Resilience Dispatch #27: The VCM In Three Figures

Oct 1, 2022
 > This edition | The voluntary carbon markets, explained in three figures      
 Read the last Dispatch | The dark matter of the emissions universe
 Next Dispatch | What to do when portfolios hit the “value-carbon frontier” 
Carbon is a new global currency. If we’re serious about stopping climate change, every economic decision that society takes in the future will have to consider not just financial value, but climate value: is this action compatible with a stable climate, or does it add to the problem?

This special series of the Resilience Dispatch will explore how we can put more “money in the carbon bank.” That is, how do we invest to build up our natural carbon sinks? We’ll look at where demand comes from, how we design investments to be more effective, fair, and durable, and how we deliver real results.

We’re beginning on the demand side – where can we tap into additional climate ambition? In this Dispatch, we take stock of the current state of voluntary carbon markets and their power to move new finance for natural carbon sinks. In this edition:


This edition of the Dispatch explores the voluntary carbon markets through three charts. I admit three is an arbitrary number. When you dig into our data, there are many, many figures that can offer important insights on the market.

But these graphics do capture something essential about where the market is today. There has been a huge influx of new demand, new products, and new actors in a few short years. The market is getting much more complex, at dizzying speed. We’re seeing some things we haven’t seen before. But growth has also amplified some long-running dynamics.

“Buyers indicated that the quality of offsets was more important to them than price, and sellers all agreed that addressing issues of quality would ultimately determine how (and how fast) this market continues to grow.”– Ecosystem Marketplace, State of the Voluntary Carbon Markets

We wrote that not in 2022, but back in 2007. It remains true today: the voluntary carbon market’s ultimate success or failure hinges on the quality it delivers (and the perception of quality).

Of course, much has changed, too. In 2007, supply and demand were largely United States-centric. Today, the voluntary market is truly global. There are also more robust efforts to provide demand-side guardrails for companies on using offsets (such as the Voluntary Carbon Markets Integrity Initiative, or VCMI), and supply-side principles for ensuring integrity (namely, the Integrity Council for the Voluntary Carbon Market, or ICVCM).

It’s also important to put carbon credits into the larger context of climate action, both in a sense of scale and of time. Today it’s widely accepted that offsets shouldn’t represent more than 5% of any company’s mitigation strategy. The market is growing now, but there is a built-in ceiling, which we’ll reach when companies more fully decarbonize their operations, energy usage, and value chains. Yet we do need offsets for the near term to keep us on track with climate targets: global emissions reductions must happen much faster than we are actually going to be able to decarbonize the economy, or we hit very nasty climatic tipping points. Offsets, particularly in the voluntary market, enable additional climate action now, when net zero decarbonization is not yet possible.

Where will the market be in another five or ten years? Will nature-based credits still be the biggest share of the market? Will tokenization and blockchain be a driver of growth or a flash in the pan? Will responsible market actors squeeze out a new generation of “carbon cowboys” looking to make a quick buck? Are we ultimately heading toward regulation and a sunsetting of a purely voluntary market at today’s scale?

Time will tell – and we’ll be here to report on it through Ecosystem Marketplace. But I’ll make one prediction. What we’ve seen over the last 20 years is that the high-quality stuff is what endures.

– Michael


Is the market truly booming? Are offsets the next big solution or a scam? And what’s up with carbon crypto tokens? Here’s a quick tour through the voluntary carbon market, courtesy of our Ecosystem Marketplace analysts.

If you want to learn more, visit our public Data Intelligence & Analytics Dashboard, and download the latest State of the Voluntary Carbon Markets report, where all of these insights were first published.

One: Voluntary carbon credit transactions quadrupled in value last year, but in the big picture, they’re still a drop in the bucket.

Voluntary Carbon Market Value, pre-2005 to 2021.
Source: Ecosystem Marketplace.
Voluntary markets leapt from $520 million in 2020 to $2 billion in transactions in 2021. That jump was driven in large part by rising prices for credits, especially for nature-based credits for activities like reforestation, “blue” carbon from coastal and marine ecosystem projects, and avoided forest conversion. Buyers like these credits in part because they deliver non-carbon benefits such as income for communities, or protecting biodiversity. We’ll come back to that point later.

