Global voluntary carbon markets (VCMs) have hit hard times. From a peak market cap in 2021 of $2.1 billion, today they are valued at only $1.4 billion, according to MSCI.
The data and indexing firm says VCMs should rebound to anywhere from $7 billion to $35 billion by 2030, a year by which the leading companies around the world are meant to hit meaningful reductions in the carbon footprints. Is such a leap possible?
Ellery Sutanto, head of business development at a young VCM in Singapore, Climate Impact X, says COP29 saw landmark agreement on standards that will harmonize language and rules among the world’s VCMs. COP29 was the 29th regular ‘conference of the parties’ the United Nations Framework Convention on Climate Change, and was held in November 2024, in Azerbaijan.
“The pace is increasing again and will coalesce around both demand and supply, in voluntary and in compliance markets,” he said.
These standards touch on rules for verifying and trading credits, so as to create more of a global arena instead of today’s highly fragmented market.
That’s an optimistic view: right now, supply and demand in the voluntary space are still falling. What VCMs need is a major infusion of fintech innovation. By itself this won’t affect their business prospects, but a serious tech upgrade could enable these exchanges to scale activity should conditions change in their favor.
Introducing VCMs
Although carbon credits have been around since the 1990s, the industry gained traction after the 2015 Paris Agreement, which set out net-zero carbon emission targets for the world by 2060, phased in stages. From 2017 to 2021, issuance of carbon credits boomed, and a slew of new exchanges was founded to grease these wheels.
These included AirCarbon Exchange in Singapore and Abu Dhabi (2019), CBL in Australia and the US (2019), Climate Impact X in Singapore (2021), HKEX Core Climate (2022) and Bursa Carbon Exchange in Malaysia (2023).
Of particular interest to DigFin readers, several of these, such as Climate Impact X, were using blockchain to settle trades. In theory they also wanted to use blockchain to establish credit provenance, although sources tell DigFin this never happened; by definition, VCMs are centralized marketplaces and aren’t really big on decentralized ledgers. But the VCM mini-boom coincided with a crypto hype cycle.
This activity peaked in 2021. It coincides with the Covid pandemic, which may have provided a psychological boost, as humanity was forced to deal with a deadly natural phenomenon. Joe Biden’s corporate America got behind ESG and sustainability, and marketing budgets swelled with net-zero promises.
That year, globally, saw issuance of 300 million tons of carbon dioxide minted in the form of credits. These credits, also called offsets, are issued by companies, governments or projects to reflect a quota of carbon emission or capture that can be traded to organizations with a greater need to pollute.
That may sound counterintuitive – paying someone, essentially, not to chop down a forest or not to burn fossil fuels – but these credits are meant to both help companies meet carbon targets as well as to help fund entrepreneurs that are investing in, or scaling up, solutions to limit emissions or remove carbon from the atmosphere.
The decline
Since then, VCMs worldwide have been in the doldrums. First, supply is falling. This means fewer large-scale renewable-energy or forestry projects are issuing credits.
One reason is scandals in the carbon-credit business. Some projects have submitted false data about their emission reductions, rendering their credits invalid. There have been bad actors among the registries: Verra, a certifier of carbon credits, was revealed to have sold rainforest offset credits that materially overstated the underlying environmental benefits. There have also been bad actors among investors: Shell was found to have bought carbon credits from projects in China that turned out to be fake.
More broadly, strident environmentalists have attacked VCMs for facilitating greenwashing, although some of these attacks reflect a deeper mistrust of market-based responses to decarbonization. VCMs to some green activists are illegitimate.
These problems highlight the generally opaque nature of VCMs. They are too small and illiquid to provide the kind of price discovery that typifies a stock market. They are also highly inefficient: despite the blockchain talk, a study by Nasdaq found 94% of VCM processes are done manually.
This is one reason why issuing credits takes a long time. A February 2025 report by the World Federation of Exchanges says on average, issuing credits takes 2.45 years after carbon removal takes place. Projects need lots of monitoring and verification. Worse, since 2021, the time to issuance has lengthened, suggesting projects aren’t scaling up their credit offset activities.
It is also taking longer for the average credit to be retired. (This means the buyer fully uses up their allotted pollution points.) Today the average time to retirement is 4.43 years, says the WFE report, and although that number varies among project types, they are slowing down. As companies drag out the use of their existing credits, they have less incentive to buy more.
Improvements needed
Fragmented markets and poor liquidity also hinders trading and settlement. Most carbon credits trade bilaterally, over the counter, not on an exchange. Centralizing activity on-exchange goes hand in hand with improving transparency, liquidity and efficiency.
While new standards agreed under the UN framework will help, the market still needs automation, efficiency, and transparency in order to revive supply and attract liquidity. Standards are one thing, but traditional stock markets provide price discovery and scalability in part because they are regulated. VCMs are not, so UN standards may go only so far.
