A Short History of the Voluntary Carbon Market

A Market Born in Kyoto in the Late 90s

The origins of the Voluntary Carbon Market (VCM) lie in the late 1990s, with the birth of international carbon markets under the Kyoto Protocol. Adopted in 1997 in Kyoto — a city known for its cuisine — policymakers tried to assemble a carefully balanced recipe for climate action: introducing emissions limits and seasoning them with flexibility. The key output was the Clean Development Mechanism (CDM), which allowed firms and governments in industrialised countries to finance emissions-reduction projects in developing countries and count those reductions toward their compliance obligations.

While the CDM was a regulated, compliance-based system, it inadvertently laid the foundations for voluntary carbon markets. It established the core building blocks still used today: project-based crediting, third-party verification, registries, and the idea that emissions reductions could be commodified and traded across borders.

However, Kyoto’s reach was limited. Only a subset of countries faced binding targets, many sectors were excluded, and numerous major emitters never fully participated.

The Evolution from Kyoto to the VCM today

Today, we can split global carbon emissions in one of two buckets:

Regulated Carbon Emissions: These are carbon emissions that fall under taxes or emissions trading systems (ETSs) enacted by governments. Generally, they place a price or ceiling on CO₂ (or other GHG) emissions for certain sectors such as power, heavy industry, etc.. Globally these systems still cover only a fraction of total emissions. Some nations or sectors do not have them at all (or they are weakly enforced). Today, only around 28% of global GHG emissions are covered by carbon pricing instruments.^[1]

Uncovered Carbon Emissions: Many emissions, especially in supply chains, agriculture, land use, and aviation, lie outside regulated carbon markets. Corporations with net-zero or carbon-neutral pledges therefore look to offset the residual emissions they cannot eliminate themselves.

These uncovered emissions represent a structural gap in global climate policy. A marketing firm in California may switch to renewable energy and reduce their footprint. However, a cement producer in Beijing may not have that option. Firms may face genuine or economic barriers to eliminating emissions in the near term, yet still operate under internal targets, investor pressure, or public commitments.

It is precisely this gap, between regulation and firm aspiration, that the VCM emerges.

In the VCM each carbon credit represents one tonne of CO₂ (or equivalent GHG) that has been either avoided, prevented from being emitted, or removed, taken out of the atmosphere.

Hence, the VCM acts as a market-based bridge, helping to fill in gaps, channel financing into emissions mitigation and removal projects, and enable actors to make credible emissions claims.

Project developers — such as those running reforestation initiatives, renewable energy installations, or cookstove programmes — can issue credits if their projects are verified by independent standards such as Verra or Gold Standard. Buyers, often companies with climate targets, purchase and then “retire” these credits so they cannot be reused.

In essence, the VCM mirrors a regulated market but operates voluntarily. It provides a mechanism for private actors to take responsibility for residual emissions and for projects to access funding that might not otherwise exist.

VCM Taxonomy

The voluntary carbon market isn’t one market but many. Credits can come from avoiding emissions, removing carbon, or financing transitions such as early coal retirement. Each delivers a different kind of emissions outcome with varying permanence and reliability.

The table below outlines the main types of credits found in today’s VCM.

A Global Market Forecast to Be Worth USD 24 bn by 2030^[2]

The VCM is crucial because most of the world’s emissions fall outside of regulated schemes. In the most optimistic sense, the VCM helps bridge the gap in addressing the remaining 72% of global emissions that fall outside of regulated markets. Ideally, it should:

• Mobilise capital into projects that mitigate or remove GHG emissions.
• Accelerate innovation in removals such as Direct Air Capture (DAC) or Bioenergy with Carbon Capture and Storage (BECCS) by creating demand and clear future revenue streams.
• Act as a transition tool bridging the time until further regulation takes effect, enabling deeper decarbonisation.

Economically, the VCM can be seen as a second-best mechanism to internalise emissions externalities in the absence of comprehensive regulation - an imperfect but useful complement to state-led decarbonisation policy.

Is My Partner Cheating on Me?

