The international voluntary carbon market and the Paris Agreement

Since the adoption of the Paris Agreement (PA) in 2015, more and more companies have presented plans on how they intend to fulfil their responsibility to curb climate change. The Voluntary Carbon Market (VCM) offers companies the opportunity to supplement the reduction of their own greenhouse gas emissions with climate change mitigation measures outside their value chain. 

Most companies will continue to generate greenhouse gas emissions for the foreseeable future. This makes the purchase of carbon credits from emission reduction or carbon removal activities necessary to offset the emissions incurred. In the VCM, companies, organisations or individuals can voluntarily offset their emissions by purchasing and retiring reduction certificates.

From the German government's point of view, avoiding and reducing greenhouse gas emissions takes precedence over offsetting emissions.

The use of the VCM should be aligned with the objectives of the Paris Agreement in order to contribute to raising global ambition and advancing the necessary transition to net greenhouse gas neutrality. Qualitative requirements must be met on both the supply and demand sides of the market to ensure that the VCM contributes to decarbonisation and green growth and helps to close the climate finance  gap. 

The VCM section describes how the voluntary carbon market works and explains project development and trading of carbon credits. It also explains how companies can embed their involvement in the voluntary carbon market in a comprehensive climate strategy while ensuring the ecological and social integrity of carbon market activities. The article is rounded off with a presentation of key guidelines and regulations as well as practical implementation support.

Project Development

The starting point for a project is usually the idea for a climate change mitigation activity. Based on the project idea, the project developer creates the project documentation in accordance with the rules of a crediting programme. crediting programmes can be administered by both private and public actors at international or national level.

To ensure that the project is designed in accordance with the rules of the respective crediting programme, the project planning document must be validated by an external auditor accredited by the crediting programme. After positive validation, which confirms that the project design complies with the provisions of the programme, the project is registered by the respective standard and project implementation can begin. It is of central importance to inform the relevant authorities in the host country about the project. The German government's goal is to ensure that no activities are implemented without the host country's knowledge.

During project implementation, GHG emissions must be monitored, reported and verified by an independent auditor. In addition to climate impact, some crediting programmes also record the sustainability contributions of projects in this way. This is mandatory for the Paris Agreement Crediting Mechanism (PACM). The amount of carbon credits to be issued is calculated by comparing the project's actual monitored and verified GHG emissions with the reference case emissions (see below). Based on the verification report for a specific monitoring period, the crediting programme issues the reduction certificates for the verified amount in a registry.

Trading in carbon credits

Reduction certificates are tradable commodities and can be purchased on both the primary and secondary markets. The primary market refers to the direct marketing of a credit between the project developer and the end user, who has the credit retired for a specific purpose, such as carbon offsetting. Carbon credits are often traded several times on the secondary market between various intermediaries (traders, brokers and providers). Although exchanges are becoming increasingly important, trading usually takes place over the counter (OTC). This trading takes place directly between the buyer and seller, without the supervision of an exchange. The contracts are not usually publicly available, which is why the prices for the carbon credits are mostly unknown – price transparency is therefore very limited. 

The prices for reduction certificates are determined by the relationship between supply and demand, with credits from different types of projects usually trading at different prices. For example, the prices for nature-based removal credits are many times higher than the prices for credits from renewable energy projects. The age of the credits and other attributes, such as particularly high sustainability contributions from the projects, also influence the price level of reduction certificates. The large price differences also reflect the quality that buyers associate with the various project categories.

The use of carbon credits

The demand for reduction certificates comes primarily from companies that want to use them as part of their climate strategy. There are two options here: carbon offsetting involves purchasing reduction certificates with the intention to balance remaining emissions and achieve carbon neutrality in the balance sheet. The contribution claim approach involves supporting climate change mitigation measures outside the company's own value chain without using the emission reductions achieved for offsetting  remaining emissions. However, incentives for the private sector still need to be developed for this approach in order to have an impact beyond philanthropic motives.

Regardless of whether the reduction certificates are used for carbon offsetting or as part of the contribution claim approach, corporate climate change action should focus on reducing emissions within the company's own value chain on the basis of a scientifically sound reduction pathway. However, not all sectors can reduce their emissions at the same speed and to the same extent. In certain areas, residual emissions will remain even with the greatest possible reduction efforts.

A fundamental distinction must be made between climate change mitigation projects that directly reduce greenhouse gas emissions and those that remove greenhouse gases from the atmosphere and store them by expanding natural (e.g. forests, moors) and technical carbon sinks (e.g. DACCS – Direct Air Carbon Capture and Storage).

