Net zero forces the voluntary carbon market to grow up fast
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Net zero forces the voluntary carbon market to grow up fast

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Demand for carbon offsetting credits on the VCM has intensified as corporates look for solutions to reach net zero. But as more and more institutions look to tap this market, can the existing infrastructure cope?

On September 26, UK airline easyJet announced that it will abandon its carbon offsetting programme from January 2023.

It is the first big drop out from the global carbon offsetting club and it was a surprising announcement given the growing demand for offsets from high-emitting sectors struggling to meet their net-zero commitments.

Historically, easyJet has been a keen supporter of offsetting. In 2019, it made a £25 million-a-year commitment to offset jet-fuel emissions through reforestation and tree planting schemes. But it was also among several airlines accused in May 2021 by Greenpeace’s investigative arm Unearthed and The Guardian newspaper of using ‘phantom’ credits to reach neutrality on the basis that the reduced deforestation offsetting schemes used to justify carbon neutrality lacked adequate proof of emission savings.

Such accusations helped shed light on the opaque nature of the carbon credit markets and the limited traceability that goes with trading an intangible asset. However, they have not dampened interest in the concept.

With demand for carbon credits continuing to grow, new players are piling into the space with hopes of increasing finance for decarbonization
Maria Belen Losada, Itaú Unibanco

The total value of voluntary carbon offsets traded globally rose from $320 million in 2019 to $473 million in 2020 and exceeded $1 billion in 2021. Global guideline initiatives have also increased confidence in the market.

The COP26 climate conference last year delivered guidance on Article 6 of the Paris Agreement, which introduced market mechanisms supporting the transfer of emission reductions between countries and deals with the issue of double counting. The Taskforce on Scaling Voluntary Carbon Markets estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by as much as 100 times by 2050.

The voluntary carbon market (VCM) was originally set up as an environmental commodity marketplace, where participants could facilitate over-the-counter deals between credit issuers and large corporates with supposedly unavoidable carbon emissions.

Since 2015, the largest buyers of carbon offsets have included US auto manufacturer General Motors, the Walt Disney Company and Barclays. Recent data from BloombergNEF shows that Delta Air Lines and oil firm Shell were among the largest buyers of credits in 2021, until crypto-trading platform Toucan Protocol swept in and bought credits worth 17 million tonnes of CO2 for tokenization.

Now that net-zero commitments have surged in almost every sector, large banks are also rushing into this space, looking to scale up their carbon operations to give their smaller corporate and retail clients access to offsetting.

This will place unprecedented strain on the existing infrastructure of the VCM.

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What buyers want

At its core, purchasing a carbon credit means purchasing proof that a metric tonne of carbon was avoided or removed somewhere to compensate for a metric tonne that was emitted.

It is still unclear whether the supply of carbon credits – which comes down to capital flows invested in registered projects to scale up credit issuance – can keep up with market growth.

According to Climate Focus’s VCM Dashboard, which consolidates carbon credit data from global standards, 174.4 million carbon credits have been issued so far this year, down from 353 million in 2021. Renewable energy projects and nature-based solutions (NbS) represent 80% of all credit issuance, but the project methodologies are also becoming increasingly diverse and require standards bodies to maintain quality control.

“There are technology needs at the project level to accurately monitor emissions impacts to provide additional assurance credits are being accurately issued into the market,” says Hugh Salway, head of markets at Gold Standard.

From our perspective, the infrastructure within today’s VCM hasn’t necessarily been built and designed to keep pace with growing demand
Matt Raeside, UBS

Gold Standard was established in 2003 by WWF and other international NGOs to ensure projects that reduced carbon emissions featured the highest levels of environmental integrity.

“Five or six years ago, standards bodies and project developers didn’t have very large cash flows to invest into new technology,” Salway points out, "and the market wasn’t large enough to support exchange-based trading at scale."

Market data suggests that demand for carbon credits has slowed this year following the war in Ukraine and fears over inflation and its impact on economic growth.

Another reason might be the intense focus on the integrity of the VCM.

The market is becoming more sophisticated and rules based. The release of the draft Core Carbon Principles and Assessment Framework for high-quality carbon credits by the Integrity Council for the VCM adds a level of detail around key attributes such as registration, traceability, additionality and permanence.

