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Carbon Markets: Don't Stop 'Til You Offset Enough

July 13, 2022

India Chen


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Credit: Photo by veeterzy from Pexels


Carbon markets are an inevitable part of our future tackling climate change. And while their most efficient use has not yet been agreed, carbon offsets will serve an important role in the journey to Net-Zero. But challenges remain. While the carbon market is not in its infancy it could still be described as being in its adolescence, and these next few years will be crucial in shaping the industry. Through this article, we seek to understand the contribution from carbon offsets to Net Zero, the problems that continue to plague the space, the case for nature-based solutions (NBS) and the specific solutions that could change the market. We conclude, excitingly, that there is a plethora of opportunity to be unlocked, and that while trials remain, tribulations may soon be over.


A Net-Zero Pathway

There is some debate on whether the use of carbon offsets contributes to Net Zero being achieved in an accelerated timeline, or provides a red herring to corporations wanting to prolong their use of fossil fuels.

Theoretically, the goal is not to offset at all, but rather to cut out emissions altogether, which would render carbon offsets obsolete.  In practice, however, the majority of Net Zero pathways will require carbon offsets to be used, whether for residual emissions at the tail-end of the transition, or to kickstart progress at the beginning of  this transition until low carbon processes can be imbedded into business models. Offsets may also be used forever to cancel out residual levels of carbon once Net Zero has been achieved ceteris paribus.

One major difficulty is determining whether offsets are being correctly, as a complement to doing as much as possible to reduce emissions, or whether they are being used in place of this, which would be greenwashing. The Paris Agreement makes this idea clear, but it can still be difficult to identify when it is being breached in practice. Additionally, and because of this, it can be hard to know the volume of offsets that will legitimately be needed. This adds further complexity when trying to model the market for the future.

Thomas Hale – an Associate Professor in Public Policy at the Blavatnik School of Government, University of Oxford deplores the issues with carbon markets in his recent Financial Times article. He criticises the current lack of transparency that the carbon offset system inhabits as well as the current lack of standardisation.

Looking at Hale’s Net Zero Tracker, an independent research consortium, 65% of 699 of the largest publicly traded companies in the world either have no data for the intention to use carbon offsets or say they will not use them. When looking at 126 countries, over 90% have no data for the intention to use carbon offsets. In some ways this is great news, as these institutions, at least in their pledges, are prioritising emissions reductions. It would, however, be fair to ask how then the market is expected to scale up 15-fold in only 8 years, as suggested by the Taskforce on Scaling Voluntary Carbon Markets? Especially considering that credit pricing in the VCM is so low at about $3 per credit.


Voluntary vs Compulsory Markets.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) of which Mark Carney is a founding member, ascertain that the voluntary carbon market needs to grow 15-fold by 2030 to support the investment required to deliver a 1.5-degree pathway to pre-industrial levels. In 2021, the voluntary carbon market crossed the billion dollar threshold as seen below, doubling its value from the previous year. In part the driver of this has been commitments to Net Zero by corporations as well as asset managers pushing for climate conscious investments. The attraction of voluntary markets over compulsory ones stems essentially from a lack of restriction in the market. Compulsory markets have more stringent regulation, the largest of these markets being the ETS (Emissions Trading System) which is European run. As well as more stringent regulation, the compulsory market in fact lags in terms of action and therefore is pushing corporate players to lead the VCM in its stead. Actors are also free to access new sources of revenue in the voluntary market and buy other investment products simultaneously – many transactions for carbon credits begin with the buying of a GHG evaluation.

The main two providers of VCM credits come from VERRA and Gold Standard.

In 2021 VERRA issued almost 300 million carbon credits, the highest number of annual issuances every recorded. Both standards are supposed to create  real impact through independently verified projects that offset carbon and are traceable.