This boom is a sign that net zero carbon pledges are moving the needle, and companies and other actors are using offsets to trim emissions that are otherwise hard to cut right away.

It also means $2 billion in additional finance for green projects around the world. Overall, the voluntary carbon markets have delivered $8 billion in climate finance since we began tracking them in 2005. That’s a significant contribution to the climate effort, but when you compare it to, say, fossil fuel subsidies, which total $6 trillion a year, it’s a pretty small number.

Likewise, when you measure humankind’s total global emissions every year, voluntary carbon market activity at 500 million tons equates to only about five days’ worth of emissions. Carbon offsets, in other words, are a useful tool, but neither a silver bullet nor a global menace.

Two: Direct relationships and a good project story are still preferred over more standardized exchanges and crypto.

Buyers’ and Sellers’ Preferred Voluntary Carbon Market Transaction Methods, 2021.
Source: Ecosystem Marketplace.
We’re seeing lots of new entrants offering new ways to trade carbon credits. We asked our Global Carbon Survey respondents how they prefer to buy and sell.The vast majority still prefer bilateral deals between project developers and end buyers. These are advantageous for project developers, who can respond directly to corporate requests for proposals and build a relationship. Project developers also get to shine in retail marketplaces and niche marketplaces (the third and fourth most popular transaction options) that allow for storytelling and rich information about projects. And buyers get to develop a more direct relationship with the project proponents, who may be half a world away.

Intermediaries such as futures exchanges are popping up these days, but have yet to gain as much traction. By working with digital spot trading exchanges they can also offer standardized futures contracts pegged to specific project attributes or compliance requirements. As futures contracts become more common (so buyers can secure future supply of credits), these exchanges could get more popular.

Crypto has had a lot of recent media coverage, but was identified as respondents’ least preferred transaction method. Blockchain, as a disruptive technology, could represent a new area of innovation and growth, or, if abused, a throwback to the old “carbon cowboys” days of the voluntary markets. Several leading market institutions are developing guardrails to make sure that tokens marketed as delivering the benefits of carbon credits are in compliance with the standards bodies issuing the initial credits.

Three: Carbon credits are more like sandwiches than soybeans.

What’s in a Category? Ecosystem Marketplace’s Carbon Offset Project Typology, 2021.
Source: Ecosystem Marketplace.
In other words, they’re much more a heterogeneous product (with attributes that vary significantly from one another, and consumer segments with different quality preferences) than a homogeneous commodity. That might not be immediately obvious – isn’t a ton of carbon always a ton of carbon when it comes to mitigating climate change?

Yes. And yet one of the side effects of a renewed focus on carbon markets integrity has been a sharpening of preferences on attributes that differentiate one ton of CO2e from another: does the project deliver co-benefits for communities or biodiversity, for example? Is it a carbon reduction or removal? Is the credit nature-based or technological?

Suppliers have responded with lots of choices. We tracked 170 different credit types transacted last year. The figure above shows them grouped into eight general categories.

We’re seeing a very clear price premium above that price for credits with additional non-carbon social and environmental benefits. Projects in the Forestry and Land Use category command the largest share of trades (46%) and the highest prices with a weighted average price in 2021 of $5.80 per ton. (Our 2021 global benchmark price across the whole market is $4.00 a ton.)

Renewable energy comes in second in terms of trading volumes (43% of trades) but at far lower per-credit prices: $2.26/ton on average in 2021, probably reflecting a consumer segment that is mainly buying based on price – a very different group from the Forestry and Land Use buyers.

Ecosystem Marketplace has made a number of upgrades to its data infrastructure and user services in response to this diversity, to provide richer, more detailed, and even more highly vetted data. A high-integrity market requires not just transparency but granularity. As we’ve seen, there’s more to a credit than a ton of carbon.