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Cleaning Up the Voluntary Carbon Market

Barclay Rogers, CEO, Graphyte

It is widely recognized that reforms are needed in the voluntary carbon market (VCM). The Biden Administration recently issued a Voluntary Carbon Markets Joint Policy Statement and Principles, and Michael Bloomberg penned an editorial arguing that “[t]hrough transparency and standardization, we can generate more trust that these investments are sound, turning a relatively small market into an enormous one, and a relatively inefficient one into a powerhouse.”

I strongly support improvements in the VCM, especially with respect to ensuring the overall integrity of the system. I want to focus attention on, and offer a potential solution for, a problem with the VCM that no one seems to be talking about:  the supply overhang from prior years that exceeds 7X current annual demand.  How are we ever going to make progress in reducing greenhouse gas emissions (GHG) emissions on the voluntary market if this supply glut remains, irrespective of any improvements in the crediting process going forward? 

The Data

The University of California, Berkeley published a Voluntary Registry Offsets Database that compiles “all carbon offset projects, credit issuances, and credit retirements listed globally by four major voluntary offset project registries—American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard, and Verra (VCS).” It’s a terrific resource.

Perhaps the most striking aspect of the database is the fact that carbon credit issuances (i.e., the number of credits created) consistently exceed carbon credit retirements (i.e., the number of credits used to offset GHG emissions) as illustrated in the figures below.

This analysis focuses on data from the Voluntary Registry Offsets Database from 1996 to 2021. Data from 2022 and 2023 are excluded due to potential time lags in the data. See The Shrinking Demand and Supply in the Voluntary Carbon Markets.


These graphs reveal a few interesting trends: (1) supply has consistently exceeded demand, (2) demand increased significantly in 2020 (jumping from 70 million in 2019 to around 165 million credits in 2020), and (3) notwithstanding an increase in demand, there remains an overhang of excess supply of roughly 1.2 billion credits.

Let’s dive a bit deeper into the data before shifting towards potential solutions. The vast majority of carbon credit supply on the voluntary carbon market come from two primary sources: (1) Forestry and Land Use and (2) Renewable Energy. Of particular importance are credits created from REDD+ projects in the Forestry and Land Use category, corresponding to 25% of total issuances, and from wind and hydro renewable energy projects, contributing 26% of the total credits issued to date.

REDD+ is a program established by the United Nations to protect forests in developing countries. See “What is REDD+?” for additional details.

When were these credits created? The figures below plot the credit issuance by year for each of these supply categories as well as the degree to which these credits are contributing to the supply overhang. It’s worth noting the weighted average age for credits issued in each subcategory: 6.9 years for REDD+ projects, 8.7 years for hydro plants, and 7.2 years for wind projects. It’s also worth noting that 45% of all credits ever generated from these projects have yet to be retired, and they make up about 40% of the total supply overhang across all credit types. These credits are the major contributor to the supply overhang.

Evolving Standards

It’s popular in the media to scrutinize carbon credits years after the project was put in place. For example, The Guardian newspaper published an article in September 2023, claiming that the “[m]ajority of offset projects that have sold the most carbon credits are likely junk.” The Guardian went on to explain that “a project was classified as “likely junk if there was compelling evidence, claims or high risk that it cannot guarantee additional, permanent greenhouse gas cuts among other criteria.” Other newspapers, including the LA Times, have reported similar shortcomings associated with carbon credit projects.

Others argue that vintage does not indicate quality. But this is just the other side of the coin of the “likely junk” perspective. It’s all simply a retrospective assessment of previously issued credits. 

I think such backward-looking criticism or justification misses the mark. These ex post facto analyses assess the carbon credit projects based on the carbon crediting standards of today, not the standards as of the time they were issued.  We can argue retrospectively about whether a previously-approved project did or did not lower atmospheric carbon levels, but I’m not sure such arguments will fix anything.

Instead of casting aspersions at, or standing in defense of, previously approved projects, we should recognize that carbon crediting is an evolving standard.  For example, Microsoft and Carbon Direct issued a set of guidelines for carbon dioxide removal in 2023 that include Essential Principles for High Quality Carbon Removal and the University of Oxford has published guidelines for how companies can utilize carbon credits to support their net zero goals. Durability, which is effectively an assessment of the certainty and likely duration of carbon removal, is included in both the Microsoft and Oxford guidelines. Durability, however, is a relatively new topic in the carbon crediting space, and Carbon Direct reported that “[a]s of 2022, the vast majority of carbon removal credits sold in the voluntary carbon market only guarantee carbon storage for decades to a century.”

Is a credit that was issued before the emergence of the concept of “high integrity” or “durability” still a valid carbon credit? I’m not here to try to answer that question. Instead, I’m simply pointing out that crediting standards evolve; they are different today than they were 10 years in the past and they will be different again 10 years into the future. It seems highly likely to me that people in 2030 will be questioning the legitimacy of certain carbon credits issued in 2024. I just can’t tell you which approaches will be questioned or why as I don’t know how the standards will evolve in the future.

The Biden administration VCM announcement introduces the concept of “high integrity” carbon credits, and the articulated principles seek to outline the requirement to realize such integrity.” High integrity, like durability, is a relatively new concept in the VCM.

Potential Solution

Let’s now connect the two points covered thus far and propose a solution that could address these issues. First, as you will recall, the VCM has been oversupplied every year since inception. There is an overhang of roughly 1.2 billion credits as of the end of 2021, and the weighted average age of credits is about 7 years.  Second, crediting standards are evolving in the VCM.  What counts as a valid carbon credit in a given year may fall below accepted standards 5 years in the future. The longer a credit goes without being retired, the more likely it is that credit will be called into question when and if it finally is used.

A “use it or lose it” policy could likely address both issues. For example, the carbon registries who govern the VCM could require a carbon credit to be retired within 5 years of its creation or be forfeited. Since credits could be banked for no more than 5 years, the potential for these credits to be called into question based on the evolving crediting standards decreases substantially. Crediting standards generally don’t evolve that quickly.

What would such a 5-year maximum banking period mean for the supply overhang? As noted earlier: (1) we have a bank of roughly 1.2 billion credits, (2) about 1.1 billion of the banked credits were created before 2019, and (3) annual demand of 161 million credits. Assuming we issued no new credits, it would take approximately 7.5 years to consume the banked amount.  On the other hand, if everything issued before 2019 were written off, the banked amount would equal about 169 million credits, corresponding to roughly one year’s worth of annual demand.  It makes sense to maintain some reserves, but a ratio of banked-to-used credits of 7.5X makes no sense at all.

Such a write-off policy would likely be resisted by those with banked credits that were issued before 2019. They would likely argue that the credits had no expiry date when they were issued, and it is not fair to impose one after the fact. Such a criticism could be addressed by announcing a policy today and explaining that it will take effect on, say, January 1, 2026. Project developers with remaining pre-2019 credits could try to sell them to buyers who could retire them before December 31, 2025. If they were not retired, they would simply vanish at the start of 2026.

Establishing clear (and improving) standards for new projects is an important step, and I applaud the work of the Biden administration, Microsoft, Oxford University, and others to guide these efforts. But we must address the overhang of banked credits if we are going to have a functional VCM. If we don’t, buyers can (and likely will) simply buy the older credits issued under less stringent criteria.  Such a “buy the old stuff for cheap” dynamic will create a perpetual problem for project developers who are complying with the current more stringent criteria and struggling to find customers. 

These problems seem so obvious, but no one appears to be talking about the supply overhang, much less how to address it. I hope this post kicks off a conversation about the problem and potential ways to fix it.


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