Issues with the Voluntary Market

Despite great leaps towards standardisation, the VCM is still open to criticism- which mainly stems from the lack of transparency and verification previously mentioned. The CDM, a compulsory carbon market, was also plagued by issues of morality and reputability, however, it did not allow forest conservation projects as a means of sequestration, as these were deemed too easy and unproductive. This actioning by the CDM prevented carbon cowboys, who sought to capitalise on a  lack of verification by creating poor quality credits. The voluntary market, which does not implement these kinds of conditions, could by contrast be criticised for lacking integrity.



Linked to the table above, there also is a geographical issue with the VCM, as shown in the table below.

Source: Ecosystem Marketplace 

It is clear from the table above that projects in the Global North only account for a fraction of total projects; only 10.9 MtCO2e in 2021 collectively. This links to a mobilisation challenge of VCM in the TSVCM Report of January 2021 in which it said that while 90% of offset commitments are from companies who reside in the Global North, 90% of NBS offset projects reside in the Global South. While this is not a criticism directly against VCM it does offer some insight into how these corporations choose to offset their emissions. Choosing projects in the Global South will be cheaper to implement, however it also leaves projects vulnerable to issues caused by verification difficulties such as unethical land acquisition or similar immoral practices. The global North has a responsibility to embed climate resilience in frontline communities in the global South, but great care is needed to ensure these projects don’t do more harm than good.  


In February 2020, ICROA (The International Carbon Reduction and Offset Alliance), VERRA and Gold Standard responded in an open letter to a series of articles in the Telegraph that painted VCMs as a ‘wild west’. In the letter they defended their contributions to VCMs, depicting the checks and balances that they had implemented as well as defending the role of the market in ‘delivering the significant and real reductions the world needs’.


While these sentiments are appreciated, the core issues explained will require further scrutiny, especially as the market scales. It also appears that the link that binds these issues centres around transparency and validity of offset projects.


Nature Based Solutions (NBS) vs Technology-Based Solutions

Looking at the Natural Climate Solutions World Atlas, the global carbon sink potential for reforestation alone is 8,672 million metric tons Co2e per year. However, when observing countries that include Nature Based Solutions in their Nationally Determined Contributions this decreases staggeringly to 6,039 MtCo2e. There is a conscious lack of inclusivity for NBS within a long horizon timeline. Why?


It seems that NBS are considered higher risk than technology-based solutions such as DACS and BECCS because they are less permanent. Forests are susceptible to wildfires in some locations, forests need to be maintained and are altogether more vulnerable to external forces which are sometimes seen as more difficult to control than technology-based sequestration.


While the TSVCM affirms that technology-based removal of carbon in various carbon capture and storage solutions should be increased, we at iClima disagree with this approach. In our opinion, sequestration supply should only come from nature-based solutions (NBS), as carbon capture technologies remain too expensive (see table below), too uncertain and with too long a lead time. Costs of creating these plants can be $400-500 million USD over a period of 6-8 years.


Additional Nature Based Solutions: Biochar, Ocean Sinks and Whales (Yes, Whales)


Biochar is created in an oxygen-free furnace by burning the crop-waste left behind after harvest. The product created is similar to charcoal, hence the name biochar. If the crop-waste was left to naturally decompose this would producemore emissions than turning it into biochar.

Using the Natural Climate Solutions World Atlas, biochar’s global mitigation potential is 287 MtCo2e per year, and its main use would be as a form of sequestration. Biochar is a stable form of carbon that can be sequestered for hundreds, or thousands of years theoretically, and actually has many soil-regenerative properties, also reducing the need for chemical crop enhancers.

Interestingly it seems we have not yet utilised ocean sinks as successfully as land-based solutions. The ocean is the largest natural carbon sink on the planet, mainly due to phytoplankton which together undertake the most photosynthesis in the world. Phytoplankton are also at the beginning of the food chain in the ocean and consume 37 billion metric tons of Co2 – the equivalent of 1.7. trillion trees!