This might be a factor that is deterring smaller corporates from entering the VCM. They worry about being called out for greenwashing if they opt for carbon credit spot trading without fully grasping the complexity around their own environmental significance. Facing reputational risk, buyers want more visibility on key indicators of credit quality.

For banks looking to bring offsetting solutions to their clients, it all comes down to price transparency.

“With demand for carbon credits continuing to grow, new players are piling into the space with hopes of increasing finance for decarbonization,” says Maria Belen Losada, Itaú Unibanco’s head of new business development for global markets and treasury. "However, to really unlock the carbon markets’ full potential, we need more visibility to better understand what investors are looking for."

As the largest bank in Latin America, where over 20% of carbon credit supply originates, the Brazilian bank has high stakes in this debate. It has pledged to become carbon neutral by 2050, which requires cleaning up a R$349 billion ($66.2 billion) corporate loan portfolio responsible for 9.3 million metric tonnes of CO2, according to its June 2022 net-zero commitment report. This might explain why Itaú backed the launch of Carbonplace, a global banking consortium aiming to establish a transaction network for carbon credits, in 2020.

The idea behind the consortium is that the VCM lacks adequate infrastructure for buyers and sellers to meet in an environment where price variations are immediately visible, and where expertise acts as a guarantee for integrity and transparency.

“For the market to become truly global, we need the right infrastructure in place to enable secure and efficient transactions,” says Junji Katto, Itaú’s digital assets product specialist.

Banks believe they are best placed to design these kinds of settlement platforms. Ultimately, the VCM is a commodity trading marketplace.

“Not everyone can access the voluntary carbon market, especially sellers in the global south. However, most people have a bank,” points out Losada.

Carbonplace uses the due diligence, know-your-customer (KYC) processes and connectivity of the global banking network to break down barriers to access.


There is a growing consensus in the banking sector that the VCM is not currently built to meet the demands of a diverse set of clients.

“From our perspective, the infrastructure within today’s VCM hasn’t necessarily been built and designed to keep pace with growing demand,” says Matt Raeside, principal investments and strategic ventures director at UBS.

One component of maintaining integrity of the voluntary carbon markets is ensuring that participants make credible claims associated with their use of credits to offset emissions
Rebecca Idell, UBS

The Swiss bank joined Carbonplace in 2021 amid hopes that the initiative’s use of distributed-ledger technology would help the market move beyond bilateral trading.

“Bilateral trading is slow, risky and very opaque at times," Raeside says. "Carbonplace will provide the integrated network. It’s a collaboration between what is the emerging carbon market and established world of banking.”

Since speaking to Euromoney, UBS has executed two pilot trades on Carbonplace, both of which involved buying a small quantity of carbon credits as part of the firm’s portfolio of carbon to test the internal processes of carbon markets and to demonstrate transaction models to clients.

Connectivity is fundamental to this technology. The market infrastructure depends on access to registries and standards bodies to efficiently trace credit ownership until retirement, which is when the carbon offsetting actually happens.

Rebecca Idell, executive director for global markets sustainable finance at UBS, says: “One component of maintaining integrity of the voluntary carbon markets is ensuring that participants make credible claims associated with their use of credits to offset emissions.”

When a corporate is trading in the VCM and making net-zero claims based on this activity, the hope is that any statement made about the offset would be factually accurate. But the market cannot operate on good faith, and Carbonplace sells itself on its ‘perfect accounting’ and effectively tracing credit ownership at any point all the way through to retirement.

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When the credits are onboarded to Carbonplace, a reference is created to the registry. As the credit is bought and retired, it is associated with a serial number both on the registry and the Carbonplace platform.

To achieve this, Carbonplace says credits should be traded on a standalone basis and not via bundled portfolios, as is often the case for large corporate buyers.

“Transactions are currently individually negotiated, and often credits need to be bundled," says Luiza de Vasconcellos, Itaú Unibanco’s environmental, social and governance business head. "This is not scalable or reliable.”

Having individual credits available for trading on the market means that buyers can look into the specific characteristic of each underlying project, allowing for a better assessment of non-financial additionality.

