VIEWPOINT

2024

N AV I G AT I N G T H E
V O L U N TA R Y C A R B O N
CREDIT MARKET TOSUPPORT NET ZEROTA R G E T S
AUTHORS
Understanding the opportunities &Martijn Eikelenboom

challenges of an emerging market space

Trung Ghi
Louay Saleh

Of Forbes 2000 companies that have committed toachieving net zero emissions by 2030, a 2023 Net Zero
Tracker study reports that 53% plan to use carbon
credits, either to offset hard-to-eradicate emissions
or to voluntarily advance their targets. However,the carbon offsetting market is still developing,and consumers, customers, and governments
are scrutinizing the veracity of many claims. This
Viewpoint provides guidance for companies that
seek to incorporate carbon credits within theiremissions strategies.

Pavel Kubicka

ARTHUR D. LITTLE

VIEWPOINT

THE CARBON MANAGEMENTHIER ARCHY
Companies face growing expectations andpressure to reduce their greenhouse gas (GHG)
emissions now to achieve decarbonization.
As a result, organizations have committed tomeeting standards and publicly set deadlines

3. Use carbon insets, within the value chain,
as described in this Viewpoint.
4. Use carbon offsets, outside their immediate
value chain, as covered in this Viewpoint.
Additional hierarchies exist, depending on thequality of the inset/offset. We discuss the factorsthat contribute to quality in the “Understandingfor eradicating their emissions. For example,

carbon management options” section below.

nearly half of the world’s largest publicly traded

Achieving 100% decarbonization requires

companies have committed to a voluntary net

companies to overcome multiple challenges. Thiszero target, according to Net Zero Tracker.

means that for some organizations and sectors,

To achieve GHG emissions targets, Arthur D.

focusing solely on the first two steps in the carbon

Little (ADL) suggests that organizations follow
the carbon management hierarchy shown in
Figure 1, focusing first on steps 1 and 2 andthen using steps 3 and 4 to complete their

management hierarchy is not enough. Many are
struggling to meet their obligations due to:- High costs and limited supplies of products,

resources, and technologies (e.g., sustainable

full decarbonization strategy:

aviation fuel currently is around 2.5 times

1. Prevent emissions by removing carbon-

more expensive than normal kerosene)

intensive operations, logistics, and raw
materials.

- Limited ability to monitor and control theactivities of their supply chain, especially

2. Reduce and replace emissions by reducing
material use, increasing energy efficiency,
and changing existing operations to lower-

when it comes to Scope 3 emissions, suchas emissions from the transportation of
goods by third parties

carbon alternatives, such as using shipping
for transport rather than air freight.

Figure 1. Decarbonization hierarchy
Figure 1. Decarbonization hierarchy
ILLUSTRATIVE
SBTi-approved

EASE OF IMPLEMENTATIONGOOD PRACTICE PREFERENCE

1. Prevent

2. Reduce

3. Inset

Avoiding or preventing GHG production(e.g., replacing ICE-powered assets with renewable power)

Reducing GHG production(e.g., improving fuel & energy efficiency to produce less emissions)

Focus of Viewpoint
Compensating emissions with projects conducted within company’svalue chain (e.g., compensating air travel with sustainable air fuel credits)

4.
OffsetCompensating emissions with projects conducted at a global level regardlessof application (e.g., compensating emissions with tree planting in Gabon)

Source: Arthur D. Little, Science Based Targets initiative (SBTi)

NAVIGATINGVOLUNTARYCARBON
MARKETTO SUPPORTNET ZERO TARGETS
Source:ArthurTHE
D. Little,
Science
BasedCREDIT
Targets
initiative(SBTi)

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ARTHUR D. LITTLE

VIEWPOINT- Regulatory uncertainties and certification

standards not yet in place, especially aroundcertificates of origin for low/no-emission

THE DE VELOPINGCARBON CREDIT MARK E T

products, leading to consumer wariness

The carbon credit market is split into two

about their adoption and slowing their rollout

groups of buyers:- Difficulties in removing some residual

1. Compliance — with governments

emissions with currently available

using carbon credits to enforce greater

technologies and processes

sustainability. There are currently around70 carbon-pricing initiatives (e.g., carbon