The fundamental tension in the voluntary carbon market is that it sells the promise of offsetting residual emissions, yet turning that promise into real-world climate impact is, in practice, extremely difficult.

I’m sorry to say, but the VCM has been cheating on us for years. We have been gaslit into believing that our flights are carbon neutral, that a marketing company in California is somehow doing the right thing for the planet, and that buying an offset meaningfully cancels out the emissions we cause. In many cases, this simply is not true.

Whether the VCM functions effectively hinges on one central idea: additionality. A carbon credit only has value if it represents an emissions reduction or removal that would not have happened without the project or the buyer’s money. If a forest was going to be protected anyway, or a wind farm would have been built regardless, then issuing credits for it does not reduce global emissions, it is merely accounting magic.

Ensuring additionality is exceptionally difficult, because it requires proving a counterfactual, an age-old problem in economics. What would have happened in the absence of the project? Without additionality, the VCM does not accelerate climate action; it risks delaying it by giving companies a way to appear climate-neutral without changing behaviour. In other words, greenwashing dressed up as climate policy.

Additionality, however, is not the only integrity problem facing the VCM. Permanence remains a challenge: carbon stored in trees, soils, or biomass can be released again through fire, logging, or land-use change, while even technology-based removals face long-term monitoring and leakage risks. Leakage means emissions avoided in one place may simply reappear elsewhere, achieving little or no net global reduction. Opacity in verification systems and registries leaves buyers unsure what they are actually purchasing. And perverse incentives arise when cheap offsets allow firms to buy their way to “carbon neutrality” rather than invest in genuine decarbonisation.

Additionality 2.0 and Fractional Credits: What Percentage is My Partner Cheating on Me?

Additionality is not black and white.

Let’s say you go out on date night with your partner. If your partner kisses someone else, most people would say that counts as cheating. If they sleep with someone else, the answer is obvious. But what if they lock eyes with someone at a bar and their jaw drops? That feels wrong but it is harder to define, harder to measure, and harder to agree on where exactly the line has been crossed. Did they cheat on you 5%, 10%, 40%?

Additionality works in much the same way. Some projects clearly would have happened without carbon credit finance — they are fully non-additional. Others would not have happened at all without it — clearly additional. But many projects sit uncomfortably in between. They may be commercially marginal: viable only if they receive a small financial push. Carbon credit revenue provides that push, tipping the project over the line.

The problem is what happens next. Once the project goes ahead, it often claims credits for the entire volume of emissions reductions, even though only a fraction of the project depended on offset finance in the first place. In reality, the project is only partially additional, but the accounting treats it as fully so.

And just as in the relationship analogy, this is where things fall apart. Was the project “additional” by 5%, 10% or 40%? There is no credible way to draw that line after the fact. Imagine driving home with your partner and having to debate what percentage they were cheating on you. Once additionality becomes fractional, it stops being a verifiable condition and becomes a narrative judgement. At that point, carbon credits no longer represent tonnes of CO₂ reduced or removed — they are hypothetical counterfactual arguments.

Repairing the Voluntary Carbon Market

The voluntary carbon market is not broken beyond repair. In response to mounting criticism, several initiatives are already attempting to restore integrity and rebuild trust.

1. Higher standards. New governance bodies have emerged to impose minimum quality thresholds. The Integrity Council for the Voluntary Carbon Market has introduced Core Carbon Principles aimed at filtering out low-integrity credits, while the Voluntary Carbon Market Integrity Initiative provides guidance on how companies can use offsets without misleading claims.
2. A shift toward removals. While nature-based projects still dominate the market, demand is increasingly moving toward permanent carbon removals such as direct air capture, BECCS, and biochar. These options are expensive and technically challenging, but they are fundamentally better than avoidance.
3. Greater corporate discipline. Some leading buyers are moving away from volume-based offsetting and toward smaller quantities of high-integrity credits, recognising that credibility itself has become scarce and therefore valuable.

These developments are encouraging. But they all share a common limitation: they operate entirely within the existing voluntary framework. They improve quality at the margin, but they do not resolve the market’s core weakness: the absence of enforceable, economy-wide accounting.

