Voluntary Carbon Credits

What are carbon credits?

One credit = one token representing a ton of carbon or equivalent greenhouse gas removed or avoided.

Carbon offsets may be used for residual emissions once an organization has taken action to reduce their emissions to as close to net zero as possible and, additionally, while they are taking action.

Access our carbon credit glossary for more information.

What are the carbon markets?

There are two key markets that trade carbon-related financial instruments: the Compliance Carbon Market (CCM) (sometimes known as the regulated market) and the Voluntary Carbon Market (VCM). Compliance markets are government- and regulator-led. They have regulated pricing. Credits in voluntary markets (the focus of this website) are unregulated. VCCs are subject to varying degrees of verification oversight and customer protection, so the market can be complex to navigate.

Types of carbon offset

The different types of carbon offsets can be split into more nature-based versus more technology-based, and either removal or avoidance and reduction:

More nature-based: projects that use natural processes to generate carbon offsets
More technology-based: projects that use technology or engineering-based solutions
Avoidance: projects that prevent the emission of carbon in the first place
Reduction: projects that actively reduce the volume of carbon emissions to the atmosphere
Removal: projects that remove carbon from the atmosphere

Risk Overview

What are the potential risks related to the VCM?

Project fraud is any deliberate misrepresentation or manipulation of carbon removal projects, causing a subsequent delivery risk or instance of invalidation by the verifier. Credits stored digitally on registry platforms could also be subject to theft by hackers or be subject to a cyberattack resulting in a data loss.

The risk of credits being issued and validated, and subsequently invalidated, by an accreditor or verification body. Invalidation could occur from methodology or accounting errors, project fraud, or a reversal.

Physical Damage refers to the risk of damage or loss to the project itself, resulting in the loss of its insured value. Projects are at risk of damage by natural catastrophes or extreme weather events, like wildfire or drought, as well as political violence or vandalism. Business Interruption is the risk that a credit’s future value is lost from damage to, or suspension of, business operations. Stakeholder businesses in the VCM landscape can be impacted by a wide range of systemic risks such as cyber hacks, jurisdictional action, or regulatory change.

The risk that the greenhouse gases sequestered by a carbon project are released back into the atmosphere, mitigating its offset effect. Reversal could occur as a result of extreme weather, natural catastrophe events, or human activities such as logging or poor land management.

The risk that pre-agreed carbon credits are not transferred or transferred late to the buyer. Non-delivery could occur if a project developer defaults, or if a project is damaged or interrupted before it can generate the necessary number of credits.

Land-based projects are subject to political risks such as confiscation, expropriation, nationalization, and deprivation (CEND), changes in law, or other state-level intervention (especially for projects in emerging markets). Politically motivated violence or war can also destroy nature-based projects and invalidate the associated credit.

The risk of financial loss arising from breaches of representations or warranties regarding the validity, authenticity and quality of carbon credits being transacted between parties.

1. Operational risk, as a result of developer underperformance or insolvency could lead to loss of their future income.