31 years after the first offset
project was initiated
by a US electric power company in Guatemala, the voluntary carbon market
is in the dawn of a new era. We see three converging factors that are expected
to drive significant growth and institutionalisation of the market: namely, the
momentum behind corporate net-zero
the publication of a blueprint to scale the market by a taskforce of leading
experts; and the emergence of new technologies that will disrupt the production
and trading of offsets.
High complexity and uncertain rewards have impeded the growth of the market — in 2019, carbon offsets issued totalled 137m t Co2e or less than 0.5 percent of global emissions.
In its simplest form, a carbon
represents a reduction of 1 tonne of Co2e in greenhouse gas emissions that would
not have happened otherwise. In practice, this definition is highly complex to
implement. Sophisticated methodologies were developed over the years to ensure
that each offset is real, has not led to any unintended negative consequence, is
not double counted, and is independently verified. The multiplication of
standards and methodologies, coupled with the controversies around specific
activity types, have turned offsetting into a highly specialised domain with
many hidden risks for buyers and sellers.
Demand for offsets is driven by voluntary commitments to take responsibility for
one’s greenhouse gas emissions by financing emissions reductions elsewhere.
These voluntary commitments hinge on the expectation that civil society and
consumers will recognise the purchase of offsets — either by publicly supporting
those who do so or by factoring it into their purchase
The lack of clear signals from these stakeholders has historically undermined
the business case for voluntary offsetting, limiting it to a group of leading
The voluntary carbon market’s recipe for scale: demand-side momentum, scalable and institutional market infrastructure, emerging technologies.
Climate change awareness has experienced an unprecedented rise since the Paris
Agreement in 2015. Thousands of companies have signed-up to science-based
civil society and youth groups have led climate marches across the
and governments are slowly increasing their climate targets, with a few already
committed to achieving net-zero emissions by
With the rise in climate awareness, the business case for offsetting is
strengthening. Recognition that offsetting is a credible lever to drive down
emissions that cannot otherwise be avoided is growing among stakeholders. The
recently published Corporate Climate Mitigation
by environmental non-profit WWF specifically refers to carbon credits and calls
for investments in climate actions. We expect to see more of these
recommendations in the future and the convergence towards a broad-base
acceptance of offsetting as a credible tool in the climate-mitigation toolbox.
Demand alone, however, is not sufficient to secure the long-term growth of the
market. Structural challenges associated with price discovery, offset quality
evaluation, upfront costs financing and efficient trading are to be overcome for
the market to fulfil its potential. The good news is, that’s exactly what the
Taskforce on Scaling the Voluntary Carbon Market
has set out to do. The Taskforce released its final report — a blueprint to
overcome these challenges and institutionalise the voluntary carbon market —
last week. Whilst the implementation timeline remains uncertain, the recent
growth in demand provides the necessary incentives for market players to
coordinate the delivery of the blueprint. We expect to see the rapid emergence
of a centralised governance structure, a commonly accepted taxonomy and
standardised carbon contracts.
The last major hindrance to growth in our view lies in the complexity and costs
associated with the production of high-quality offsets. The annual verification
process underpinning the issuance of offsets relies on manual checks, email
communications, pdf files and excel spreadsheets. The voluntary carbon market is
one of the few sectors left untouched by the digital revolution of the last
decade. This is going to change as market players — including
SustainCERT — step up to provide digital
verification solutions, enabling real-time verification of data and
near-real-time issuance of carbon credits.
Digital transformation is on its way and will profoundly transform the voluntary carbon market.
Downstream digital innovations have recently emerged to transform the way
offsets are purchased and retired. Technology startups such as
Pachama or Wren
claim to simplify the process of calculating and offsetting one’s footprint.
Fortune Global 500 companies including SAP and BNP Paribas are investing
in technology-based offsetting solutions to capture their share of a market
expected to boom in the next decade. We expect to see an acceleration in these
downstream innovations with the purchase of offsets becoming integrated into all
The digitisation of the upstream segment has seen much less activity, and we
consider this to be an exciting area of growth for a company such as
SustainCERT. Upstream activities include all processes involved in producing an
offset: data collection, greenhouse gas calculation and third-party
verification. Emerging technologies such as IoT and satellite imageries will
simplify the data-collection process and significantly increase its accuracy.
Algorithm and machine learning can replace excel spreadsheets in the GHG
calculation process to produce consistent, comparable outputs in tonnes-of-Co2e
terms. Finally, the verification process itself is going to be radically
different. Currently performed as a one-time action repeated before every annual
issuance of offsets, it is set to become an ongoing process where data is
verified as it feeds GHG calculation algorithms.
As a result of these profound digital transformations, carbon offsets will be
verified and issued on a near-real-time basis going forward, costs and
complexity will be handled by software solutions and accuracy will be
significantly enhanced. This is a win-win-win for project developers,
carbon-offset buyers and the planet.