These factors mean that, after having done alltax, EU Emissions Trading System [ETS]) inthat they are capable of in terms of avoiding andplace globally, covering 23% of 2022 global

reducing emissions, companies are looking atemissions. Many of these schemes, such as

options that either compensate for hard-to-abate

those in Japan, Korea, and China, allow theemissions, bridge the gap until new emissions

use of offsets (with specific limitations).

reduction technology is in place, voluntarily

Historically, the EU ETS allowed them as well,

reduce emissions (such as from historic

but they are no longer accepted in the fourth

activities), or enable compliance with national

phase of the scheme (2021–2030).

regulatory schemes.
In some cases, companies are therefore turning to

2. Voluntary — driven by the private sector andcarbon credits in the form of insets and offsets asinterim or longer-term solutions to reduce theirhard-to-eradicate emissions, as shown in Figure 2.
It is important to emphasize that carbon credits

used to reduce overall emissions for buyers or
to compensate for historical emissions. For
example:- Microsoft has committed to removing, by
2050, the equivalent of all its emissions

are not an alternative to reducing emissions
through other means. They are only credible if ansince the company was founded in 1975.

organization first has done its utmost to decrease

More than 85% of its carbon-removal

current emissions.

portfolio in 2022 was made up of forestbased carbon credit initiatives. In 2023, thecompany announced it would purchase 2.7

Figure 2. Carbon offsetting use

million tons of carbon credits over the next
decade generated from Ørsted’s biomassburning power plants; the carbon will thenbe buried under the North Sea.

Figure 2. Carbon offsetting use
100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

Companies with
net-zero targets(n=702)
No offsetting0%

By 2030

2030–2040

Use of offsetting not specified

2041–2050

Yes, conditions not specified

2051 or later

Not specified

Yes, with some conditions

Source: Arthur D. Little, Net Zero Tracker

NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

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ARTHUR D. LITTLE

VIEWPOINT- Frontier, a consortium involving Alphabet,Meta, Stripe, and Shopify has announced

a US $53 million deal with Charm Industrial

UNDERS TANDING CARBONMANAGEMENT OP TIONS

to remove 112,000 tons of CO2 between

When setting their strategy for hard-to-abate

2024 and 2030 by converting agriculturalor historic emissions, organizations must

waste into an oil that can be stored

understand the differences between the twounderground.

forms of carbon credits: offsets and insets.

- NextGen, a joint venture between

Mitsubishi Corporation and carbon-- A carbon offset is an activity thatcompensates for the emission of CO2 or otherremoval project developer South Pole,GHG by providing for an emission reductionplans to purchase over 1 million tons ofelsewhere. For example, Disney has purchasedcarbon credits by 2025 and has alreadycarbon offsets in the form of REDD+ (reducingbought 200,000 tons.

emissions from deforestation and forest- Meta has agreed to purchase in advancealmost 7 million tons of carbon credits

from Aspiration, which will be delivered

degradation) projects in Peru.

- A carbon inset involves emission-reduction
activities implemented within a company’s

between 2027 and 2035. The credits will bevalue chain. For example, IKEA has boughtfrom various carbon projects managed bycarbon-reduction certificates for a fuel switch,

Aspiration involving nature-based climate

using sustainable biofuel in a vessel thatsolutions, such as native reforestation,

normally would have burned fossil fuel. Thisagroforestry, and sustainable agriculture“insets” a portion of IKEA’s marine transport

practices.

emissions.

According to analysis by Trove Research andWhile insets are typically more expensive per ton

BloombergNEF, the voluntary carbon credits market

of CO2 equivalent (e.g., experts estimate ~$150

is expected to grow around six-fold between 2022

per ton of CO2 for marine biofuel insets versus

and 2030, from approximately 0.2 gigatons of CO2~$7 per ton of CO2 for REDD+ offsets), they areequivalent (GtCO2e) to around 1.2 GtCO2e, before

arguably more impactful as they are closely(see Figure 3).