In a 2019 IMF Podcast, economist Ralph Chami and whale conservationist Michael Fishbach explain how important whales are to this ocean carbon sink. In a biological carbon pump, the waste from large whales, rich in nitrogen and iron, feeds the phytoplankton, stimulating growth. Migrating whales move from feeding grounds to breeding grounds – which are comparatively poor in nutrients. The waste that they dispense in these breeding grounds stimulates the growth of phytoplankton. When whales die, their bodies store 33 tons of Co2 and fall to the bottom of the ocean,a form of natural carbon sequestration. Here they provide food for all kinds of organisms and contribute to the complex ecosystems in the deep ocean. The purpose of the podcast is to show the necessity for whales’ protection. It puts a price on each whale, in terms of carbon, at around $2 million USD.

Source: World Economic Forum



So why is it that ocean sinks are not focused on as much as land-based sinks such as afforestation?

Looking at whales as an international public good, they fall into the Tragedy of the Commons. The Tragedy of the Commons, while sounding like a Shakespearian play, is the theory that when a good is public and it only creates positive externalities, it is grossly misused by being over consumed and under-funded; in other words, it is taken for granted. Other reasons for this bias include the relative affordability of land-based solutions and the fact they are just easier to implement than blue carbon projects.

In a 2021 World Economic Forum podcast – House on Fire – the creators suggest that investors vary considerably more when it comes to ocean-based solutions compared to their terrestrial counterparts. Corporates are willing to invest due to the pressure placed on them from actors such as large asset managers, politicians, and society. However, they already have planned strategies that often do not include oceanic solutions and/or are unable to change their pathways. Investors apparently see ocean-based strategies as unproven in gaining long-term returns, casting doubt upon their ‘investability’.

However, despite this, there is growing interest in other oceanic ecosystems such as mangroves and saltmarshes. Up to 20% of the world’s mangrove forests are ripe for blue carbon projects. If successful, half of these could be protected for as little as $5 USD per ton. The potential for ocean-based solutions is growing exponentially, and this will only rise as scientists find new ways of harnessing this promise.

Potential Solutions

While many of the issues of voluntary markets are expected to improve and indeed be eradicated as the market size and therefore efficiency increases, this depends on the implementation of stabilising mechanisms, standardisation of carbon credit quality and ability to tackle the double counting of offsets. The biggest variable in realising the full potential of the market is innovation. Innovation as well as integration will be imperative in scaling the market. While standardisation is necessary, as well as some regulation, this seems more assured due to the intervention of the TSVCM (Commodity Futures Trading Commission), as well as the CFTC. The  CFTC meeting on June called for greater transparency and climate risk RFI (request for information) to better inform its understanding and oversight of clime related financial risk as pertinent to the derivatives markets and underlying commodities markets.

However, one CFTC commissioner has concerns about a growing role for the agency in tackling climate risk, including in the VCM. Commissioner Summer Mersinger said in a statement after the RFI was issued that she "was struck by the lack of concern or interest in legacy agriculture contracts and futures markets."

"With respect to what is asked in the RFI, information is only useful if it can further our efforts to achieve our mission, which is why I find it concerning that we are requesting information that we cannot use and not asking questions on well-functioning markets where climate risk is already hedged," Mersinger said, adding: "I can only conclude that the RFI reflects either inadvertent 'mission creep' at best, or a power grab to expand the CFTC's authority at worst."

If standardisation for products was introduced, McKinsey affirm that this would help to increase liquidity throughout the market, as well as aid in scaling it. Additionally, increased regulation would help to prevent the uncertainty that surrounds the future of VCM.


Interestingly, blockchain could offer a much needed incentive for investment. Taking a different approach to those advocating simply for stronger regulation, the Toucan Protocol tokenises carbon credits that can then be used in decentralised finance (DeFi). This stimulates demand, driving capital towards important climate projects.