Throughout this infrastructure building process, the banking consortium is eager to demonstrate corporate responsibility. Carbonplace includes nine member banks whose efforts to communicate along a single narrative speaks to the sensitive nature of lobbying for carbon credit trading. No bank wants to be seen as helping clients to avoid transition responsibilities by prioritizing offsets.

Yet some of the problems that the banking consortium claims to address aren’t seen as such by the environmental commodity trading platforms that have been doing this for years.

Broadening scope

Carbon offsetting is now seen as an essential tool to reach net zero, and all kinds of corporates want access to the market. The VCM is first and foremost an environmental commodity trading platform; for some of its veteran stakeholders, it seems the banking sector is bringing uninformed retail and commercial participants into a marketplace that was built for specialists.

For companies building and operating the infrastructure for carbon-offset trading, some of the widespread criticism around limited transparency and standardization boils down to an information gap.

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“It’s a new sector,” says Henrik Hasselknippe, Xpansiv’s head of markets. "There are a number of participants coming in with solutions to problems that are not always there."

Part of global exchange platform CBL, Xpansiv covers 41% of the voluntary carbon market. Last year, 122 million tonnes of carbon were traded through its exchange and registry infrastructure. Hasselknippe argues that bilateral trading between counterparties will sometimes be the easiest way to execute a transaction. But what any exchange can do is remove the counterparty risk.

Users of the platform can submit bilateral trades to Xpansiv for clearing and settlement. This process is simplified by the use of standardized contracts, which act as a label to guarantee that each credit will meet a certain set of quality-related criteria.

Exchange platforms understand how fast the market is changing. Operators have been forced to focus on delivering as much granular data as possible. Each carbon credit project ID number will be linked to publicly available registry data according to variables including vintage, location, methodology and monitoring.

“It is mind boggling, this is more information than any commodity trader would likely have on most other commodities they trade,” says Hasselknippe. “Anyone who is an experienced commodity trader will understand how that operates.”

The problem is that not everyone is an experienced commodities trader. Questions arise as to whether the existing infrastructure is fit to onboard a whole new range of buyers with different interests and needs.

“Some of the key administrative aspects of the market – including the process of onboarding clients and KYC – are insufficient,” one banker at a large US firm tells Euromoney.

For some larger scale nature-based projects, geospatial technologies can help to more accurately understand what’s going on at the project level
Hugh Salway, Gold Standard

There has been considerable focus on blockchain technology as a tool to expand the VCM.

“It is a sensible technology for dealing in an intangible asset, and you want to be able to understand where it’s gone and manage double counting,” says Salway at Gold Standard.

At Carbonplace, the use of blockchain technology enables complete traceability. Unlike the compliance carbon market – where regulated entities obtain and surrender emissions permits and offsets under mandatory regimes – there is no overarching regulator monitoring the journey of each credit from issuance through the trading value chain.

Itaú Unibanco sees blockchain as the right tool to track the origin of the credit down to emission level and to reassure clients.

However, the bank did have concerns about public blockchain networks because of the intensive use of energy.

“We built Carbonplace on a private network. This way, we can control energy use,” says Katto.

Knowledge gap

On the verification side, standards bodies are also looking for technological support to keep up with the market pace.

For Gold Standard, the goal is to digitalize the whole certification process end to end. The firm has been looking at application programming interface (API) connectivity to digitalize monitoring, reporting and verification (MRV) processes.

“For some larger scale nature-based projects,” says Salway, "geospatial technologies can help to more accurately understand what’s going on at the project level. There are also technologies that can support monitoring cookstove projects through the use of sensors."

MRV technology could provide more reassurance that projects are accurately crediting. This would be applied at project level to determine how much emission reduction is achieved, but for VCM users it would also act as a quality guarantee because of more robust data.

But the market also needs better management across all the different carbon offsetting methodologies.

As government policies align with the global renewable energy agenda and the cost of these technologies falls, the VCM is moving towards not only nature-based solutions but also energy efficiency, waste management projects, industrial gases and fuel switching.

In NbS for example, where afforestation and reforestation projects dominate supply, there is much to be done in terms of standardizing blue carbon credit methodologies for coastal and maritime ecosystems to be monetized.

