Explaining voluntary carbon markets

We unpack how organisations can use carbon-pricing markets to achieve their climate goals

Carbon markets

7 Aug 2025 Insight

Reports and highlights

Voluntary carbon markets (VCMs) are a market-based mechanism that aim to reduce greenhouse gases (GHGs) by funding carbon projects that either remove GHGs from the air (removal projects) or prevent the release of such emissions (avoidance projects).

VCMs are, obviously, voluntary, so organisations do not participate for the purposes of compliance with 'cap and trade' regulations such as the EU or UK ETS. Instead, organisations may use VCMs as a means of reaching self-imposed carbon targets which could be used to achieve a competitive advantage (ie, by enhancing their reputation among shareholders, customers, and other stakeholders to whom ESG compliance and decarbonisation is increasingly important).

How do VCMs work?

                                    Carbon Projects: Carbon projects remove GHGs from the air or prevent their release. Project developers issue voluntary carbon credits (VCCs) which represent an amount equivalent to the volume of GHGs removed or avoided through the relevant carbon projects. 
Standard Setting Bodies: Carbon projects can be certified and rated by standard setting bodies (such as Gold Standard or Verra), which involves the monitoring, reporting and verification of the projects and underlying VCCs. Some standard setting bodies work on a closed basis whereby their certified VCCs have to be held within their associated VCC register.  
Carbon Registry: often operated directly by standard setting bodies, registries are like a bank account for VCCs, which track the ownership of VCCs as they are issued, bought and sold, and retired once they are eventually used to offset emissions.
Sold on the Market: VCCs are then placed on the market and sold or traded through bilateral sales or intermediary brokers, traders, or exchanges.
End Buyers: Organisations, including companies and governments, can buy VCCs as a means of offsetting their carbon emissions.

The key participants in VCMs

1. Project developers

Project developers set up and run carbon projects. Projects vary in size, scale, and longevity and can be based across geographical locations. Project developers implement methodologies for calculating the volumes of GHGs that their projects remove or avoid and issue VCCs in respect of these volumes. In the EU and UK, one tonne of carbon dioxide generally translates to one VCC.

Reforestation: This involves the planting of specific tree species and removal of invasive species to encourage the regrowth of forests that have recently been deforested.
Afforestation: This requires similar practices to reforestation, but afforestation projects take place over land which was not previously forested.
Soil sequestration: This is a natural process by which carbon is stored within the soil. Sequestration projects can take place over agricultural land where farmers plant certain types of crops (eg, perennial crops with deeper roots or cover crops like clover, beans and peas) to encourage greater sequestration of carbon into soils. This is a popular practice among famers for whom generation of VCCs through agricultural sequestration acts as an alternative revenue stream.

Key concerns with nature-based removal projects:

Permanence: Difficulties in predicting and measuring the period for which GHGs will remain sequestered.
Methodology: There have been various accusations that some carbon standards have overstated the actual carbon sequestration potential of nature-based projects.
Lack of biodiversity: A lack of biodiversity can be caused where only limited and sometimes non-native species of trees are planted in one region.
Social impacts: Social impacts of carbon projects on local communities and indigenous people who may be forced off native lands to make space for projects.

Science-based carbon removal projects involve capturing GHGs from the atmosphere and using chemical reactions to trap these into rock above or below the Earth's surface or into the sea. Science-based removal projects are generally more effective than nature-based projects as GHGs can be trapped for a longer term with a lower risk of being released back into the atmosphere.

Key concerns with science-based removal projects:

High capital costs: The technology and infrastructure can be very expensive, so VCCs are often priced at a significant premium (compared to nature-based VCCs).
Environmental, health and safety risks: Depending on the sequestration approach, there can be environment, health, and safety-related risks due to the potential release of toxic byproducts.

Project developers should therefore be conducting rigorous risk assessments to assess and mitigate the negative environmental and social impacts, when planning for projects

Avoidance projects involve proactive measures to prevent carbon from being released into the atmosphere and include, by way of example:

projects for the prevention of deforestation (REDD+);
cookstove projects where log burning stoves are replaced with electric cookers;
projects developing greater fuel or energy efficiency in buildings; and
the development of renewable power plants. Note, however, that many renewable power projects are economically viable without the need for investment from VCMs which may result in them being awarded a lower quality certification.

Concerns with avoidance projects

The key concern associated with avoidance is a difficulty in measuring the amount of GHGs that would have in theory been emitted but which have been avoided through the project. For instance, for certain REDD+ projects, it may be difficult to measure the actual risk of deforestation in a region.

2. Standard setting bodies

Certification of VCCs

Standard setting bodies (usually non-profit organisations) may certify that projects meet their stated objectives and verify the volumes of GHGs that individual projects state that they remove or avoid. While there is currently neither a regulated global standard nor a requirement that all carbon projects must be certified, there are 10 Core Carbon Principles, created by the Integrity Council for the Voluntary Carbon Markets (ICVCM).

