New Research Report: Understanding Voluntary Carbon Markets, Part 1

The use of carbon offsets to reduce greenhouse gas emissions has been hotly debated. Trading offsets through Voluntary Carbon Markets (VCMs) has the potential to direct significant amounts of capital to climate solutions and help high-emitting sectors (e.g., aviation, oil and gas) meet climate targets. However, many concerns remain about the quality and integrity of carbon offsets and the lack of regulation and oversight in this burgeoning industry. There have been numerous critiques of greenwashing.

To better inform this debate, it is necessary to improve our understanding of how the VCMs function and how to critically assess the quality of a carbon credit. A new study, the first in a series by the Institute for Sustainable Finance, CPA Canada and the International Federation of Accountants, provides a crucial resource for existing and potential market participants, including businesses, capital providers, accountants and the broader public, on the state of VCMs and their future development:

Download the full report: "Understanding Voluntary Carbon Markets, Part 1: Key considerations for professional accountants and purchasers on the carbon credit life cycle."

This first instalment of a three-part series covers the fundamentals of VCMs, including:

• Why do voluntary carbon markets exist?
• How do they differ from compliance markets?
• What is a carbon credit and how are they processed and used?
• Who is participating in the market and why?
• What are the criticisms of carbon credits, and risks and challenges for market participants?
• And what are the considerations for verifying, valuing and pricing credits?

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 total market size of VCMs is projected to grow to US$10-$40 billion by 2030.

But there are significant issues to overcome. VCM markets are non-regulated and some carbon offset projects’ effect in reducing emissions can be difficult to gauge. The use of low-integrity 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.

Exaggerated carbon reduction claims have eroded both public and market trust in these markets.

What’s on the horizon?

Two 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:

Part 2: Use of voluntary carbon credits in Canada and globally, and accounting & disclosure considerations

Part 3: The role of professional accountants in enhancing the integrity of VCMs

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 isfcanada.org.

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

About IFAC  

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 180 members and associates in 135 countries and jurisdictions, representing more than 3 million accountants in public practice, education, government service, industry, and commerce. 

Media contact

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