Sustainability and Risk Practices
How the voluntary carbon
market can help address
climate change
The voluntary carbon market is gaining momentum and plays an
increasingly important role in limiting global warming. Here’s how.
This article was a collaborative effort by Christopher Blaufelder, Joshua Katz, Cindy Levy,
Dickon Pinner, and Jop Weterings.
© Getty Images
December 2020
As business leaders set increasingly ambitious standards such as Gold Standard and Verified
commitments to reduce global greenhouse-gas Carbon Standard (VCS)—credits can be issued.
(GHG) emissions, a market is developing that can The impact of a carbon credit can only be
help to achieve them by supplementing companies’ claimed—that is, counted toward a climate
efforts to reduce their own emissions. This is the commitment—once the credit has been retired
rapidly growing market for voluntary carbon credits. (canceled in a registry), after which it can no
longer be sold. A carbon credit is considered a
Carbon credits (often referred to as “offsets”) “voluntary carbon credit” when it is bought and
have an important dual role to play in the battle retired on a voluntary basis rather than as part of
against climate change. They enable companies to a process of compliance with legal obligations.
support decarbonization beyond their own carbon
footprint, thus accelerating the broader transition The proceeds from the sale of voluntary carbon
to a lower-carbon future. They also help finance credits enable the development of carbon-
projects for removal of carbon dioxide from the reduction projects across a wide array of project
atmosphere—delivering negative emissions, which types. These include renewable energy; avoiding
will be needed to neutralize residual emissions that emissions from fossil-fuel based alternatives;
will persist even under the most optimistic scenarios natural climate solutions, such as reforestation,
for decarbonization. However, while the voluntary avoided deforestation, or agroforestry; energy
carbon credit market is currently experiencing efficiency; and resource recovery, such as
significant momentum, it is still relatively small. avoiding methane emissions from landfills or
The recently launched report by the Taskforce on wastewater facilities; among others.
Scaling Voluntary Carbon Markets aims to create
a blueprint for solutions that could help overcome While most of these project types including
obstacles to its further growth. (For more about renewable energy, avoided deforestation, and
the Taskforce, which McKinsey supports as a resource recovery focus on avoiding carbon
knowledge partner, please read our article "Scaling emissions, others, such as reforestation, focus on
voluntary carbon markets to help meet climate removing carbon dioxide from the atmosphere.
goals."¹) This article will explain how carbon credits This is a meaningful difference, illustrating the
work and how they can help in the global effort to dual role voluntary carbon credits can play in
address climate change. addressing climate change:
— In the short term, voluntary carbon credits
The dual role of voluntary carbon from projects focused on emissions
credits in addressing climate change avoidance/reduction can help accelerate
A carbon credit is a certificate representing one the transition to a decarbonized global
metric ton of carbon dioxide equivalent that is either economy, for example by driving investment
prevented from being emitted into the atmosphere into renewable energy, energy efficiency, and
(emissions avoidance/reduction) or removed natural capital. Avoiding emissions is typically
from the atmosphere as the result of a carbon- the most cost-efficient way to address
reduction project. For a carbon-reduction project atmospheric greenhouse gas concentrations.
to generate carbon credits, it needs to demonstrate
that the achieved emission reductions or carbon — In the medium to long term, voluntary carbon
dioxide removals are real, measurable, permanent, credits could play an important role in scaling
additional, independently verified, and unique (see up carbon dioxide removals (or negative
sidebar, “Criteria for carbon credits”). If a project emissions) needed to neutralize residual
meets these criteria—as specified by independent emissions² that cannot be further reduced.
¹Christopher Blaufelder, Cindy Levy, Peter Mannion, Dickon Pinner, and Jop Weterings, “Scaling voluntary carbons markets to help meet climate
goals,” November 2020, McKinsey.com.
²Emissions that can only be eliminated at prohibitive cost or that cannot be eliminated with existing technology.
2 How the voluntary carbon market can help address climate change
Criteria for carbon credits
Carbon credits should represent emission reductions or carbon dioxide removals that are:
— real and measurable—realized and not projected or planned, and quantified through a recognized methodology, using
conservative assumptions
— permanent—not reversed; relating to projects with a reversibility risk such as forestry projects, which could suffer from fire,
logging, or disease. Here, comprehensive risk mitigation and a mechanism to compensate for any reversals need to be in
place.
— additional—would not have been realized if the project had not been carried out, and the project itself would not have been
undertaken without the proceeds from the sale of carbon credits
— independently verified—verified by an accredited, independent third party
— unique and traceable—transparently tracked in a public registry and not double-counted
Additionally, it is important that appropriate safeguards are in place to ensure projects comprehensively address and mitigate all
potential environmental and social risks.