Reductions take place in the company’s own value

e 3. Projected demandfor voluntary carbon credits
reaching approximately 5.4 GtCO2e in 2050
related to mitigating a company’s own emissions.
chain and contribute to transforming their own
supply chain toward a more sustainable future.
Figure 3. Projected demand for voluntary carbon credits
GtCO2e/yr
6

5.4

5
4
3
2
1.2

1
0

0.2
2022E

2030F

2050F

Source: Arthur D. Little, BloombergNEF

NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

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ARTHUR D. LITTLE

VIEWPOINTO R G A N I Z AT I O N S M U S T
U N D E R S TA N D T H E
DIFFERENCES BETWEENTHE T WO FORMS OF
CARBON CREDITS:OFFSETS AND INSETS

2. Use carbon credits to finance sustainable
activities. For example, an industrial company
may invest in carbon-reduction equipment
and then utilize it to capture/sequester morecarbon than is needed for the company’s own
compliance. The excess carbon captured canthen be sold at attractive rates as high-quality
carbon credits to partially finance the overall
installation cost. Additionally, companies canThey therefore have increased credibility withstakeholders and consumers. However, there canbe significant differences between the qualityof credits in each of these categories, based on
factors such as the type of technology/naturebased solutions involved and the co-benefits
received.

take advantage of subsidies such as the US
Code Section 45Q Credit for Carbon Oxide
Sequestration. This enables companies togenerate between $60-$180 per ton of CO2,
depending on the type of activity. (We will
explore using carbon credits for sustainablefinance in more detail in a future Viewpoint.)
3. Sell credits as a key revenue stream by

CARBON CREDITOPP OR TUNITIESFOR ORGANIZ ATIONS

leveraging their existing capabilities.

As demand for carbon credits increases globally,

project management expertise, accesscompanies should consider what offsets canto land, access to resources, stakeholder

mean for them. These offsets can impact their

management, and marketing capabilities.

business strategy in four key ways:

Harnessing these capabilities provides

1. Buy credits to supplement theirdecarbonization programs and achieve
their targets. Examples include:-

Meeting regulatory requirements in
hard-to-abate areas/sectors- Temporarily reducing current footprint

Today, many organizations possess the key
assets and capabilities that are required todevelop carbon credits, such as mid-scale

the opportunity to generate new income
streams around carbon credits. For example,
a partnership between oil and gas companies
Wintershall Dea and Equinor has secured
licenses to store carbon under the North Sea.
4. Develop new products and value
propositions based on high-quality carbon

until real abatement projects are

credits. Many companies are already offering

implemented

retail clients opportunities to offset their- Compensating for residual carbon footprint
after emissions-reduction programs havebeen developed- Compensating for historic emissions since
the organization was founded

activities, including travel and hotel stays,
ecommerce purchases, or energy companies
offering green gas (a mixture of biogas andnatural gas) combined with carbon credits
at a higher price. In fact, 2023 research from
Circana and New York University’s Stern
Center for Sustainable Business found thatsustainably marketed products are increasing
their share in the US and are commanding
price premiums.

NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

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VIEWPOINT

NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

ARTHUR D. LITTLE

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ARTHUR D. LITTLE

VIEWPOINTCHALLENGES IN THE
CARBON CREDIT S MARK E T
Whether they are buying or selling carbon credits,
companies must understand and overcome avariety of challenges within the market, including:- Accusations of greenwashing. TheC O M PA N I E S M U S T
U N D E R S TA N D A N D
O V E R C O M E A VA R I E T Y
OF CHALLENGESWITHIN THE MARKET

practice of using credits to appear moresustainable but without changing underlying

On the other hand, the journey toward a

behavior or activities has led to skepticism

sustainable future continues, and evenaround the market as a whole and whether

though the recent COP28 conference has

specific schemes in fact offset emissions.

concluded without reaching a consensus

For example, some projects that claim to

on carbon trading rules, discussions remain

be protecting forests have instead seen

ongoing, reflecting the commitment towidespread deforestation, making thefinding a solution.

credits issued worthless, while some leading
certification bodies have been accused ofapproving valueless offset schemes. Better
monitoring, reporting, and verification as wellas robust base scenarios are needed to rebuild
confidence. Additionally, the recent emergenceof independent rating agencies that quantify
the likelihood that a benefit will be achieved will
also increase transparency. At the same time,on the demand side, using credits is credible
only if an organization has done its utmost to
decrease emissions through other means. This- Quality credit realization, cost, and budget

overruns. Project identification, development,
approval, and execution can be challenging
and time-intensive, especially in environments
where carbon credit development is still a new
topic. These challenges have been apparent
with, for example, Shell removing mention ofits $100 million/year carbon credit programfrom its recently updated strategy.

