Voluntary Carbon Markets: Necessity of Regulation and Legislation Proposals

  • Luís Prata e Castro de Sena Esteves

1. Introduction:

 Voluntary Carbon Markets (VCM) are markets where there is the possibility of trading carbon credits in which projects that contribute to reducing or absorbing greenhouse gases (GHG) sell those credits to companies looking to offset their emissions after pressure from stakeholders to act and reach net neutrality in 2050. It is mainly a private initiative of companies looking to reach net zero targets, facing [JD1] several issues due to the technological impossibility of putting an end to all emissions immediately or the prohibitive cost to do so and using [JD2] VCM to compensate for those emissions that they cannot avoid emitting in their activities. Even though most companies look at offsetting as a solution as an easy way instead of decarbonizing their operations, goods, and services. One carbon credit will correspond to one ton of Co2, where the prices follow the market forces. VCMs are different from Compliance Carbon Markets, such as the European Union (EU) Emissions Trade System ( ETS), in which companies and governments are required to account for their emissions using carbon dioxide (Co2) certificates as a legal requirement to operate that includes intensive GHG enterprises (energy utilities and industries as concrete factory’s) and VCMs credits cannot be used to satisfy compliance market obligations. A cap-and-trade system is a market where the regulating authority sets emissions limits. The limit is split into allowances that companies can use and emit or trade, making the ETS the best example [1]. In this essay, I will analyze the need for VCM regulations and the proposal from the EU and the Portuguese Government, their advantages, and shortfalls.

2. VCM and Climate Change

  Carbon pricing is seen as one of the solutions to reach emission targets and promote a just transition and it can be done through compliance and voluntary carbon markets. The VCM remains one of the solutions to tackle climate change and reach the net zero targets in 2050, with many companies counting on this market to offset their emissions and reach net zero. VCM can help companies and projects needing funding that are climate beneficial, which would not happen otherwise while compensating emissions that cannot be reduced any other way while having co-benefits for communities, the environment, and the economy. The Paris Agreement (PA) targets are dependent on several solutions and VCM is one of the mechanisms in Article 6 of the PA to tackle climate change. VCMs have environmental quality concerns regarding the projects and several stakeholders have made allegations regarding the credibility and reliability of GHC emission avoidance, reductions, and removals sequesters[2], so there is a general lack of trust and integrity in this market in which regulation can play a role. I do believe that VMC is a tool but there is a needed harmonization of rules and methodology to ensure effectiveness in emissions reduction.

3. Need for Regulation?

 Carbon markets operating around the world amounted to 850.000 million dollars in 2021[3]. The cap-and-trade global market generated 238.000 million euros[4], 90% corresponding to the ETS (214.000 million euros) while the VCM generated between 1.000 and 2.000 million dollars comparatively in 2021. The demand for VCM will hit 30.000 million dollars by 2030 and the Carbon Offsetting and Reducing Scheme for International Aviation (CORSIA) adopted by the International Civil Aviation Organization will rely on VCM, so there is a significant need for credible projects to offset these emissions and achieve the goal to reduce emissions.

 Allowances at the EU ETS reached almost 100 euros per ton of Co2 and VCM prices range from 15$ for reforestation projects to 100$ for tech-based removal emissions[5]; The price difference between ETS and VCM can be explained obviously by the decreasing number of allowances emitted and its legal nature, but trust issues and its lower increase in demand and value[6] can also explain the difference. There is a problem regarding what methodology, and criteria to qualify projects as reducing emissions, permanence of emissions, and carbon leaks and there is a need to create uniformized standards. There have been several projects that have overestimated the deforestation they avoided for example. This leads to even more questions concerning the methodology of accountancy of emissions as there as serval private entities certifying projects and emitting those carbon credits such as Gold Standard[7], Varra, and ClimateCare. These entities have all their requirements, fueling the integrity mistrust of these carbon credits and their actual impact on climate change and combating greenwashing[8]. To ensure that these problems are mitigated the European Union proposed in 2022 the first certification framework for carbon removals regulation[9].

4. EU Legislative Proposal

 To foster carbon removals and promote trust in voluntary carbon markets the European Parliament and European Council proposed the regulation for the first voluntary certification framework on carbon removals in November of 2022. This regulation has the goal to facilitate the deployment of carbon removals by operators and groups of operators while driving climate ambition to limit the global increase of temperature to below 1.5º Celsius, to reach net zero is essential to invest in carbon removals integrated into the Circular Economy Action Plan, being part of the EU´s plan to be the world´s first climate-neutral continent by 2050[10].