In a recent analysis, we found that at least 5 Aligning such a target’s ambition level with the
gigatons of negative emissions will be needed latest climate science is widely seen as best
annually to reach net-zero emissions by 2050. practice. In other words, the target needs to be
These could be realized through a combination in line with the level of decarbonization required
of natural climate solutions such as reforestation to limit global warming to well below 2 degrees
(for example, sequestering carbon in trees) and Celsius above preindustrial levels at a minimum—
nascent technology-based carbon capture, use, and ideally be in line with a 1.5-degree pathway,
and storage solutions such as direct air capture which scientists estimate would reduce the odds
with carbon storage (DACCS), and bioenergy with of initiating the most dangerous and irreversible
carbon capture and storage (BECCS). Voluntary effects of climate change. The Science Based
carbon credits can help finance the scale-up of Targets initiative has developed methodologies
these solutions. for setting such a target, which have been already
adopted by more than 1,000 companies, including
many leading multinationals. To achieve the
The role of voluntary carbon credits in required emissions reductions, companies can
corporate climate commitments pull levers such as improving energy efficiency,
A credible corporate climate commitment begins with transitioning to renewable energy, and addressing
setting an emissions reduction target that covers value chain emissions.
both a company’s direct and indirect greenhouse
gas emissions: if a company does not already have As a next step, a company may commit to a
an emissions baseline from which to set a target, target that involves the use of voluntary carbon
creating one is a necessary first step. credits—either to compensate for emissions
How the voluntary carbon market can help address climate change 3
that it has not been able to eliminate yet or to Strong momentum, mainly driven
neutralize residual emissions that cannot be further by new corporate commitments and
reduced due to prohibitive costs or technological point-of-sale offerings
limitations. These types of targets come with Following three years of robust growth, the
various designations (for example, carbon neutral, voluntary carbon market³ reached a record
climate neutral, net-zero, carbon negative, climate high in 2019, both in terms of issuances and
positive) but they all typically involve a company retirements (exhibit). Issuances were 138 million
supplementing reductions achieved within its own tons of carbon-dioxide equivalent—almost
carbon footprint by financing reductions elsewhere double the 2018 volume—and retirements
through the purchase and retirement of voluntary 70 million, a 33 percent increase compared
carbon credits (see sidebar, “Types of carbon with 2018. This growth has been driven by
targets”). By offsetting its remaining emissions a combination of new corporate climate
in this way, a company can claim it is mitigating commitments, such as those to carbon neutrality
its residual impact on the climate. Some, such as and net-zero, as well as so-called “point of sale”
Microsoft, have gone further by setting aspirations offerings of voluntary carbon credits, such as
to make a net-positive impact on the climate. Shell’s carbon-neutral fuel, which is a bundled
³ We estimated the voluntary carbon market size based on five standards: VCS, Gold Standard, Climate Action Reserve, American Carbon Registry,
and Plan Vivo. We excluded ARB-eligible credits and Gold Standard-labeled Certified Emission Reductions (CERs) used for meeting compliance
targets.
Types of carbon targets
In the context of corporate target setting, “carbon neutral” refers to offsetting all unabated greenhouse-gas emissions through
the application of carbon credits to a given part of an organization’s footprint (for example, company-level, activity-level,
product-level), usually on an annual basis. The term carbon neutral is typically used to cover other greenhouse gases as well;
relevant standards, such as PAS2060, clearly specify carbon neutral’s scope as including carbon dioxide equivalent (CO2e)
emissions, beyond just carbon dioxide.
“Climate neutral” is often used interchangeably with carbon neutral, but it places more of an emphasis on covering greenhouse
gases beyond carbon dioxide. In addition, it can include climate impacts other than greenhouse-gas emissions, for example,
radiative forcing from aircraft contrails.
While the exact definition of “net zero” is still being debated, it is considered a forward-looking commitment requiring companies
to reduce their emissions and balance remaining (residual) emissions by a given target year. There is an emerging view among
stakeholders including nongovernmental organizations and corporate climate leaders that a credible net-zero target requires
reducing emissions in line with the latest climate science and neutralizing residual emissions (at net zero) using carbon dioxide
removals (not carbon credits from emissions avoidance/reduction projects).
Finally, both “carbon negative” and “climate positive,” which are used interchangeably, have not yet been clearly defined, but
they imply going beyond the targets described above to make a net-positive impact on our climate.