- Changing regulations. Whether carbon credits

can be used to meet emission-reduction targets

is particularly important if carbon reduction

differs among countries/regions. The credits

is linked to compensation strategies, as therethat are eligible also change. For example, inneeds to be a clear case demonstrated for thethe early phases of the ETS, using internationaluse of credits.

credits was allowed, but this ended from phase- Developing policies and ecosystems. The
carbon credit market has existed for morethan 30 years. However, its policies andecosystems have developed progressively.
Recent events, such as the inaugural auction
on Malaysia’s carbon credit trading exchange,
which saw limited interest with credits sold at
minimum reserve price, highlight the market’s
evolutionary journey. We anticipate gradualmaturity and increased engagement as
understanding and awareness of the market’s
potential continue to grow. Depending on how
developments evolve, the global voluntarycarbon market may reach between $5-$50
billion by 2030, according to ADL analysis.

NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

4 onward. More recently, the EU has banned
the use of “climate neutral” claims based oncarbon offsets. There is also a lack of unified
regulations around the market, although thisis being addressed through actions such as therecently published Core Carbon Principles (CCP)of the Integrity Council for the Voluntary Carbon
Market (ICVCM), focusing on the supply side,and the newly issued guidelines of the Voluntary
Carbon Market Integrity Initiative (VCMI),
focusing on the demand side. In this respect,
new reporting regulations (especially the EU’s
Corporate Sustainability Reporting Directive
and the International Sustainability Standards
Board reporting standards S1 and S2) will further
increase overall data transparency.

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ARTHUR D. LITTLE

VIEWPOINT- National climate goals. Countries

credits and potentially impact requirements

increasingly understand the value of theirand companies’ strategies. In November 2022,

natural resources to the carbon offset market

the EU Commission released a proposal for an

and are introducing new regulations to both

EU carbon-removal certification framework.

maximize the revenues these generate andThis defines qualifying carbon removals as

to ensure they benefit their own, national

well as a process for verifying and monitoring

decarbonization targets. For example, theprojects. The regulation would cover projects

Tanzania government reported a significant

including forest restoration; carbon capture,

boost in its voluntary carbon market as moreutilization, and storage (CCUS); and direct

than 20 companies committed to investing

air capture (DAC). The Energy Transition

over $20 billion in carbon offset credits, withAccelerator, announced at COP27 as a joint

the country already attracting over $1 billion

effort between the US Department of State,

in investments since it adopted legislation

Bezos Earth Fund, and Rockefeller Foundation,

on carbon trading in 2022. Given that we areis aiming to become a mechanism for climate

still not on the path of reaching the Parisfinance and green development in developing

Agreement targets, negative emissions will

economies. Companies looking to meet net

be required, and some of them will be supplied

zero and emissions-reductions targets would

through voluntary carbon credits.

purchase carbon credits from emissions-- Lack of pricing transparency. Most current
deals are over the counter, with the firstcarbon credit exchanges launching only
recently. These exchanges (such as AirCarbon
Exchange or Xpansiv CBL) have contributed tohigher liquidity and price transparency.

K E Y CONSIDER ATIONSIN THE CARBON CREDIT
MARK E T

reduction projects in the power sectors ofqualified developing countries. Additionally,
implementation of Article 6 of the Paris
Climate Agreement would create a global setof standards with the potential to consolidate
the highly fractured global market that exists
today.
2. New and existing competitor activity. The
expansion of the carbon credit market is
attracting a range of players. For example,
Shell has created its own voluntary carbon

When developing their carbon offset strategies ascredit business, acting as a trader of credits

part of their overall net zero targets, companies

from a portfolio of environmental projects

must understand and analyze eight key areas:around the world. In shipping, Maersk is

1. Regulatory changes. The regulatory regime
around emissions currently varies around theworld but is seeing a general tightening overtime, especially in hard-to-abate areas. For
example, in the EU, planned reforms to the
ETS will require the installations it covers to
reduce their carbon emissions by 62% from2005 levels by 2030 — a 44% increase on thecurrent target. Additionally, from 2026, theEU Carbon Border Adjustment Mechanism
will see imports of steel, cement, fertilizers,

providing sustainable biofuel alternatives
to its customers as carbon insets. Financial
services firm Rabobank has created a partner
ecosystem, helping farmers store CO2 in thesoil, determine and monitor impact, and sell
generated carbon credits to its corporateclients, with farmers receiving 75% of theprice. Companies should look to understandcurrent market activity and also monitor the
strategy and tactics of both new and existing
competitors.

aluminum, and electricity subject to a carbon
tax. These reforms drive pricing of carbon

