Is the voluntary carbon market moving towards version 2.0?

According to new analysis from Calyx Global, a carbon credit rating platform, quality in the voluntary carbon market (VCM) shows promising signs of improved integrity. The report combines market trend data with Calyx Global’s assessments of over 500 projects to provide insight into ongoing efforts to improve carbon market integrity.

Finding higher-rated carbon credits in VCM remains challenging due to the dominance of mega-projects, such as REDD (Reducing Emissions from Deforestation and Forest Degradation) and large-scale grid-connected renewable energy projects broad, which usually do not achieve higher ratings (A and B).

Co-founder of Calyx Global, Donna Lee, emphasizes the need for higher quality carbon credits to restore confidence in the market.

“We wanted to start tracking quality, recognizing that the voluntary carbon market is starting to mature. The sooner we improve the quality of the carbon credit and restore trust, the more effective companies can be in addressing climate change.”

The report, The State of Quality in the Voluntary Carbon Market, identifies key trends and below are the key findings.

Reduction in issued low-quality carbon credits

Since 2021, media scrutiny of the voluntary carbon market has intensified, coinciding with an increase in the issuance of carbon credits. Both market volume and media criticism peaked in 2023. However, there has been a noticeable change in the quality of credit issuance, especially from the beginning of 2024.

Quality in VCM varies widely, with poor quality and high quality loans in every sector analyzed by Calyx Global. To date, projects in the Manufacturing and Industry sector have the highest GHG integrity.

According to the analysis, which evaluated over half of all loans issued in the last 5 years, only about 20% of these loans fall in the upper half of their rating scale (C+ and above).

Notably, less than 10% of evaluated credits received a grade of B or higher. This highlights the difficulty in finding high integrity carbon credits in the current market landscape.

The issuance of low-rate loans (E-rated) has fallen significantly, falling by nearly 50%. This decrease is mainly due to the reduction of credits issued by REDD+ projects. These loans have historically been skewed toward lower ratings.

The decline in REDD+ credits has been partially offset by an increase in emissions from household and community projects, such as stove credits. These projects tend to have more credits in the “C” rating range.

Despite the overall improvement in credit quality, highly rated loans (A and B ratings) remain rare. This rarity is due to the smaller number of such projects actively lending in the market today. Moreover, these higher-rated projects tend to be smaller in scale compared to mega-projects such as REDD and large-scale renewable energy projects.

Slow adoption of quality updates

Despite recent shifts towards higher quality in VCM, a clear and consistent trend has not yet emerged.

Over 75% of new listings in the main registries – the American Carbon Registry (ACR), the Climate Action Reserve (CAR), the Gold Standard and the Verified Carbon Standard (VCS) – come from the Forest and Land and Home sectors and Community. These sectors show mixed results in Calyx Global’s rating system.

The Forestry and Land sector is dominated by improved forest management (IFM) and afforestation/reforestation (AR) projects, which are undergoing methodological changes aimed at increasing their effectiveness and integrity.

In the Home and Community sector, stove projects account for the majority of new listings. And efforts are being made to improve stove methodologies to improve their quality and impact.

It may take time for low-quality loans to be completely removed from the system. Some low-quality loans are still tied to forward contracts, delaying the full impact of improved quality standards. Although there have been improvements in the rules and requirements for generating carbon credits, these updates have yet to be fully integrated into the active market.

A trade-off: GHG integrity versus SDG impact

As buyers are attracted to “beyond carbon” benefits, such as social and environmental benefits, the main driver of market trends is the quest for higher greenhouse gas (GHG) integrity.

About 54% of projects assessed for GS integrity have Sustainable Development Goal (SDG) contributions verified by a third party. This trend is particularly prevalent among nature-based projects, which often seek additional SDG certification through programs such as the Wine Standards for Climate, Community and Biodiversity (CCB) and the Verified Impact of Sustainable Development (SD) Standard VISta), resulting in verified SDG contributions.

In contrast, waste and renewable energy projects often do not pursue additional SDG certification. Or they are enrolled in programs that do not require verification of SDG claims.

Some argue that the ideal carbon credit should have high GHG integrity and significant SDG impact. However, such loans are currently challenging to find, according to Calyx Global’s findings. There appears to be a trade-off between GHG integrity and SDG impact in the current market.

This trade-off is partly because many projects that deliver the highest SDG impacts, such as REDD+ projects and stoves, have problems with over-lending.

Household-based projects often have verified contributions to the SDGs, mainly due to the Gold Standard requirement to report, monitor and verify at least three SDGs per project. Verra has now filed a similar claim.

Calyx Global concludes that VCM continues to evolve and is heading towards version 2.0. This analysis is essential to instill confidence in carbon credits and enable them to contribute effectively to climate change mitigation.