5 September 2022

Transparency, liquidity and integrity in the voluntary carbon market

The VCM can now be viewed as an established commodity market in its own right, argues John Melby

John Melby

The road to a low-carbon future is essential and daunting.

Measuring and reducing emissions from internal, downstream, and upstream sources is a formidable challenge for companies.

Investors, bankers, and financial intermediaries face an equally complex conundrum as they fund and implement solutions to lower emissions at portfolio and borrower companies.

But change is happening quickly. Technological advancements and groundswell commitments are boosting efforts to reduce emissions across the board. One area that has gained much attention recently is the voluntary carbon market (VCM), which is often portrayed anachronistically as fragmented, illiquid, and opaque, reducing its effectiveness as a tool for global emission reductions.

This criticism overlooks recent developments in the VCM, which now has transparent, liquid spot and futures markets, established benchmarks, settlement mechanisms, and robust market data.

Moreover, ongoing improvements at leading standards organizations continue to raise the quality and integrity of emission-reduction projects across core principles of environmental and social benefits, additionality, permanence, transparency, governance, independent verification, and other criteria.

This work is complemented by a range of symbiotic initiatives to define and codify evolving best practices.

At the market level, these developments mean that participants can buy and sell carbon credits in largely the same ways—and with the same level of confidence and efficiency—they enjoy in more established commodity markets.

In fact, in our view, the VCM can now be viewed as an established commodity market in its own right.

Transparency is the currency of trust

Price transparency has come a long way with the advent of active spot and futures exchanges, market-data services, and end-of-day assessed prices.

In addition, registries at the market's core provide a level of transparency that exceeds most commodity and financial markets; anyone can access the public websites of leading registries, allowing them to view complete, project-specific documentation, as well as issuance and retirement data, volumes retired, and often the retiring entity's name.

At the market level, live prices for individual project credits can be viewed on the trading screen of marketplaces like Xpansiv market CBL, which transacted nearly 100 million credits from more than 250 individual projects in 2021.

The VCM can now be viewed as an established commodity market in its own right

In addition, over the same period, CBL saw more than 16 million credits trade in its suite of Global Emissions Offset™ (GEO®) standardized instruments that cover nature and technology market segments.

This data is also available on mobile applications, enabling market participants to check prices 24/7.

From the world's largest financial institutions to the smallest boots-on-the-ground project developers in the remotest corners of the globe, all have equal access to live market data.

Live, end-of-day, and historical spot and futures market data is readily available.

In 2021 CME Group launched futures contracts on CBL's standardized GEO spot contracts.

Pricing for these instruments — including a forward curve of active contracts currently extending to December 2025 — is available through the exchange's usual channels.

VCM prices are also assessed daily by leading price-reporting agencies, including S&P Global Platts1, Argus, and OPIS, enabling market participants to mark positions to market, and structure forward-transactions using proven data sources based on reliable, fully transparent methodologies.

In addition, many companies provide detailed data on their carbon credit purchases, as well as their broader emissions reduction programmes.

This disclosure is expected to grow under proposed mandates by the US Securities & Exchange Commission and the European Union.

Increasing liquidity and participation

Liquidity measured by market volumes has skyrocketed in recent years, growing from 104 million tonnes2 in 2020 to 494 million tonnes in 2021.

In dollar terms, the market grew from $520 million to $1.985 billion year over year3.

Spot volumes traded and cleared through CBL grew to 25% of total volume and 28% of total dollar value in 20214.

CBL Volume 9,886,435 31,370,779 121,571,471
CME Volume     47149000
Total VCM 104,000,000 188,000,000 494,400,000

Liquidity measured by market impact has also blossomed as a growing number of intermediaries scale up capital committed to carbon markets and provide basis trading and other tactics enabled by liquid new benchmark contracts.

These capabilities and instruments extend the array of trading and risk-management tools, which, in a virtuous circle, grow liquidity across all markets.

High integrity benchmarks at the core

The development of pricing benchmarks and related instruments marks the maturation of commodity and financial markets.

In the VCM, these instruments provide an additional benefit, enabling buyers to source high-quality carbon credits — without having to sift through hundreds of individual projects, which requires resources and expertise in short supply.

Sellers benefit too, by structuring forward-transactions at a premium or discount to benchmark contracts.

Embedding this basis in forward-transactions enables sellers to manage price risk and closely monitor position value.

VCM participants are committed to ensuring credits deliver the environmental benefit of a tonne of carbon avoided or removed.

The deep, detailed work on project integrity is done by standards organizations that have developed and continue to refine the complex scientific models and criteria that are at the heart of this burgeoning market.

In parallel, collective initiatives are developing best practices around core carbon principles, crediting methodologies, and environmental benefits.

This work will come into sharper relief as regulators mandate disclosure requirements around carbon credit use.

These developments will further enhance confidence in the VCM, enabling it to scale to the size and universal acceptance needed to meet critical emissions targets by 2050.

Today's VCM is already a robust market

Globally, companies are driving changes to their emissions profile, both through direct impacts to their operations, but also drawing on mechanisms like the VCM to complement their activities.

The VCM has already evolved into a robust market framework that supports the needs of these participants with respect to price transparency, ability to manage risk through hedging and use of benchmarks, and the stability of independent standards bodies to assure that the associated offsets are well-understood and fulfill integrity requirements.

While all markets — established and new — require constant scrutiny to assure they are robust, the VCM has all the elements in place that enable companies to act in confidence using this mechanism.

John Melby is President and COO of Xpansiv.


1- In 2021, Xpansiv and S&P Global Platts entered a partnership to advance VCM price transparency, collaborating with market participants to develop new products and assessments.
2- Metric tons of carbon dioxide equivalent
3- State of the Voluntary Carbon Market, Ecosystem Marketplace, August 2022
4- CBL 2021 volume totaled 121.5 million tons worth $550 million, equal to 24.6% and 27.8% of Ecosystem Marketplace's total market activity by volume and value, respectively.

John Melby