Effective voluntary carbon markets can reduce emissions, fund the restoration of ecosystems, and channel capital into vulnerable communities, all financed by private capital. But to deliver impact at scale, market confidence needs to be increased. Proper regulation would support that.
In November, the UK government published a little-reported statutory instrument, with the objective of regulating environmental, social and governance rating agencies, and potentially carbon market rating agencies too.
As the chief executive of a carbon rating agency, I say do it. Do it now. But I also say the UK government should regulate carbon credit agencies, alongside introducing broader measures to regulate carbon markets at every level, establishing a framework the rest of the world can follow.
This would mean regulating everything from disclosures at a project level, to how all the traders, brokers and insurers operate within these markets.
Thoughtful and robust regulations could transform carbon credits into a trusted, transparent and tradable net zero instrument with the credibility of other financial securities.
Carbon market confusion
To the untrained eye, carbon markets that are comprised of three main parts — the voluntary markets, compliance markets and Article 6 markets — are confusing.
In VCMs, which allows businesses to offset their emissions, the “voluntary” is not just about the purchasing decision. It also refers to the fact that market actors, market infrastructure and the carbon credit instrument itself are broadly unregulated. Where there are regulations, they are not universally adopted and often regionally specific.
This is in contrast to compliance markets such as the EU Emissions Trading Scheme, which is regulated by design. In the ETS alone, trades neared $1tn a year as of 2023, shows Reuters data, compared with just $723mn of VCM transactions taking place globally in 2023, according to Ecosystem Marketplace.
Carbon ratings assess independently the extent to which a carbon credit delivers on the promise to avoid or remove a tonne of CO₂ equivalent emissions for a given activity, over a given period of time
It also contrasts with Article 6 markets — operationalised at the COP29 climate summit in November last year. These UN-regulated markets allow governments to trade carbon, which could unlock billions in capital flows in the coming years.
The lack of robust regulation in the voluntary market is holding back investor confidence. In the absence of progress, some market actors have stepped forward to take action.
Carbon credit ratings, such as those provided by BeZero Carbon, have an important role to play. Put simply, carbon ratings assess independently the extent to which a carbon credit delivers on the promise to avoid or remove a tonne of carbon dioxide equivalent emissions for a given activity, over a given period of time.
Ratings acknowledge credits are imperfect and provide a way to make those imperfections transparent, empowering the markets to price them accordingly.
Voluntary efforts only go so far
Carbon credit ratings also complement other integrity initiatives, such as the Core Carbon Principles from the Integrity Council for the Voluntary Carbon Market.
The CCPs set standards of quality for entire project methodologies — an endeavour to be supported and applauded. But they are not a silver bullet, as no two carbon projects apply those methodologies in the same way. It would be difficult to compare meaningfully a credit from a mangrove restoration project in Indonesia with a carbon removal credit from Iceland, without project-level risk assessments.
The UK government’s recently released principles for VCMs also show some promise. They emphasise the importance of high-quality credits and encourage independent validation — rightly setting the bar high. But it is unclear if and how these standards would be enforced. Without proper oversight there is little guarantee of compliance.
Many actors in the voluntary market have also adopted voluntary codes of conduct, emphasising transparency, disclosure and the avoidance of conflicts of interest. But these initiatives, along with carbon ratings, only go so far.
Regulation needed to build VCM confidence
If VCMs are to have the same level of respect as other traded instruments and assets, we need regulation equivalent to that governing the financial markets.
We need to regulate disclosure requirements for transactions and reporting, market infrastructure providers, carbon as an intangible financial instrument, traded and structured instruments, and carbon rating agencies.
The good news is that we do not need to look far to see how this can work in practice. I believe that applying the regulation governing bond markets, which at their core rely on the trading of intangible assets, to carbon markets would be very achievable.
The first step would be to define carbon credits not as commodities — which implies they are all equal — but as intangible risk instruments, reflecting their varying risks and returns.
Mirroring the structure of bond markets would involve mandating greater disclosures from carbon credit issuers to better manage risk. It would call on the Financial Conduct Authority, which has the experience and frameworks in place, to hold market actors to account, prevent fraud, mitigate conflicts of interest and uphold standards of conduct.
In addition, it means regulating market actors such as carbon rating agencies — much like how traditional rating agencies such as S&P, Moody’s and Fitch are already regulated — to ensure assessments accurately reflect the creditworthiness of the instrument.
This legal clarity would deliver the confidence that actors across the value chain have been searching for.
The prize is real. Our research shows a $100bn carbon market would generate $700bn of investment capital; $60bn channelled to the UN sustainable development goals, up to 1.2bn tonnes of CO₂ equivalent emissions mitigated; 150mn hectares of land restored and more than 17mn jobs worldwide created.
Regulating VCMs would be good for businesses, for investors and for the planet.
