Decoding the Carbon Markets: Compliance vs. Voluntary

Now, more than ever, your climate commitments are watched and noted by everyone from the workforce to investors to customers.

As a result, your organization may be considering programs for its carbon reduction strategy or even full carbon neutrality. Yet the carbon market landscape is wide and varied, with its own vernacular to boot. Deciding where and when to jump in are daunting propositions, even for sustainability pros.

Here, we’ve compiled five things to know and consider before taking the plunge into a meaningful and credible carbon reduction strategy.

The Compliance (Mandatory) Carbon Markets and Voluntary Carbon Markets are not equivalent entities.

Not all carbon markets are created equal. It’s like if you’ve got a choice between a $5 Canadian bill and a $5 US bill: while both bills have the same denomination, they hold different values in different contexts, and which you’ll choose depends on your circumstances.

This is how we think of the two main categories of carbon markets. Both the Voluntary Carbon Markets (VCMs) and Compliance Carbon Markets (CCMs) offer carbon reduction solutions, but in different ways (and with different levels of certainty and credibility).

Here is an immediate overview of the two types of markets: how each operates, its advantages, and its shortcomings.

For an example of how this happens, check out this clip from John Oliver, or this one from later in the same program.

Each market offers different value propositions—the VCM expansive scope, accessibility, and a free market approach, and the CCM accountability, verifiability, and reliability. At Climate Vault, we turn to the CCM to knock out carbon because of the credibility and guaranteed additionality of locking up carbon allowances.

Verification matters!

Carbon programs aim to reduce or offset footprints in various ways, with varying levels of verifiability—proof that they accomplish the carbon impact they claim. That is, if they make any actual impact at all: a European Parliament report found that 85% of VCM offsets fail to reduce emissions.

Of course there are valid programs in the VCM, too. The onus falls on the participant, to learn how a program tracks and measures its offsets and to ask for verification of a program’s additionality.

Verification is more standardized when participating in the CCM. Emission allowances are serialized so they can only be used once, are fully auditable, and are definitively quantified.

Price does not always reflect value.

What is the cost of a ton of carbon? It depends: in the VCM, prices can vary from $10 to nearly $1200. Offsets in the VCM that cost more are generally more sound in their impact and long-term benefit to the environment, but this is not a perfect correlation. Factors other than cost-per-ton affect offset prices, such as broker percentages and registry fees.

Whatever the cost of offsetting a ton of carbon, the value of an offset factors in whether you actually get the tonnage you’re paying for—and what ripple effects it has. For instance, some offset projects actually harm the communities they set out to help. And depending on fees and commissions, much of your investment may never make it to a project developer.

Prices vary in the CCM, as well, although the market drives these costs rather than commissions and fees, and the price for a metric ton of carbon in the compliance market varies much less (and is often much more affordable) than in the voluntary market.

Offsets and allowances are an immediate bridge to carbon reduction, but not a long-term solution.

Despite all the focus they receive in the sustainability space, offsets and allowances are not going to reverse climate change. They provide immediate and necessary impact, but they alone are not sufficient.

Companies, individuals, and governments cannot truly prevent more severe climate change without changing their carbon behavior and/or developing technologies that lower the total amount of carbon in the atmosphere.

Truly powerful long-term solutions are in the works but will take a great deal of time (and other resources) to implement at scale—think nascent carbon removal technologies, or renewable power grids.

For reducing footprints now, carbon markets can bridge the gap from short-term impact (even immediate impact, in the case of locking up carbon allowances) to enduring difference. Programs like ours will ultimately leverage carbon reductions into long-term carbon removals.

One size does not fit all.

Considering the diverse landscape of carbon offsets and permits, each organization must determine its own best course for tackling its carbon footprint. But one thing is for certain: action is imperative, both for businesses and for the planet.

Top talent, customers, investors, other stakeholders: they all increasingly require environmental and social responsibility from companies. Staying competitive means showing a serious commitment to those responsibilities. Understanding the carbon markets helps you resolve the best course for your sustainability needs, according to your own specific circumstances.

To calculate your organization’s footprint and determine what’s best for your carbon reduction journey, say hi to the team. With Climate Vault, you can decode the carbon markets, leverage emission allowances to take lasting environmental action, and meet your sustainability goals.