To stabilise the VCM fully, incremental fixes are not enough. We need structural reform.

The irony is that carbon markets have faced this problem before. Under the Kyoto Protocol, international crediting operated within a compliance system: emissions reductions counted toward legally binding national targets, and accounting was anchored at the sovereign level. The voluntary carbon market inherited many of Kyoto’s mechanisms, project-based crediting, verification, and registries, but lost the enforcement layer that gave them credibility.

Article 6 of the Paris Agreement is an attempt to rebuild that missing spine. At its core are Internationally Transferred Mitigation Outcomes (ITMOs): emissions reductions transferred across borders with corresponding adjustments to national carbon accounts. If a tonne of CO₂ reduction is sold abroad, it is subtracted from the host country’s inventory. Each tonne can be claimed once.

This matters enormously for the VCM. ITMOs directly address the problems voluntary markets struggle with most: double counting, baseline manipulation, ambiguous additionality, and weak enforcement. In short, Article 6 offers what voluntary markets cannot generate on their own — accounting discipline backed by states.

Fitting in Paris and Article 6

But this solution comes with serious risks. Article 6 is being shaped through complex negotiations among policymakers far removed from on-the-ground project realities. The resulting rulebook is dense, technical, and increasingly abstract. As layers of classifications, sub-mechanisms, and accounting treatments accumulate, the system risks losing its most important anchor: the intuitive principle that one tonne of carbon reduced should equal one tonne claimed. When markets debate ever finer distinctions, credibility does not necessarily increase, it becomes harder to audit. Sorry Gambia you cannot trade your ITMO class C type 113 A to Chile because rule 113 clause 12.77 says so.

There is also a deeper equity concern. Most credit-generating projects are located in low- and middle-income countries. If their lowest-cost mitigation opportunities are absorbed into international transfers (whether into the VCM or compliance markets) to help wealthier countries meet targets, those countries risk being left with fewer and more expensive options for their own decarbonisation. The global community does not have a strong track record of ensuring that such trade-offs serve the long-term interests of developing economies; Africa, in particular, has heard many promises before.

This points to a crucial design principle: Article 6 should prioritise high-hanging fruit. International finance should flow toward projects that are genuinely transformative, capital-intensive, and technologically challenging, rather than harvesting the cheapest mitigation options available. Direct air capture, industrial decarbonisation, and durable removals are harder, slower, and more expensive but they are also less likely to crowd out domestic climate action. The voluntary carbon market should follow the same principle.

Put simply, policymakers need to write better rules: ones that channel international finance toward additional, high-impact mitigation without turning climate cooperation into an esoteric accounting exercise.

As the Climate Tzar, Here is What I Would Do to Fix the Market:

The danger is not that the voluntary carbon market fails, but that it survives without credibility. A credible future for the VCM rests on four structural shifts.

1. Link voluntary credits to compliance systems.
High-integrity credits aligned with Article 6 and ITMO accounting should be eligible in limited, carefully designed ways, to interact with emissions trading systems. This brings oversight, liquidity, and comparability, while sharply reducing greenwashing risk.

2. Standardise transparency and accounting.
Public registries, harmonised methodologies, and audit-like disclosure should be non-negotiable. If a credit cannot survive scrutiny equivalent to financial reporting, it does not belong in a market that trades climate credibility.

3. Move from private trust to public alignment.
Global agreement at COP level is essential, but alignment matters more than complexity. Fewer rules, clearly enforced, beat elaborate frameworks no one can verify.

4. Show national leadership.
Countries can move faster than international negotiations. Domestic standards, bilateral agreements, and clear rules for voluntary credit use don’t require perfection but pragmatism.

The voluntary carbon market stands at a crossroads. If not cleaned up, it becomes a distraction; a way to delay real decarbonisation while claiming progress on paper. Done well, it can channel capital to real mitigation and removals, accelerate innovation, and complement regulated climate policy where regulation still falls short.

Footnotes

1. Source: World Bank: compliance mechanisms, includes carbon taxes and ETSs. ↑

2. Source: Grand View Research, 2024 ↑