The ICVCM is an independent governance body which was set up in 2021 in response to a recommendation from the Taskforce on Scaling the Voluntary Carbon Markets (TSVCM), a group comprising private-sector institutions including the buyers and sellers of carbon credits, standard setting bodies, financial institutions, and academics. The TSVCM recommended the establishment of core carbon principles to ensure that the supply of VCCs on the VCMs increase and have high levels of integrity

The principles are grouped into the following categories:

the effective governance and transparency of projects;
whether the projects have a real and measurable impact on emissions; and
how projects contribute to sustainable development.

The ICVCM also provides an assessment framework setting out more detailed guidance on requirements carbon projects should follow to achieve each of the principles. VCCs are usually issued after the removal or avoidance has taken place, however, there are some VCC products which allow the trading in future VCCs which have not yet crystallised.

Concerns with certification

Many carbon standard setting bodies base their ratings on these principles. In theory, the rating of the VCC should indicate the quality and integrity of the project but several reports and investigations have surfaced which call into question the methodologies used by industry-leading standard setting bodies. One of the main concerns is the risk of VCCs overstating the effectiveness of certain carbon projects, particularly projects in the avoidance category for which, as outlined above, GHG emissions are more difficult to quantify.

Registration of VCCs

Standard setting bodies may also operate registries. Carbon projects, intermediaries and end buyers of VCCs set up accounts with registries who issue a serial number to each VCC and assign the serial number to the relevant owner's account. As the VCC is bought or sold, the serial number for it is transferred to the new owner's account, or when the VCC is used to offset an emission, the serial number is retired from the registry so that it cannot be resold.

Registries may also produce a database containing a list of certified VCCs, details of their ownership and details of the projects they are produced from. The relevant database can be updated to reflect changes in ownership and retired to reflect VCCs that have been offset against emissions.

Concerns with registration

Registration of VCCs is intended to track their ownership and avoid the issue of double counting (ie, where more than one entity uses the same VCC to meet their emission goals). One of the risks involved with the registration system again relates to the fact that VCMs are not governed by a centralised body. Certain projects may be registered to more than one carbon standard setting body, so a single VCC could in theory be listed on more than one registry. To avoid this, reputable standard setting bodies closely monitor the dual registration of projects and put in place robust procedures to mitigate this risk.

3. The Market

Once certified, VCCs are issued by project developers and are placed on the market. There are several routes for VCCs to take once they enter the market, including private bilateral sales between project developers and end buyers, or intermediary trades involving exchange systems, retailers, and brokers. Retail traders buy large quantities of VCCs directly from project developers and sell these on to other intermediaries for a commission, while brokers buy VCCs from other intermediaries on behalf of end buyers for a fee. Exchanges, like marketplaces for other commodities and financial instruments, involve selling VCCs based on standardised contracts.

There is some concern among commentators that standardising contracts and categorising VCCs based on the type of carbon projects they are generated from could, for the purpose of VCC trading, result in end buyers receiving insufficient information about the exact nature of the projects.

This lack of transparency could disincentivise project developers to ensure their VCCs are of a high standard and follow the principles of integrity and measurability. When brokers are used or where private bilateral sales take place, the end buyer may be able to undertake greater diligence and have control over the quality of VCCs they purchase.

The proliferation of projects combined with increased scrutiny means that, while voluntary carbon credits present an opportunity to meet climate targets, they also present a risk.

4. End buyers

End buyers can use VCCs as part of their sustainability strategies by using VCCs to offset against their GHG emissions. This is a common strategy used by companies for whom GHG emissions are currently unavoidable or hard to abate. Article 6 of the Paris Agreement also enables countries to participate in VCMs for which rules are in the process of being developed.

Buyers must, however, be aware of the above risks associated with VCMs, particularly where they invest in low quality VCCs or in projects which are forecasted to commence but later fail to materialise. Several reports of carbon projects which either overstate their effectiveness or have negative social and environmental impacts have resulted in reputational damage for well-known organisations.

The proliferation in the number of projects, project developers and VCCs available, combined with increased scrutiny from market observers means that, while VCCs present an opportunity to meet emissions reductions targets, they also present a risk (failure to materialise, low quality, potential exposure to greenwashing claims). It is increasingly important that organisations undertake thorough due diligence prior to purchasing VCCs and ensure that the relevant purchase agreement mitigates these risks to the extent possible.

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Key contacts

Dr Silke Goldberg

Partner, London, Israel Group , Nordic Group and Ukraine Group

Jannis Bille

UK Head of ESG, London

Zoe Asher

Associate, London

Legal Notice

The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

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