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Small Business (SME) Guide to the US Voluntary Carbon Market

The 1.5°C Imperative

To avoid catastrophic climate change, we must stabilize the global climate at 1.5°C above pre-industrial levels. This requires drastic action: global greenhouse gas emissions must be halved by 2030 compared to 2020 and reach Net Zero by 2050. 

The Intergovernmental Panel on Climate Change (IPCC) suggests that to meet the 1.5°C climate target, global greenhouse gas emissions in 2050 should not exceed 7 billion tons, and 19 billion tons to stay within a 2°C limit.

Achieving this requires rapid reductions of our current emissions levels, as well as scientific and technological advancements in carbon sequestration and removal (see: Exceeding 1.5°C global warming could trigger multiple climate tipping points.)

The Role of Small Businesses

Collectively, small businesses contribute substantially to the economy, underscoring the importance of their participation in carbon offsetting initiatives, since despite what we may think, their carbon footprints are far from being negligible. Even at the lowest end of the scale, office workers at SMEs generate between 1 to 6 tons of CO2 per employee annually (see Stats for employees in industrial and commercial companies are of course much higher. The significant drivers for emissions at most SMEs are: 

  • Air travel
  • Office mobility,
  • Heating / Cooling
  • Electricity
  • Waste management. 

Carbon Credits

While offsets are crucial for businesses and individuals looking to reduce their emissions, the reality is that some emissions will always remain on the balance. These emissions can be neutralized through the purchase of carbon credits, which are certificates representing a reduction of one tonne of carbon dioxide (or its equivalent in other greenhouse gasses).  These credits can be traded on the global carbon market, or purchased directly from businesses, fostering a dynamic market environment driven by reducing GHG emissions. 

Carbon Credits vs. National GHG Policies

Incorporating carbon offsets into national GHG strategies is vital for reducing the overall costs associated with emission reductions. This approach supports both nature-based solutions and technological innovations in achieving a net-zero balance.

Nature-Based Solutions and Their Impact

Nature-based solutions leverage ecosystems to absorb CO2 emissions from the atmosphere. These solutions not only represent avoided emissions but also significantly impact the global climate by removing greenhouse gasses from the air. Trading in carbon credits (see below), which represent these emissions reductions, helps businesses and countries meet their environmental goals.

Market Dynamics and Pricing

The price of carbon credits varies based on the type of credit and prevailing market conditions. Recent demand spikes indicate market volatility and the growing importance of carbon markets in environmental strategies. However, concerns persist about whether current prices are sufficient to meet the objectives of the Paris Agreement. Prices are projected to need an increase to $30-$100 per ton to effectively contribute to these goals.

Key Players in the Carbon Offset Market

The carbon offset market features several key players, including:

  • Project Developers: These entities initiate projects that generate carbon credits, representing the supply side of the market.
  • Carbon Brokers and Trading Firms: These firms play a crucial role in matching supply with demand. They acquire large quantities of credits to create portfolios sold to end buyers or act as intermediaries.
  • End Buyers: Companies and individuals looking to offset their GHG emissions form the demand side of the market.
  • Certification Standards: Non-governmental organizations (NGOs) ensure that projects adhere to specific goals and emission reduction volumes.

Carbon markets comprise two segments: 

  1. The Compliance Market, where companies must comply with governmental emission reduction targets. 
  2. The  Voluntary Market, where companies choose to offset their emissions.

Voluntary Carbon Markets

Voluntary carbon markets (VCM) are platforms that provide a robust, reliable, and secure way to offset emissions that cannot be reduced or sequestered, and as such play an essential role in global efforts to combat climate change. VCMs rely on the principles of supply and demand to determine the value and availability of carbon credits. 

The dynamic nature of voluntary carbon markets is evident from the continuous evolution and recognition within industry circles, as highlighted by the Environmental Finance Voluntary Carbon Market Rankings 2023, where over 4,300 companies participated.

Voluntary carbon markets play a crucial role in directing financial resources toward global emissions reduction or elimination activities that would otherwise be impossible due to insufficient political and economic incentives.