 The goals are also to ensure high-quality carbon removals in the EU and establish an EU governance certification system to avoid greenwashing with the use of harmonized criteria and leads to trading in the Carbon Markets. The framework for certification will consist of  “quality criteria for carbon removal, rules for the verification and certification of carbon removals and rules for the functioning and recognition by the Commission of the certification schemes.”[11] The regulation doesn´t apply to the emissions obliged to the EU ETS (directive 2003/87/EC) and regulation 2018/841 deals with emissions and removals of greenhouse gases, especially related to land use regarding carbon farming referred by the regulation proposal.

 Regarding the QU.A.LITY (QT) criteria the carbon removal projects must be quantifiable and quantified, additional to existing climate benefits, strive for Long-term storage, and contribute to sustainability[12]. The principles consider the QT criteria, those being Additionality; Long-term storage; Sustainability. The Additionality principle (Article 5) refers to the need to go beyond union and national requirements and take place due to the incentive effect of certification for the carbon removal to be considered additional. Long-term storage (Article 6) is linked to ensuring the long-term storage of carbon, avoiding carbon leaks during the monitoring period, and adopting a liability mechanism to address that leak in the project. The Sustainability principle (Article 8) is related to the need to have a neutral impact or even ensure co-benefits by executing the project contributing to going beyond the net carbon removal, climate change adaptation, and sustainable use and protection of water resources while also supporting the circular economy, control of pollution and protection and restoration of biodiversity and ecosystems. This principle has a broad view of sustainability and considers the co-benefits, while the promotor benefits from these positive impacts on the methodology certification. In the table annex, there is also enunciated the formula to asset the carbon removal benefit.

 This legislation covers three types of carbon removal activities such as permanent removal, carbon storage in products, and carbon farming. It is important to consider the importance of carbon farming in this regulation and the potential for carbon sequestration of good farming practices and land use, leading to sustainable carbon cycles[13].

 This mechanism has at least four intervenient: the EU commission, the Member-states and national accreditation bodies, the certification bodies, and the operators. The scheme starts with the accreditation of certification bodies by Member-states and national accreditation bodies, then the EU recognizes certification schemes managed by those certification bodies after developing certification methodologies. Then these [JD3] certification schemes register carbon removal activities (CRA), issue the carbon removal units, and manage public registries while certification bodies audit and certificate operators that develop the CRA. The certification schemes must submit an annual report about their operations, fraud cases, and remediation measures to the Commission.  This proposal differs from the codification of the methodologies for the future when an independent external group will originate methodologies for the diverse CRA.

5. Portuguese Legislative Proposal

 The Portuguese proposal establishes a CVM and the respective framework. This Proposal has the goal to contribute to the mitigation of GHC emissions in the national territory and the fulfilment of European and international obligations related to climate targets while also pretending to leverage the implementation of projects of emissions mitigation on the Portuguese territory by individuals, public and private entities. The participation of organizations in the climate transition is also a goal by creating a framework for offsetting  GHG emissions and financial contributions in favor of climate action. There is also the goal to promote environmental and socio-economic co-benefits derived from the implementation of the projects such as biodiversity protection, a more resilient landscape, improving water quality and reducing soil erosion, increase of the territory´s resilience to climate change, a more circular economy, and an increase in air quality as examples. This market is guided by seven principles such as credibility, additionality, permanence, efficiency, monitoring, transparency, and sustainability. Credibility refers to the accuracy and robustness of baseline scenarios of emission reduction accounting. Efficiency related to the potential carbon leaks caused outside the project’s perimeter due to its implementation. Regarding Monitoring, there should be implemented a monitoring, reporting, and verification scheme to account for GHG emission reductions or sequestration. At the same time, the Transparency principle wishes to ensure public access to information for participation and avoid double counting of emission reduction.

 Emission offset by an organization must be preceded by the calculation of the emissions related to its activity and make part of a plan of decarbonization and decrease in emissions strategy that aims to reach net neutrality (Article 5), to ensure accountability and avoid “carbon-washing”. This market comprises the projects, the platform for registering those projects and correspondent carbon credits, the certification system, the legal framework related to the market regulation, the carbon market agents, and the regulators. The Portuguese proposal gives priority to carbon forestry sequestration projects that contribute to the preservation of human capital and a more resilient and adapted landscape to wildfires, a chronic condition of the Portuguese forests[14] that these projects could help revert and reduce emissions by the fact that the forest does not burn down so easily and sequester carbon in trees and soils. There are dedicated priority areas for these projects in more vulnerable territories that benefit from fee exemption. These projects have several co-benefits, such as biodiversity and air quality, which is an essential provision for the Portuguese territory.

The periodic verification of the execution of projects generates carbon credits (CC) that will be emitted in an estimate for the project lifecycle. The carbon credit can assume the form of future carbon credits (FCC) and verified carbon credits (VCC) and each credit corresponds to one ton of Co2. The reversion/leak of carbon in projects is regulated in this legislation and institutes a duty to promoters to ensure the minimization of risks associated with the carbon sequester projects, and being there a risk of reversion mitigations measures shall be predicted in the documents related to the project. The reversion in a project that doesn´t indicate that possibility leads to the cancellation of the CC. The first validation of the carbon projects is made by an independent auditor, formally qualified by criteria defined by the government (Article 16), the second stage is a periodic verification by an independent auditor on the project’s duration.

