Voluntary Carbon Markets
Five main players make up the engine of carbon markets.
Project developers represent the upstream part of the market, and produce carbon credits. Projects can range from large-scale, industrial style projects like a high-volume hydro plant, to smaller community-based ones like clean cookstoves.
Community-based projects are usually very localized and typically designed and managed by local groups or NGOs. They tend to produce smaller volumes of carbon credits and it is often more expensive to certify them. However, they often generate more additional co-benefits and meet the UN's Sustainable Development Goals (SDGs), contributing, for example, to improved welfare for the local population, better water quality, or the reduction of economic inequality.
When a carbon credit project also helps to meet some of the SDGs, the value of a credit from that project to potential buyers may be higher, and the credit can trade at a premium to other types of projects.
Industrial projects are typically larger-scale projects that can often produce large volumes of credits with more easily verified GHG offset potential. But this kind of project may not generate strong co-benefits and may not meet additional SDG objectives. For this reason, credits emitted by industrial projects may trade at a discount to projects that do carry SDGs.
The large-scale nature of some types of projects can also raise questions about whether they are truly "additional", meaning that they would be able to operate without the additional revenue generated from the sale of carbon credits.
This is a particularly salient question in the development of renewable energy projects, given that renewable energy is often cheaper in some regions than the development of new, conventional fossil fuel plants.
The downstream market is made of end buyers: companies—or even individual consumers—that have committed to offset part or all of their GHG emissions. Among the early buyers of carbon credits were tech companies such as Apple and Google, airplane operators, and oil and gas majors, but more industry sectors are joining the market as they set their own net-zero targets.
There is a fifth player unique to carbon markets. Standards are organizations, usually NGOs, which certify that a particular project meets its stated objectives and its stated volume of emissions.
Standards have a series of methodologies, or requirements, for each type of carbon project. For example, a reforestation project will follow specific rules when calculating the level of CO2 absorption of the planned forest and therefore the number of carbon credits it produces over time.
A renewable energy project will have a different set of specific rules to follow when calculating the benefit in terms of avoided CO2 emissions and carbon credits generated over time.
As of January 2021, the number of carbon credits issued by the largest Standards (UN Clean Development Mechanism, Verra, the American Carbon Registry, Climate Action Reserve and Gold Standard), totaled 3,110 million mt of CO2. Of these, 810 million mt were still available in January, while 2,300 million mt had already been offset and therefore retired, meaning that those credits had been used by buyers to offset their emissions.
To link supply and demand, there are brokers and retail traders, just as in other commodity markets. Retail traders purchase large amounts of credits directly from the supplier, bundle those credits in portfolios, ranging from hundreds to hundreds or thousands of mtCO2e, and sell those bundles to the end buyers, typically with some commission.
Brokers buy carbon credits from a retailer trader and market them to an end-buyer, usually with some commission.