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ARTHUR D. LITTLE

VIEWPOINT

3. Role(s) in the carbon credit value chain.

tend to be more expensive. There are carbon

Companies need to decide where to play in thecredits with co-benefits that go beyond GHG

carbon credit value chain in terms of activities

removal and avoidance (e.g., meeting otherand opportunities. They might simply become

United Nations Sustainable Development Goals).

a purchaser of credits or they can develop their

Local carbon credits are gaining popularity,

own credits for internal use alone or also sell

but the volume potential in many countries

them on the open market. They must decideis limited. Organizations should understandwhether to source from individual project

which are the best strategic fits for their needs

developers, invest in early-stage projects

and volumes and ensure that they complete(pre-issue), buy from established registries

sufficient due diligence so that projects provide

and sources, or use emerging marketplaces

good quality rather than phantom credits.

and exchanges. Companies should determine

To ensure such quality credits are effectively

which approach will deliver the greatest long-

invested, a credible auditor is critical. Whileterm value and enable them to meet their

there are currently many auditors, it is likely thatbroader objectives.

a relatively small number will be seen as credible

4. Meeting effective standards. There is a range

as the market develops.

of standards and certifications available on

7. Partner selection. The carbon credit market

the market, from international organizations

is an emerging ecosystem where standards

such as Verra and Gold Standard, to country-

are not yet fully in place. That means it isspecific ones such as the Thai T-VER credits

vital to partner with responsible, high-quality

and Australian Carbon Credit Units. Companies

companies to ensure verifiable results.

must choose which standards to adhere toCompanies have the option of buying credits

for their own projects and to ensure that any

from brokers, exchange platforms, project

investments they make are fully verifiable anddevelopers, or even “codeveloping” them withaudited. With the ICVCM and VCMI promisingproject developers. Whichever channel theygreater oversight of the sector, focusing

choose, companies must conduct the requiredon quality is vital to avoid accusations ofdue diligence to protect against potential

greenwashing. Going forward, an overarching

fraud or greenwashing, and ensure that thestandard may be required to allow for global

right products are delivered on time andcarbon trading and to ensure a high level ofwithin budget.

compliance in the market.
5. Size and scale of investment. Companies

8. Organizational capabilities and risk
appetite. Depending on the role selected

need to effectively plan the extent of their

within the carbon credit market, organizations

involvement in the carbon credit market,

are likely to require new competencies andwhether as a buyer, trader, or supplier. Theyexpertise. After deciding where to operate,should fully understand any constraints thatcompanies should carry out a full review ofwill impact the limits of their ambition along

existing skills and resources to understandwith the factors to take into consideration

the additional capabilities required to deliver

when it comes to target volumes of credits.

success. Examples of skills that may be

6. Types of carbon credit. There is a wide
selection of available carbon credits, including
those for nature-based abatement solutions(e.g., reforestation projects), protecting
ecosystems (e.g., preventing deforestation),and industrial removal (e.g., CCUS or DAC) or

necessary include commercial deal making,technical due diligence, marketing, and carbon
accounting. Risk appetite should include
considerations of exposure to different
projects, technologies, suppliers, evolving
standards, and definitions of quality.

avoidance. Solutions based on technology

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NAVIGATING THE VOLUNTARY CARBON CREDIT MARKET TO SUPPORT NET ZERO TARGETS

ARTHUR D. LITTLE

10ARTHUR D. LITTLE

VIEWPOINT

CONCLUSIONEMBR ACINGTHE OPPORTUNITIESOF CARBON CREDITSTHE USE OF CARBON CREDITSIS E XPECTED TO INCREASE

The use of carbon credits as part of wider emissions strategies
is expected to increase due to greater regulation and ambitious
company targets. To play in the market, businesses should:
1Create a holistic decarbonization strategy (avoid and reduce)and roadmap that includes direct (Scope 1) and indirect(Scope 2 and Scope 3) emissions before investigating thepotential role of carbon credits.

2

Actively consider the role that the company wants totake in this ecosystem — buyer, seller, or trader — andits contribution toward supporting overall growth andecosystem integrity.

3

Move quickly to secure supply channels, resources,
and to build necessary expertise.

4	Develop a strategy focused on business needs andstrengthening competitive advantage, backed byverification and monitoring to avoid greenwashingrisks, while ensuring it delivers on stated objectives.

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