6. Comparison Between the Proposals

 As we can see at least three principles (Additionality, Permanence, and Sustainability) are equally referred to in both legislations, which reveals a particular alignment and compatibility as the regulation that will eventually enter into force will prevail over national law and they mustn’t be incompatible as it brings legal uncertainty to the projects approved and operating on the time of entry into force. The fact that the Portuguese state and EU Commission define the criteria for the accreditation of independent auditors is also vital to ensure harmonization and transparency. While the regulation focuses more on carbon farming, the Portuguese proposal focuses more on carbon forestry sequestration projects taking into consideration the EU agricultural context and the Portuguese territory management situation, which makes sense as a complementary action. In the regulation, there is a certification leading to carbon market and in the Portuguese case, there is the creation of a voluntary carbon market with a platform to trade those credits while the EU proposal contributes to already established carbon markets (without regulating a specific platform for trading those credits). The quality criteria is still not comparable as there is still non-available methodology for the portuguese proposal. The certification process in the regulation vs portuguese proposal is done in a diverse way as the national agency Agência Portuguesa do Ambiente (APA) is responsible for accreditation of the accreditation bodies that can be other entities others than APA regarding the carbon credits, the APA will probably be designated the government as the independent entity to emit certification of the credits while applying the governments to be established requirements.

Comparative Table between the Proposals

Comparative Analysis Regulation ProposalPortuguese Law Proposal
GoalFacilitate the deployment of carbon removals by operators or groups of operatorsMitigations of GHG emissions in the national territory and fulfillment of European and International commitments
MechanismEstablished Carbon MarketNew Voluntary Carbon Market
MethodsQuality criteria for carbon removals (CR) Rules for verification and certification Rules for functioning and recognition by the Commission  Quality criteria, considering the carbon cycle of the project. Methodology for carbon projects Priority for forestry sequestration projects on vulnerable territories Regulation regarding carbon credit emission and trading
Quality CriteriaCR Activities shall provide a net CR benefit. Net removal benefit= CRbaseline-CRtotal-GHCincrease >0 CR shall be quantified in a relevant, accurate, complete, consistent comparable, and transparent manner. Carbon farming- respect Regulation (EU) 2018/841The methodology is developed by a commission lead by APA, IP. Quantification method, eligibility about the additionality and baseline scenario and criteria duration.
  PrinciplesAdditionality; Long-term storage; SustainabilityCredibility; Additionality; Permanence; Efficiency, Transparency; Monitorization;  Sustainability
  Certification Bodies  Shall be accredited by the national accreditation authority. Reg EC No 765/2008Independent entity qualified by established criteria by the government

7. Advantages and Shortfalls

Both the Regulation and the Portuguese law proposal bring credibility to a market affected by the recent scandal related to the Guardian investigation regarding Verra-certified CC used by prominent companies around the globe to offset emissions[15]. This scandal led to the stepping [JD4] down of Verra’s CEO[16] and significant changes to their methodology[17]. Moreover, the fact that these legislations consider the criteria lacking in the previous private and non-accredited carbon certifications is encouraging to ensure that this mechanism is a tool for climate change mitigation.    Regarding the risks of incompatibility of the Portuguese proposal with the regulation proposal, the Portuguese proposal is very much aligned, only with a difference on the certification entity that appears to be more strick in the portuguese proposal, so I would recommend that the Portuguese proposal adopt the same methodology.

The Portuguese market can have shortfalls regarding the offer side as priority is given to carbon forestry sequestration projects in vulnerable areas, and those projects can need help finding funding. Even selling the FCC to fund the projects is insufficient as they are limited to 10% of the project´s CC. Furthermore, land distribution in Portugal gives rise to small plots of land that hinder an adequate scale of reforestation projects[18], which can cause a shortage of projects of this kind, the preferential ones. I also add that the focus on forestry projects is risky as a carbon sequester strategy because climate change is fueling severe droughts in Portugal and more violent wildfires, and the future previsions are not encouraging on that matter[19] as that endangers the permanence of emission sequester. Also there should be a longer period the duration of projects to ensure effective permanence, being the ZERO Association proposing at least a 100-year horizon for the projects[20].  The permanence is the main critic made by this environmental stakeholder. There could also be a focus on the carbon farming as Portugal has also a relevant agricultural sector and that could boost farmers earnings and competitiveness while also providing extra carbon emissions removal on the national initiative.

 As the methodology that will give rise to the certification and accreditation bodies is left for delegated acts and an ordinance, there is a need to ensure that the Portuguese methodology is compatibilized, being a possible shortfall.

