The voluntary carbon market constitutes a complex and intricate ecosystem, encompassing a multitude of stakeholders dedicated to ensuring the success of carbon offset projects by effectively reducing or removing greenhouse gases from the atmosphere. However, this ecosystem operates with a degree of opacity, with discussions and negotiations often conducted discreetly behind closed doors, particularly regarding pricing. The world of voluntary carbon trading is predominantly shaped by developers, verifiers, validators, and registries, each motivated by financial gain.
In India, as in many other countries, there is no comprehensive government database documenting the number of projects signed by various entities for carbon credits. This vital information is primarily held by global carbon registries. The most prominent of these is the Verified Carbon Standard Program (VCS), managed by Verra and headquartered in Washington, DC. VCS alone is responsible for overseeing approximately 64 percent of independent (non-governmental) carbon credits issued worldwide. The second-largest global registry is the Gold Standard, followed by the American Carbon Registry (ACR) and the Climate Action Reserve (CAR), previously known as the California Climate Action Registry. A relatively new entrant in this field is the Qatar-based Global Carbon Council (GCC) registry, founded in 2016 and, to date, has approved nine projects, many of which are associated with renewable energy. GCC asserts ambitious plans for its future role in this market.
These registries play a pivotal role in establishing standards and guidelines for project development, verification, and trading. They also provide a platform for project developers, whether private or public entities, to register their projects and have them verified. Upon meeting the criteria and demonstrating greenhouse gas reduction or removal, the registry issues carbon credits for these verified projects.
The pricing of carbon credits is a matter strictly negotiated between buyers and sellers, a process that unfolds behind closed doors. Globally, registries have issued carbon credits for a total of 6,481 projects designed to avoid or reduce 1.4 billion tonnes of emissions. In 2021 alone, the annual transaction value of this market reached nearly $2 billion.
The price of carbon credits is influenced by market dynamics, and this pricing mechanism does not necessarily align with the goal of decarbonization. Carbon credits earned from these registered projects can be traded and utilized by companies to offset their emissions, aiding them in achieving their climate objectives. Remarkably, the “State of the Carbon Developer Ecosystem” report by the UK-based research organization Abatable revealed that the top 15 project developers held 35 percent of the carbon credits issued globally in 2022. Three Indian companies, namely EnKing International (now EKI), Jaiprakash Power Ventures, and Himachal Baspa Power Company, were among the top 15 project developers, with EKI experiencing remarkable growth.
Within this market ecosystem, other crucial players include validation and verification bodies that independently assess projects and claims about carbon offsets before they can be listed in the registries. These entities employ various methodologies depending on the type of avoided or removal projects. Additionally, buyers play a vital role, as they require carbon offset projects to mitigate their greenhouse gas emissions. Buyers range from luxury brands like Gucci to entertainment giants like Disney, tech giants like Microsoft, and major oil companies such as Shell.
Despite the significant involvement of various stakeholders, one aspect often overlooked in this carbon trading ecosystem is the ownership of the projects. The true project owners, whether companies running solar projects or communities with trees planted on their land, often lack a substantial presence within this ecosystem. This gap underscores the need for a more inclusive approach that ensures the benefits of carbon trading flow to those directly involved in and impacted by these projects.
Before diving further into this story, it’s essential to understand the scale of the market, the types of projects it invests in, and what is known about pricing.
As per data available with the Berkeley Carbon Trading Project, Verra and Gold registries have been responsible for 6,481 carbon credit projects globally, resulting in the issuance of 1.4 billion credits. In 2021, the market’s annual transactions reached nearly $1.98 billion.
Carbon credits are issued for two categories of projects: those that avoid greenhouse gases by enabling a shift to clean energy sources and those that remove or sequester greenhouse gases already emitted. The majority of credits (for 1.4 billion tonnes of CO2 equivalent) have been allocated to renewable energy projects, followed by forestry and land-use projects. It’s noteworthy that a significant portion of nature-based solution projects (such as afforestation) and household device projects (like clean cookstoves) are situated in Southern countries. These projects are more cost-effective in terms of carbon credit prices, making them attractive offsets for buyers.
The pricing of carbon credits is determined through negotiations between sellers and buyers and is influenced by factors such as project technology. Clean cookstove projects typically sell carbon credits for $3 to $10 per credit, while direct air carbon capture and storage projects can command prices ranging from $300 to $1,100 per credit. This significant price range highlights the absence of standardized pricing and the need for market reform to align credit prices with actual project costs. This reform is particularly crucial for nature-based projects, which should account for the value of land and the labor of the communities they aim to serve.
In August 2023, India’s power minister announced the country’s willingness to export carbon credits, with a focus on countries that purchase green hydrogen from India. This announcement followed several months of deliberation on the issue. Initially, the minister had stated that India would not permit carbon credit exports until the nation met its climate goals, as outlined in the Paris Agreement. However, the government’s stance appeared to evolve later, allowing Indian carbon credits to be sold both domestically and internationally.
India has a substantial share of the voluntary carbon credit market, with 860 registered projects and 1,451 projects under consideration at Verra and Gold Standard, which together oversee approximately 90 percent of non-governmental carbon credits globally. Indian entities have earned about $652 million from carbon credits used to offset emissions, with these credits accounting for approximately 11 percent of India’s annual greenhouse gas emissions in 2021.
The voluntary carbon market is poised for continued growth and presents a significant opportunity for India to play a pivotal role in global carbon credit trading.
The voluntary carbon market operates as a complex and multi-faceted ecosystem involving various stakeholders and significant financial transactions. While carbon credits hold substantial potential for mitigating climate change, the market’s opacity and pricing dynamics warrant attention. Addressing these issues and ensuring that the benefits of carbon trading reach project owners and communities is essential for a more equitable and effective approach to climate action.