4 How the voluntary carbon market can help address climate change
Exhibit
Thevoluntary
The voluntarycarbon
carbon market
market hashas grown
grown significantly
significantly in recent
in recent years. years.
Voluntary carbon market, millions of metric tons of carbon dioxide equivalent Issuances Retirements
200
150
100
50
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(estimate)
Note: We estimated the voluntary carbon market size based on 5 standards: Verified Carbon Standard (VCS), Gold Standard (GS), Climate Action Reserve (CAR),
American Carbon Registry (ACR), and Plan Vivo. We excluded ARB-eligible credits and Gold Standard-labeled CERs used for meeting compliance targets.
Data was retrieved from aforementioned registries on December 2, 2020 for YTD volumes up until the end of November (ie, 150 million tCO2e of issuances
and 81 million tCO2e of retirements). We projected volumes for full-year 2020 based on extrapolation in line with historical seasonality (last 5 years), and did not
adjust for any COVID-19 related impacts on seasonality patterns.
Source: ACR; CAR; GS; Plan Vivo; VCS
retail offering of gasoline and voluntary carbon credits, projects more generally (see sidebar, “Issuances
and airline passenger offsetting programs, which enable and retirements”). While still relatively small, the
passengers to offset the emissions of their flights voluntary carbon market is experiencing significant
through the airline’s website. momentum and its impact (and future potential) is
getting more and more attention.
Based on year-to-date volumes and an extrapolation in
line with historical seasonality patterns, we expect the Natural climate solutions (NCS), a category
market to set another record this year, with issuances including project types such as reforestation,
and retirements both growing by approximately one- avoided deforestation, improved forest
third compared with 2019. After years of declining management, and agroforestry, have grown faster
prices (from an average price of around $7 per ton than any other project category and contributed
in 2008 to around $3 per ton in 2019⁴) due to supply significantly to the voluntary carbon market’s
outpacing demand, we expect average prices to go growth trajectory. From 2016–19, issuances within
up in the near to medium term, mainly due to strong this category more than doubled every year, on
demand growth especially for higher-cost project average—and in 2019, NCS accounted for 53
types such as reforestation and carbon dioxide removal percent of total issuances. Meanwhile, retirements
⁴According to the Ecosystem Marketplace.
How the voluntary carbon market can help address climate change 5
Issuances and retirements
To analyze the voluntary carbon market, we focus on two metrics: issuances and retirements, which together give a good idea
of market dynamics. Issuance volume is a proxy for supply, as it represents voluntary carbon credits issued by a standard (for
example, Gold Standard, VCS) upon the successful verification of emission reductions or carbon dioxide removals realized by a
certified carbon-reduction project. Retirement volume is a proxy for demand, as it represents voluntary carbon credits bought
and canceled in a registry, preventing the onward sale of the certificates. Only upon retirement can the buyer in whose name
the credit was retired claim its impact (that is, count the credit toward a climate commitment).
in this category have also rapidly grown (close Strengthening impact and quality assurance
to 50 percent per year, on average). We believe While reputable standards such as Gold
this trend could be the result of increased Standard and VCS certify projects’ adherence
awareness of NCS’s potential (they can deliver to the requirements of their respective
one-third of the emissions reductions needed methodologies, buyers typically have
to align with the Paris Agreement between now limited transparency on the progress of the
and 2030⁵), a growing focus on carbon dioxide carbon-reduction projects in their portfolio.
removal (of which NCS is the most cost-effective Stakeholders also regularly raise questions
and technologically proven method), and buyers’ about certain types of projects, such as those
preference for co-benefits beyond climate related to additionality in large-scale renewable
change mitigation, such as biodiversity and energy projects; biodiversity in the context
impact on local communities. of afforestation projects planting non-native
species and/or monocultures; leakage and
insufficient local community engagement in the
What’s next: challenges and case of avoided deforestation; or permanence
opportunities of natural climate solutions more broadly (see
To accelerate the voluntary carbon market’s sidebar, “Additionality, leakage, and permanence
growth trajectory and realize its full potential, it defined”).
will be important to address some significant
challenges. These include the need to While reputable standards have implemented
strengthen impact and quality assurance, to safeguards to address these issues, the
align stakeholders on the criteria for credible use combination of insufficient transparency and
of voluntary carbon credits as part of an overall continued stakeholder skepticism has led buyers
climate strategy, build new market infrastructure, to demand a further strengthening of impact
and reduce regulatory uncertainty. We believe and quality assurance. As a result, we expect
that implementing innovative solutions to these innovation in measurement, reporting, and
challenges could unlock further growth. The verification practices to accelerate over the
recently launched Taskforce on Scaling Voluntary coming years.