Technology can help with managing some monitoring issues, but expertise is also needed for verification and auditing. The majority of new users of the VCM are financial services firms, which do not have the requisite environmental expertise.

“The biggest bottleneck right now is in the labour force,” says a spokesperson from US non-profit Verra, which works on global standards for sustainability. "There aren’t enough people at the project management level who understand how our methodologies work.

“Even the rating agencies doing the project evaluations are coming in with a banking mentality,” the spokesperson adds. "They know banking, they know what makes a strong commoditized product and what their clients will want to see."

So much of what goes into evaluating a project is subjective. The hope is that as the market grows, expertise will follow. For this to work there needs to be more dynamic participation, driving prices upwards and increasing capital flows towards projects.

Until this happens, more users may follow easyJet and quit.

The airline has said it will now focus on investments in low-carbon technologies including the scaling up of hydrogen-powered jet engine production. Carbon offsetting will, however, remain a practical solution for most large corporates to mitigate unavoidable emissions.

The VCM will have no choice but to adapt to newcomers in order to drive capital flows towards carbon-avoiding and carbon-removing projects.

The commodity trading exchange platforms might not have anticipated such a diverse set of client needs, but they can learn from new market initiatives targeting carbon offset trading to bring the right kind of infrastructure to the VCM.


Token participation

Voluntary carbon markets have proved a magnet for tokenization. More and more crypto companies are buying credits, launching their own platforms and even creating registries. And they are moving quickly.

Web3 services company Likvidi was launched in 2019 as a security token adviser. By September of 2022, the British Virgin Island registered startup has launched a trading platform, a forest carbon registry and its own collection of carbon credit yielding non-fungible tokens (NFTs) called Origins.

“The average person’s yearly carbon footprint is about six tonnes, and our NFTs yield around 12 tonnes, so you are well offset just by owning and staking one NFT,” says chief executive Ransu Salovaara.

The 120 NFTs it has created are linked to Verified Carbon Standard (Verra)-approved carbon sequestration projects. Individuals can ‘stake’ their decentralized wallet, link it to an NFT on the Likvidi platform and then start to earn carbon credits.

“We operate on the blockchain not on the registries,” says Salovaara, "but we do inform the registry that these tokens are on behalf of NFT owners."

For Likvidi, the point is to help individuals to access the VCM.

Since the registries don’t cater for individual traders, crypto companies are setting up shop elsewhere on the public blockchain.

“We have our own registry, VeriForest, with a pilot project in Tanzania, and that will be then fully satellite and blockchain based,” explains Salovaara.

Likvidi can only look to buy already retired carbon credits to advertise on its platform.

“We retire them when you take them from Verra on behalf of NFT holders, who are the final destinations of the credit,” he says.


This fragmentation of the market is a problem for standardization. Since May, a temporary ban has been in place on tokenization of carbon credits after Toucan Protocol started ‘bridging’ retired Verra credits, exchanging them for tradable tokens.

According to S&P Global, around 22 million Verra-issued credits have been bridged on-chain. The speculation of such intangible assets was threatening the traceability and accountability the VCM depends on.

“If you have a model where credits are retired on a registry and then there’s a token created elsewhere, then the registry can no longer act as the source of truth,” says Hugh Salway, head of markets at Gold Standard.

Standards bodies don’t intend to ban blockchain technology altogether, and discussions are taking place on what role tokenization will now have in the carbon credit space. Verra has issued a statement saying it wants to explore the possibility of “immobilizing” credits in accounts on the registry. These would then be available for tokenization “provided that this can be done in a way that prevents fraud and upholds environmental integrity.”

The Toucan story attracted a lot of attention, but it is difficult to tell just how far tokenization can go. Ultimately, it comes down to whether retail clients have a place in the market.

“Tokenization is targeting a very different segment,” says Henrik Hasselknippe, head of markets at Xpansiv, part of global exchange platform CB. “If you are a large commodity trader or a large industrial company planning to use carbon offsets as part of your net-zero commitment, you’re not going to do that with a crypto token that you bought off an anonymous player on the public blockchain.”


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Sustainability and ESG senior reporter
Marianne Gros is sustainability and ESG senior reporter. She joined Euromoney in 2022, having previously covered asset allocation news in the European institutional investment space.
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