New collaborative research project: Understanding the Voluntary Carbon Markets

Many organizations plan to rely on carbon offsets when they aren’t achieving emissions reduction targets on their own. However, questions about quality and verification, and allegations of greenwashing, have challenged the integrity of Voluntary Carbon Markets (VCMs) and led to questions about whether they are effectively reducing greenhouse gas emissions. At the COP28 climate conference in Dubai, discussions on improving the quality of VCMs will be a priority.

To better understand the carbon credit markets and the related issues and challenges, the Institute for Sustainable Finance (ISF) has partnered with CPA Canada and the International Federation of Accountants (IFAC) to initiate a new research project. The research will examine existing carbon markets to understand best practices and standards that will ensure confidence in carbon markets, and identify key opportunities for CPAs to foster trust, bolster transparency and strengthen accountability in the voluntary carbon market. Learn more with our recently published teaser titled “Understanding the Voluntary Carbon Markets.”

VCMs were created with the intention of mobilizing capital towards nature-based climate solutions (e.g., afforestation/reforestation, wetland restoration) and innovative low-carbon technologies (e.g., carbon capture and storage, transportation electrification). VCMs also have the potential to help bridge the US$4.1 trillion nature financing gap by 2050, and support developing countries’ pursuit of Sustainable Development Goals (SDGs). The market size of VCMs is reported to have reached US$2 billion in 2021, quadrupling the value of 2020. The total market size of VCMs is expected to grow to US$10-$40 billion by 2030.

Opportunities and challenges with VCMs

Carbon markets have the potential to allocate capital to organizations that can reduce or remove carbon by allowing those that aren’t able to achieve enough emissions reductions to trade on the market, says ISF Director of Research, Dr. Ryan Riordan. “We’re using markets for what they’re supposed to be used for,” he says.

But the are significant issues to overcome. Many carbon offsets are not regulated or verified and their effect in reducing emissions is difficult to gauge. The use of low-value carbon offsets for attempted “greenwashing” by corporations has also been a problem. One often-cited example is the use of credits offered to preserve trees that were never in danger of being cut down.

A lot of the lack of public understanding around carbon credits has to do “with how quickly the market has grown over the past few years, and the complexity in the way it has evolved,” said Rosemary McGuire, Vice-President of Research, Guidance and Support at CPA Canada.

“There is not a great understanding of who’s generating the credits, who’s verifying them, and how to distinguish between the quality of various credits. And so that’s really the impetus for us in doing a bit of a deeper dive to uncover what the market and the infrastructure surrounding it look like, and then how the accounting profession can contribute to enhancing the transparency and credibility of the market,” she explains.

Despite the dramatic growth of VCMs and the opportunities it creates, the current state of VCMs is far from perfect. Exaggerated carbon reduction claims have eroded both public and market trust in these markets. Further, VCMs can lack transparency or suffer from potential conflicts of interest and poor governance. The accounting considerations of carbon credits, along with their function, creation process and overall role, is also unclear. Their prevalence, potential and limitations have caught the attention of policymakers, standard-setters and regulators.

What’s on the horizon?

This collaborative research series aims to inform existing and potential market participants, including organizations, capital providers, accountants and the public on the state of VCMs and their future development:

• In early 2024, the first instalment of the research will focus on the fundamentals of VCMs, including the differences from compliance markets, the process of generating and using carbon credits, as well as a description of the market participants and their incentives for participation. It also provides an overview of the criticisms, risks and challenges for market participants.
• Future installments will dive deeper into the accounting and verification issues, particularly against the backdrop of identified risks and areas of manipulation in the market. This phase of the project will explore the roles of CPAs in enhancing the integrity of VCMs and identify key opportunities to foster trust, bolster transparency and strengthen accountability as VCMs continue to expand in Canada, and around the world.

About the Institute for Sustainable Finance

ISF was launched in 2019 as a Canadian-specific centre of expertise and collaboration for advancing sustainable finance. Housed at Smith School of Business at Queen’s University, ISF is independent and non-partisan. It focuses on developing research, education, and collaborations among academia, business and government that will improve Canada’s capacity for sustainable finance as the shift to a low-carbon economy occurs. ISF’s work is generously supported by Ivey Foundation (inaugural supporter), McConnell Foundation, McCall MacBain Foundation, Chisholm Thomson Family Foundation, Smith School of Business, Queen’s University and Founding Contributors BMO, CIBC, RBC, Scotiabank and TD Bank Group. For more information, visit https://smith.queensu.ca/centres/isf/

About CPA Canada

Chartered Professional Accountants of Canada (CPA Canada) works collaboratively with the provincial, territorial and Bermudian CPA bodies, as it represents the Canadian accounting profession, both nationally and internationally. This collaboration allows the Canadian profession to champion best practices that benefit business and society, as well as prepare its members for an ever-evolving operating environment featuring unprecedented change. Representing more than 220,000 members, CPA Canada is one of the largest national accounting bodies worldwide. cpacanada.ca

Media contact

David Watson
Associate Director, Communications, Institute for Sustainable Finance
david.watson@queensu.ca
C: 613.796.3605