The average carbon credit sold on the (famously unregulated) voluntary carbon market (VCM) must embark on a journey spanning multiple years and organizations before reaching its final destination. Read on to discover the major milestones in the carbon credit lifecycle.

1. Initiated by the developer

The project developer identifies a project that will earn carbon credits by either reducing or removing greenhouse gas (GHG) emissions. Objectives, methodology, and expected reductions are outlined in a project design document (PDD).

Who’s involved? The project developer or aggregator is the individual or organization legally responsible for a project and entitled to its credits. Players include (but are by no means limited to) South Pole, The Nature Conservancy, EKI Energy Services, Finite Carbon, 3Degrees, Carbon Engineering, Running Tide Carbfix, Undo, CarbonFuture, and Climate Impact Partners.

What are the risks? Given their inherent variability, it can be difficult to accurately calculate the impact of reduction projects. Recently, researchers uncovered over-crediting in 29% of forestry projects.

2. Funded by the investor

The PDD is used to raise the funds needed to implement the project. Upfront financing can be secured through private investment or a direct sale to the end buyer. Crowdfunding platforms are growing as an alternative source of capital.

Who’s involved? Unless a direct sale has been secured, the developer may turn to any number of dedicated investors or fundraising platforms, including Livelihoods Funds, Solid World, Maya, Gaia Gives, Aspiration, and The Climate Pledge Fund. More recently, multi-project investment funds have been securitized as a way to unlock carbon finance for projects.

What are the risks? The project could be underfunded or delayed if investors doubt its claims, exacerbating an already long and expensive process (on average, it takes between three to five years to bring a credit to market).

3. Verified and completed by the auditor

An accredited third-party auditor, or validation/verification body (VVB), guarantees the project is of high quality as defined by recognized standards. Typically, that means additional, permanent, counted once, and not harmful.

Who’s involved? Though the VCM lacks a single authority, four methodologies have emerged as the dominant standards against which project quality is assessed (in order of market representation): Verra Verified Carbon Standard (VCS), Gold Standard (GS), American Carbon Registry (ACR), Climate Action Reserve (CAR). The International Organization for Standardization (ISO) 14064 standards are also commonly used, as are more specialized players, such as Puro.earth, which is aimed at carbon removal projects specifically.

What are the risks? Project delivery could fall short of the verification criteria, or a previously verified credit could be invalidated due to methodological changes.

4. Certified, issued, and monitored by the registry

Once a project is verified, the relevant standard body issues the developer with a carbon credit certificate and records it in a registry where issuance and trading activity is tracked. The credit is now a tradeable asset ready for sale.

Who’s involved? Broadly speaking, the organizations that set verification standards also house and monitor the carbon credits to which they apply. Registries include Verra, Gold Standard (GS), American Carbon Registry (ACR), Climate Action Reserve (CAR), and Puro.earth.

What are the risks? Once registered, the credit is vulnerable to digital theft or cyber attack. Reversal or invalidation at this stage could lead to further market risks relating to price and demand.

5. Rated by the rating agency

Not all carbon credits are created equal. To help buyers distinguish between different credits, rating agencies conduct independent assessments of project quality and integrity and award each credit a score based on their findings.

Who’s involved? Ratings agencies comprise a small but growing ecosystem of integral players, including Sylvera, BeZero, Calyx Global, CCQI, and Renoster. Just as they have in other markets, rating agencies — alongside insurance — play an integral role in de-risking volatile assets.

What are the risks? If the rating agency uncovers new information that was missed in pre-certification screening, it could lead to not just a damaging low rating but (potentially) invalidation.

6. Sold and resold by the intermediary

Carbon credits can be bought and sold on multiple channels multiple times. On the primary market, they are accessible through a broker, on a marketplace, or directly from a developer. They can also be traded on the secondary market.

Who’s involved? Alongside a growing number of marketplaces such as Carbonplace, brokers include Arbor Day Foundation, STX, Terrapass, Climate Partner, Cool Effect, Klimate, and Redshaw. They differ from exchanges (e.g. Xpansiv CBL and Carbon Trade Exchange (CTX)), which facilitate traditional commodity trading.

What are the risks? In addition to ongoing reversal, invalidation, and downgrade risk, trade introduces contract risk to the equation. Here, in particular, buyers are vulnerable to double counting by sellers.

7. Claimed and retired by the buyer

Companies purchase carbon credits to offset their residual emissions, usually as part of a wider net-zero strategy designed to meet shareholder and regulator expectations. Once claimed and retired, it cannot be traded again.

Who’s involved? Companies in higher-emitting sectors, such as energy, infrastructure, and transport, are the biggest buyers, followed by finance companies with responsibility for (but relatively little influence over) the emissions of portfolio companies. 

What are the risks? Having retired the carbon credit, the end buyer now bears the weight of risks compounded across the prior six stages of its lifecycle. To paraphrase Oka’s Laura Fritsch: That is no way to guarantee market integrity.

8. Insured by Oka, The Carbon Insurance Company

Make that stages 4-8, in fact. The VCM is growing fast and fragmented, with new projects, players, incentives, and expectations proliferating weekly. Rapid maturation might be good news for the market as a whole, but the organizations and individuals operating within it are exposed to growing pains in the form of reversal, invalidation, downgrade, and contract risk at each stage post-certification.