresenting their quality – are uniquely advantaged in this type of market. While such markets may be improved by government intervention, they also create a free-market opportunity for legitimate firms to “signal” their integrity to consumers in a credible manner.
Fraud always involves the creation and subsequent abuse of trust between a buyer and a seller. To avoid stagnation, let alone grow, VCM projects must develop durable ways to credibly signal integrity and establish an unassailable level of trust between buyers and sellers.
Efforts Underway: Guardrails, Collaboration, Innovation
If the market is to grow at the pace necessary, experts agree that credit buyers need more assurance their investments will be relatively low-risk in the long run, so they will be more likely to up their commitments. Carbon Market Watch’s Benja Faecks says for this to happen, the industry may need more regulation: “Civil society, investors, and governments depend on transparent and credible rules to distinguish well-substantiated transition plans from those that remain inadequate and prone to greenwashing.” Meanwhile, with thousands of companies signed onto the Science-Based Targets initiative (SBTi) to audit their net-zero commitments, carbon offsets will need to quickly earn SBTi’s trust again, as concerns about quality are currently limiting their embrace.
And that will take collaboration. There is tremendous momentum, led by the Integrity Council for the Voluntary Carbon Markets initiative (ICVCM), and actions taken by registries and standards bodies like VERRA, Gold Standard, Climate Action Reserve, and Puro.Earth to clarify standards, rules, and regulations. New attempts to clarify what quality looks like include the ICVCM Core Carbon Principles and the Oxford Net Zero-Aligned Offsetting Principles. Gold Standard also recently launched a pilot phase for NbS Certification. Meanwhile, the newly-established “credit buyers’ club” Symbiosis Coalition is a collective of tech giants committed to contract up to 20 million tons of high-quality impact NbS carbon removal credits by 2030. According to Symbiosis’ Executive Director Julia Strong, this sends a “strong signal to project developers that buyers are willing to pay what it takes for high-quality projects that benefit the environment and local communities.”
Establishing a reliable signal of project quality
The problem today continues, nevertheless, to be inherently one of trust: Voluntary Market carbon project investors and credit-buying companies depend on the actual delivery of promised impacts by projects that usually do not offer sufficient performance transparency. Meanwhile, no one in the value chain – whether proponents, technical consultancies, investors, registries, or credit buyers – is inherently motivated to uncover bad project news once it reaches the crediting phase.
How can the VCM’s legitimate firms and projects credibly signal their integrity and establish an unassailable level of trust? It was this question that ultimately led to the birth of Impact Inside.
Impact Inside’s SaaS platform addresses key challenges faced by voluntary carbon market (VCM) buyers when evaluating nature-based solutions (NbS) projects. It enhances carbon project quality and project performance transparency, leading to increased buyer confidence.
Impact Inside was created not only to let carbon project proponents and their stakeholders to highlight the true story of their projects using objective, transparent information, but also to avoid the possibility of reporting fraudulent outcomes. By mapping a blueprint tailored to the unique project with measurement, reporting, and communications for both public and investors, Impact Inside leads proponents down a path to higher-quality credits, de-risked projects, and ultimately the more reliable, trusted information-driven market the world needs.
Conclusion
The global VCM has grown to $2 billion in a relatively short time and is expected to grow to nearly $15 billion by 2032. Meanwhile experts have made it clear that the VCM would need to grow even faster if the world is to meet climate commitments.
That said, if quality concerns are not overcome, the pervasive lack of buyer confidence and trust we see today will continue to hinder VCM growth.
That’s where we come in – Impact Inside makes project design, end to end measurement, reporting, documentation and storytelling more transparent, credible, integrated, and less burdensome.
Everyone has a stake in seeing the Voluntary Carbon Market expand and scale to its full potential. However, there is a limited and hard-to-detect supply of the demonstrably high-quality projects investors need. Of late, scores of administrative bodies and overseers have described to market practitioners what high-quality projects look like, but practitioners have few ready-made options to deliver projects that possess these characteristics. New to the market, Impact Inside at last gives project proponents, technical consultancies, and investors a platform that, when used, can send an unmistakable signal of quality to the market.