Companies engage in these markets, not because of legal obligations but to proactively manage their environmental impacts. By choosing to offset their emissions voluntarily, companies demonstrate environmental responsibility and contribute to a sustainable future.

Voluntary Carbon Markets are Growing 

The voluntary carbon market has seen impressive growth over recent years. According to Ecosystem Marketplace, 2023 saw the value of the market hold at $1.98bn. Key sectors such as energy, consumer goods, finance, and insurance are leading the purchasing of these markets. Additionally, nature-based and renewable energy credits are gaining significant traction within the VCM.

Future Projections for Voluntary Carbon Market

Looking ahead, the demand for carbon credits is projected to surge. By 2030, annual global demand could reach between 1.5 to 2.0 gigatons of CO2, and by 2050 this could increase to as high as 13 gigatons. Market size predictions for 2030 range from $5 billion to more than $50 billion, depending on various price scenarios influenced by factors like rising carbon emissions, the expansion of carbon pricing initiatives, and increased adoption of Net Zero targets.

Voluntary Carbon Market Challenges

Despite these optimistic projections, challenges remain. Annually, about 34 billion tons of CO2 are emitted globally, yet the available offsets listed on registries only cover around 300-400 million tons—less than 1% of total emissions. This highlights a significant gap in the market’s ability to fully compensate for global CO2 emissions. The potential size of the VCM by 2050 will largely depend on global efforts to reduce residual emissions under Net Zero targets. 

The Benefits of Voluntary Carbon Market Action

Participation in voluntary carbon markets offers a unique opportunity. It allows businesses and private individuals to act towards the transition to a lower-carbon economy and help mitigate the worst effects of climate change. The purchase of carbon credits supports projects that reduce or eliminate emissions. This market-driven approach helps channel funds into environmentally beneficial activities and overcomes the aforementioned limitations of inadequate incentives.

U.S. Climate Efforts 

The U.S. is undergoing significant shifts in energy production and consumption patterns to align with national and global climate objectives. Central to these efforts is the shift toward renewable energy sources. Wind energy, particularly offshore wind farms, stands out due to its efficiency and cost-effectiveness compared to other energy sources. As of this week (April 2024), the Biden Administration has announced plans to speed up the approval process for renewable energy projects. 

U.S. Demand for Carbon Credits

As the younger generations, for whom climate issues are a primary agenda, take a growing role in the economy, and as existing state and regional greenhouse gas (GHG) reduction programs and anticipated federal regulations go into effect, a growing number of companies are starting to take action driving an increasing demand for carbon offsets in the U.S. 

The latest stats for carbon credit demand in the US indicate a record demand for carbon offsets in 2023. Companies purchased and retired a record 164 million offsets in 2023, up 6% from the previous year. In December 2023 alone, 37 million credits were retired, marking a 43% increase from the previous highest month. 

This surge in activity demonstrates a strong commitment by companies to achieve their net-zero goals through carbon offsetting, and while most of this is still coming from major corporations, the trend is undeniable.

Your Strategic Advantages in U.S. VCM

As climate change continues to pose real threats to global economic stability, the engagement of U.S.-based SMEs in these markets is not only an ethical decision but a strategic one as well. By investing in carbon offsets, SMEs can enhance their brand reputation, meet consumer demand for sustainable practices, and gain a competitive edge in a more sustainable future.

The voluntary carbon market provides a flexible and impactful way for U.S. SMEs to address their environmental impact. By purchasing carbon credits, these businesses contribute directly to projects that reduce greenhouse gasses, ranging from renewable energy to forest conservation. This action helps mitigate their own carbon footprint and supports the broader transition to a lower-carbon economy.

Furthermore, as regulatory landscapes evolve and consumer preferences shift towards more sustainable products and services, SMEs that proactively reduce their emissions will find themselves better positioned. The voluntary carbon markets offer a pathway for these businesses to not only comply with upcoming regulations but also to lead in sustainability, creating opportunities for growth and innovation. This proactive approach in the voluntary carbon markets is essential for any SME aiming to secure its place in a future-oriented sustainable U.S. economy.

To learn more about how your organization can become Net Zero see our recent case study.

Feel free to contact us for an initial consultation.