Essentially carbon offset projects such as reforestation, biochar, afforestation and mangrove protection can produce carbon credits which are then turned into tokens called TCO2s. Once a tokenized carbon credit has been used to offset emissions, it is 'retired'. This retirement is recorded on the blockchain, and everyone can verify that it has happened. Toucan has built a 'carbon bridge' which has helped to create a publicly accessible carbon credit library (the 'Toucan Meta-Registry'), which helps to bring transparency to the market and unlock better financing for climate projects. The pooling of TCO2s which Toucan facilitates also creates deep liquidity for carbon markets. TCO2s, as well as pooled carbon reference tokens like Name Change Tokens (NCTs), can be traded at centralised and decentralised exchanges, or used as green building blocks for DeFi, NFTs or the metaverse. Again, each token is representative of a real carbon offset that has been verified by the producers/standards body.

The Toucan model has a number of benefits. First, it could unlock demand for carbon credits and create liquidity in the market, facilitating easy trading due to pooling. Second, and critically, it offers much needed transparency to the financing of carbon offset projects, as transactions can be traced and publicly verified.

We contacted Toucan for a response to a few questions that we had about their ecosystem. We would like to thank them for their time and generosity in offering not just full answers to our questions, but also guidance on the fundamentals of blockchain and the carbon market, as outlined above. Below are some of our questions and their answers in full:

1. The TSVCM (Taskforce for Scaling Voluntary Carbon Markets) has said in its Jan 2021 report that VCM needs to scale up 15-fold by 2030 – To what extent do you see Blockchain, specifically Toucan Protocol, contributing to this scale up? 

“On-chain markets can help improve transparency and integrity so they can scale carbon credit markets in an effective way. It makes these products available for more people, simpler to integrate, as well as reduces barriers for carbon projects to get funded as projects. Scaling-up with integrity is the mission of the project.”

2.The most common criticism that surrounds carbon markets is their lack of standardisation and transparency – can decentralised finance fix a problem that historically has been fixed with more regulation? 

“This is what blockchain can fix. On blockchain, everything is transparent. On top of this, Toucan has built a standard for how credits can be tokenized. We're creating buckets of credits with similar attributes, and you can program what specific traits and methodologies can go in. This is what will help mature the market. If something is vetted and standardized, you have less risk. For example, a pool will have a certain level of quality, and that's guaranteed. Because the rules of the system state it must fit those criteria. No one can scam you on this, and that's how it has to work. This technology solves those challenges, which traditionally involved having to rely on brokers sending a PDF certificate for example. We are already seeing advancements in the standardization of this process.”

3. Why and how will carbon become a multi-chain asset? 

“Carbon will become a multi-chain asset because carbon should be integrated into these economic systems. We see carbon as an important part of economic activity because the earth should be a stakeholder of our global economic system. We're seeing various chains integrate environmental focused assets, more bridges being built – for example, we're working with teams on building optimistic bridges between EVM chains, starting with Celo, and are soon to move to Ethereum Mainnet and other chains. 

The important part is being able to see and access the credits. We need to make it easier for any actor in the world to leverage these carbon credits and simplify this process. The on-chain market is the easiest place to start, ultimately most of the emissions and demand comes from the real-world economy.”

4. What is next for Toucan over the next 3 years? 

“We want to launch bridges on all major chains and improve the user experience. We want to make it easy for any company to offset without having to figure out wallets, and other complexities, making it super simple to onboard more people into crypto and bring high quality credits on-chain. We want to channel the financial energy in crypto towards funding as many carbon credits as possible, and planet-positive projects to help drive billions into this space.”


For more information on a Net Zero Blockchain, check out our recent article entitled: ‘A Net Zero Blockchain – possible or probable?’   


Overall, the future of carbon markets will be an interesting one. While their use as a pathway to Net Zero needs more clarification, and we must consider the inclusion of diverse offset projects such as oceanic solutions, the potential for carbon markets is huge. In using new and creative technologies, carbon markets can be lucrative for investors while funding verified offset projects. The scope of these projects now needs to be widened, geographically, and in type, while providing security that they are supporting local communities and ecosystems.  There is no doubt that the standardisation of credits is helping, not hindering the VCM, providing a benchmark for credits and a frame of reference. However, there is yet more to be done to prove that carbon projects are achieving their stated aims and offsetting emissions that would otherwise have been released into the atmosphere.

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