8. Conclusion  

VCM are powerful tools to ensure just transition and climate action when used to offset unavoidable emissions and integrated into decarbonization plans of CC acquiring entities. The CC demand is soaring, bringing an even more pressing necessity for regulation, as unregulated carbon markets have led to several issues related to the real emission reductions of sequestration and, consequently, a lack of trust in the offsetting activities. The EU regulation on voluntary certification framework on carbon removals and the Portuguese Voluntary Carbon Markets legislation bring needed quality requirements for high-value carbon offsets and methodologies while promoting co-benefits on projects. Both legislations consider the specificity of land uses and encourage practices that can lead to climate change adaptation and mitigation. The certification bodies provide more certainty as they will be accredited and supervised by the regulatory entities and EU Commission in these legislator’s proposals.


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[1] Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature: https://core.ac.uk/download/pdf/33303003.pdf

[2] Patrick Greenfield, “Revealed: More than 90% of Rainforest Carbon Offsets by Biggest Certifier Are Worthless, Analysis Shows,” The Guardian, January 18, 2023, sec. Environment, https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe.

[3] “The Untapped Power of Carbon Markets in Five Charts,” BloombergNEF (blog), September 16, 2022, https://about.bnef.com/blog/the-untapped-power-of-carbon-markets-in-five-charts/.

[4]“Voluntary Carbon Markets – A SIX White Paper,”. Pg 5-7: https://www.six-group.com/dam/download/company/report/whitepapers/six-whitepaper-voluntary-carbon-markets-en.pdf

[5] “Voluntary Carbon Markets: How They Work, How They’re Priced and Who’s Involved,” June 10, 2021, https://www.spglobal.com/commodityinsights/en/market-insights/blogs/energy-transition/061021-voluntary-carbon-markets-pricing-participants-trading-corsia-credits.

[6] “Voluntary Carbon Markets – A SIX White Paper,” .Pg 5-7

[7] https://www.goldstandard.org; https://verra.org/programs/verified-carbon-standard/; https://www.climateimpact.com

[8] Soh Young In and Kim Schumacher, “Carbonwashing: A New Type of Carbon Data-Related ESG Greenwashing,” SSRN Scholarly Paper (Rochester, NY, April 25, 2021), https://doi.org/10.2139/ssrn.3901278.

[9] “Carbon Removal Certification,” accessed June 1, 2023, https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/carbon-removal-certification_en.

[10] “Going-beyond-Carbon-Reductions-the-Proposed-Eu-Carbon-Removals-Certifications-Regulation.Pdf,” accessed May 31, 2023, https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2023/02/going-beyond-carbon-reductions-the-proposed-eu-carbon-removals-certifications-regulation.pdf.

[11] Article 1 of Chapter One: Proposal for a regulation of the EP and of the Council 2022/0394(COD)

[12] “EU Carbon Removal Certification Framework: New Rules to Turn Greenwashing into Genuine Removals,” Energy Post (blog), May 16, 2023, https://energypost.eu/eu-carbon-removal-certification-framework-new-rules-to-turn-greenwashing-into-genuine-removals/.

[13] “Carbon Farming,” accessed May 27, 2023, https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/carbon-farming_en.

[14] “Portugal Wildfires: State of Alert Begins amid Third Heatwave,” BBC News, August 21, 2022, sec. Europe, https://www.bbc.com/news/world-europe-62623333.

[15] Greenfield, “Revealed.”

[16] “Verra CEO and Founder Steps down as Carbon Credits Body Eyes ‘next Phase,’” May 23, 2023, https://www.businessgreen.com/news/4116216/verra-ceo-founder-steps-carbon-credits-body-eyes-phase.

[17] “Verra Makes Major Changes to Methodology of Forest-Based Carbon Offsets,” April 20, 2023, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/agriculture/042023-verra-makes-major-changes-to-methodology-of-forest-based-carbon-offsets.

[18] “Desafios Do Futuro Mercado Voluntário de Carbono – ECO,” accessed May 28, 2023, https://eco.sapo.pt/2023/02/22/desafios-do-futuro-mercado-voluntario-de-carbono/.

[19] Carl-Friedrich Schleussner et al., “Climate Impacts in Portugal,” 11 December 2019, accessed May 30, 2023, https://youth4climatejustice.org/wp-content/uploads/2021/01/Climate-Analytics-Climate-Impacts-in-Portugal-min.pdf

[20] “Proposta de mercado voluntário de carbono não garante remoções seguras e permanentes de carbono da atmosfera” 11 April 2023, accessed May 30, 2023, https://zero.ong/blog/noticias/proposta-de-mercado-voluntario-de-carbono-nao-garante-remocoes-seguras-e-permanentes-de-carbono-da-atmosfera/

  • Luís Prata e Castro de Sena Esteves