Carbon Markets aims to create a blueprint for
these solutions.
⁵ Bronson Griscom et al., “Natural climate solutions,” Proceedings of the National Academy of Sciences, October 2017, Volume 114, Number 44, pp.
11645–50, pnas.org.
6 How the voluntary carbon market can help address climate change
Additionality, leakage, and permanence defined
A carbon-reduction project is considered “additional” when its impact (emission reductions and/or removals) would not have been
realized if the project had not been carried out, and that the project itself would not have been undertaken without the proceeds from
the sale of carbon credits. As technology costs continue to fall, a growing number of renewable energy projects no longer need the
proceeds from the sale of carbon credits to be viable—a key reason why the criterion of additionality is particularly relevant in the con-
text of renewable energy projects. In response, standard bodies have started to phase out large-scale renewable energy projects. For
example, VCS no longer certifies new, grid-connected renewable energy projects unless they’re located in least-developed countries.
Leakage occurs when a carbon-reduction project displaces emission-causing activities and produces higher emissions outside the
project boundary. For example, protecting a certain forest area may cause loggers to go elsewhere. Leakage risk can be mitigated by
strengthening project design as well as conservatively quantifying emission reductions and removals, making appropriate adjustments
for estimated leakage.
Carbon-reduction projects should realize permanent emission reductions and/or removals. Where projects have a reversibility
risk—such as forestry projects, which could suffer from fire, logging, or disease—comprehensive risk mitigation and a mechanism to
compensate for any reversals needs to be in place. It is common practice for standard bodies to include buffer provisions (requiring all
projects with reversibility risk to set aside a certain percentage of credits in a buffer or insurance pool). In the unfortunate event of a
reversal of emission reductions and/or removals (for example, due to fire or disease), credits from the buffer would be used to cover
the losses.
Aligning stakeholders on credible use of on market data (for example, transaction volumes,
voluntary carbon credits price levels) and a paucity of reference data, which
There is currently no consensus among was a key barrier to market growth in the past.
stakeholders on what it takes to use voluntary Standardized, tradable products and contracts
carbon credits credibly as part of an overall climate could help increase liquidity and scale transactions,
strategy. Therefore, companies may have different provided that the quality of credits traded and
interpretations of the role voluntary carbon credits integrity of market participants are ensured.
could play in their journeys toward net-zero. Key
points of discussion include the extent to which Reducing regulatory uncertainty
a company can rely on voluntary carbon credits The negotiations about the Paris Agreement’s
versus reducing its own footprint; the type of credits Article 6, which introduces a new international
(for example, emissions avoidance/reduction versus carbon market/mechanism, are ongoing. As a result,
carbon dioxide removal) to use, and how their role the implications of Article 6 for the voluntary carbon
may evolve over time. There is a clear distinction market are still unclear. Should voluntary purchases
between the role of voluntary carbon credits today of carbon credits by private sector actors help
and that which they will play when a company has all countries achieve their post-2020 climate pledges
but fully decarbonized its footprint and needs only (which are referred to as nationally determined
to neutralize its residual emissions. contributions), or should they be incremental to such
targets? Will governments continue to allow projects
Building new market infrastructure to issue voluntary carbon credits? When is double-
Today, voluntary carbon credits are mainly traded counting an issue, and how can that be avoided?
over the counter, resulting in limited transparency Reducing regulatory uncertainty may encourage
How the voluntary carbon market can help address climate change 7
more buyers to make long-term commitments, carbon footprint and help neutralize residual
and developers to make large-scale investments. emissions by financing carbon dioxide removal
projects. To realize this potential, significant
practical effort is required to address current
challenges and scale up the voluntary carbon
Voluntary carbon credits could play a critical market. Achieving that will create significant
role in helping the world attain a 1.5-degree benefits not just in the battle against climate
pathway. They can both accelerate the transition change but also in preserving nature and the
to a lower-carbon future by enabling companies untold benefits it provides to humanity.
to support decarbonization beyond their own
Christopher Blaufelder is a partner in McKinsey’s Zurich office; Joshua Katz is a partner in the
Stamford office; Cindy Levy is a senior partner in the London office; Dickon Pinner is a senior partner
in the San Francisco office; and Jop Weterings is director of environmental sustainability, based in the
Amsterdam office.
The authors wish to thank Alexis Depiesse, Damien Mourey, and Julian Vennekens for their
contributions to this article.
Copyright © 2020 McKinsey & Company. All rights reserved.
8 How the voluntary carbon market can help address climate change