The authors of the WFE report, Ying Liu and Pedro-Gurrola-Pérez, wrote, “VCMs can constitute a useful element for the green transition, but for that to happen it is essential to improve the functioning of these markets, increasing their transparency and integrity.”
One source familiar with VCMs told DigFin that there’s still a fundamental disconnect between what companies will pay for a carbon credit versus what it costs a project to decarbonize. Today prices for many credits are at rock bottoms. “Companies won’t pay $10 or $15 for a rainforest project, but that amount is just what it takes for monitoring and verification,” he said.
He notes that globally, VCMs cater to more than 2,000 projects that sell their credits to 200 to 300 corporations. That may sound promising, but fewer than 3 percent of listed companies have ever purchased carbon credit. And about a dozen multinationals are responsible for about four out of five credit purchases. He notes some companies buy the equivalent in credits what it costs in emission terms to fly their team to a global conference.
In other words, the market has failed to provide the true price of emissions, and all the market externalities that go into industry and our way of life. Companies dump chemicals in rivers, wipe out rainforests, deplete fish stock, and pump fossil fuels into the sky – none of which is reflected in the price of goods and services, anywhere. VCMs are going to struggle for as long as companies lack incentives to fully account for the environmental costs of their actions. Without a global carbon tax or tough regulation, any company that attempts to do so will be punished by the markets.
The center cannot hold
That was true before rightwing America decided sustainability was ‘woke’. While the hard-left was undermining the credibility of carbon credits, the second Trump administration has waged a war on even the language of ESG. No wonder the leading proponents for sustainability on Wall Street have suddenly decided to ignore the issue.
There is no realistic path to mainstream changes in corporate behavior – for now. It is true that many ESG regulations have been baked into stock exchanges’ listing rules around the world. But with the US blatantly throwing such commitments out the window, others may feel like they too can pick and choose their rules.
Companies and governments have all paid lip service to 2030 targets, which is meant to be a milestone on the way to net zero by 2060. But no one has actually achieved those commitments.
Of course, we can all just keep pretending everything is fine, never mind our increasingly hot and long summers, collapsing ice sheets and all that stuff. Sustainability is about more than feel-good green marketing. It’s also about managing real and quantifiable risks to bottom lines and company survival.
So what, then, is the point of VCMs? Leftie eco-warriors think anything market-based is a sellout. Actual market participants get punished if they deviate from shareholder value.
Why we invented VCMs
Carbon credits are an imperfect bridge to address these realities. Financing decarbonization is expensive, which is why companies don’t want to do it, but these credits can offset that. But VCMs aren’t a market in themselves, like stocks are. They exist to narrow the gap between corporate competitiveness and investing into decarbonization. There will be a point when green energy is essential to businesses, and VCMs facilitate the funding to get companies there. But to be effective, carbon credits need to be priced better, which means the VCM world needs to become more efficient and scalable.
It’s likely that some CFOs will relent as 2030 targets loom; listing rules will force some companies to act. This will provide a boost to VCMs. If the corporate world sees this as just another cost of doing business, trading credits will normalize.
Big picture, this is beyond the ability of VCMs to effect change. They’re just facilitators of carbon trades. Moreover, many of these exchanges were founded by people from the environmental, NGO world, not by greedy, jaded finance types, or by Silicon Valley-style tech moguls.
What VCMs can do, though, is to take a much more tech-first approach to how they operate. They need to be built for scale, which they are not today. If standardization, politics, and a few Godzilla-level climate disasters will focus minds. Then companies will look to carbon credits to manage risk, not just to score some marketing points.
Innovate!
What would a solution look like? Fintech folks, DigFin is talking to you, get your pencils out. These VCMs are too small . Moreover, the world of verification registries is also fragmented. Tech alone can’t change business models, but the global VCM market needs the equivalent of a DTCC or central clearinghouse, to enable – and here’s everybody’s favorite word – interoperability.
Carbon credits need to be fungible if they are to foster a liquid market. That means a market that can trade a British aviation credit with an Indonesian forest token. Maybe this calls for the savvy of a high-touch sales trader…but maybe it can also be automated?
A tech solution might start with ways to connect ledgers and manage the transfer of assets. In blockchain speak, layer-2s. In AI language, federated models of data sharing, machine learning to develop cross-market models of valuation, and agentic bots to trade and settle.
Best of all, VCMs can now use AI large-language model transformers to do a lot of their own coding. We are entering a new age of innovation in which those with a commercial idea and access to the right kinds of data can write code, build apps, and design systems with relatively light dev and engineering help. VCMs should be exploring these possibilities in order to be ready with a scalable market solution should macro supply and demand change again.
Of course, this requires a certain mindset. If fintechs find banks and insurers, tradfi, hard to work with, at least those institutions are greedy. VCMs are still infused in the world of NGOs and ESG. They need to find the sane middle ground between anti-woke zealots and de-growth zombie statists. Is there a big enough pot of ethically sourced gold to incentivize a new wave of green innovation?