Crediting programmes lay down the rules for the development and implementation of climate protection projects and stipulate, among other things, the basis on which their climate protection impact is calculated. Crediting programmes can be administered by both private and public actors at international or national level.

Private, self-regulated crediting programmes have dominated the voluntary carbon market to date, as there have been no internationally agreed and generally accepted rules for actors in the VCM. Examples include the Gold Standard for the Global Goals (GS4GG – administered by the Gold Standard Foundation) and the Verified Carbon Standard (VCS – administered by Verra), each of which has developed its own set of rules and control mechanisms for certifying projects and generating reduction certificates.

Article 6 of the Paris Agreement now offers the Parties to the Paris Agreement, among other things, the possibility of transferring carbon credits via a multilateral mechanism (Article 6.4). Article 6.4 also gives companies reliable access to the carbon market, regulated by the Paris Agreement. Thanks to the results of the negotiations at COP29 in Baku, the market mechanisms of the Paris Agreement can now move into the implementation phase. Article 6.4 credits will gradually become available on the market from 2025 onwards. The German government's goal is to have as many international market activities on the voluntary carbon market as possible registered under Article 6.4 in order to ensure transparency and quality in the global carbon market.

Within the EU, the Carbon Removals and Carbon Farming (CRCF) Regulation also came into force in December 2024. This provides an EU standard for the uniform certification of carbon removals. The provisions, quality criteria and MRV requirements contained therein are intended to prevent greenwashing and can also be used by companies in the implementation of their climate strategy. All climate change mitigation  effects achieved under this framework are to be credited to the EU's NDC and cannot be counted towards the NDCs of third parties or international compliance schemes.

Article 6.4 of the Paris Agreement establishesd a new market-based mechanism, the Paris Agreement Crediting Mechanism (PACM). 

The mechanism is centrally monitored by the Supervisory Body of the Article 6.4 Mechanism (SBM). The SBM determines which methodologies can be used in project development and implementation, accredits the auditors responsible for validation and verification, is responsible for registering projects and issues reduction certificates upon successful project implementation. 

The integration of the PACM into the structure of the Paris Agreement is intended to ensure compliance with rules and standards and guarantee the quality of the reduction certificates issued. At the UN Climate Change Conference in Glasgow in 2021, generally binding rules, procedures and processes for implementing climate change mitigation projects under the mechanism were agreed upon. These were specified in more detail at the Climate Change Conference in Baku in 2024, so that the utilisation phase of Article 6 can now begin. 

Another special feature of the PACM is its aim to involve non-state actors, such as local communities, and its contribution to overall mitigation in global emissions . To ensure that the mechanism contributes to reducing global greenhouse gases, 2% of the reduction certificates issued must be cancelled when they are first transferred. In addition, a contribution is made to vulnerable countries affected by climate change through the financing of the Global Adaptation Fund.

The PACM provides for the issuance of two different types of reduction certificates: Article 6.4 emission reductions that are authorized for international transfer (authorized A6.4 ERs) and those that are not authorised for international transfer and can be counted towards the host country's climate target (mitigation contribution A6.4 ERs). 

There are three options for using authorized A6.4ERs:

• Use by a Party to the Paris Agreement to fulfil its NDC
• Fulfilment of mandatory targets under another international climate change mitigation programme, such as CORSIA
• Other forms of use, such as those for fulfilling voluntary climate targets

Regardless of the form of use, the host country is obliged to carry out so-called corresponding adjustments (CAs) for the authorised A6.4ERs credit. These reduction certificates do not contribute to the host country's NDC, thus avoiding double counting . Authorised A6.4ERs are therefore particularly suitable for carbon offsetting. [ See page content: The problem of double counting within the VCM ]

In addition to authorised A6.4ERs, emission reductions that have not been authorised for international transfer and therefore do not entail CAs can also be issued under the PACM. These so-called mitigation contribution A6.4ERs contribute to the host country's NDC.

From 2025 onwards, the new carbon credits issued under Article 6.4 will gradually become available. The German government aims to have as many international market activities on the voluntary carbon market as possible registered under Article 6.4 (international UN registry) in order to ensure transparency and quality in the global carbon market. 

In the Paris Agreement, all countries committed to pursuing nationally determined contributions (NDCs) and implementing measures that will help limit global warming to a maximum of 2 degrees, or preferably 1.5 degrees, compared to pre-industrial levels. The Paris Agreement is binding under international law and has global reach. The agreement marks a turning point in international climate policy and has significantly changed the framework conditions for market-based cooperation, including for the voluntary carbon market. The transformative nature of the agreement and its universal scope have contributed to this in particular: under Article 6, the agreement enables Parties to cooperate in implementing their NDCs, including through voluntary cooperation for market-based climate action. Article 6.2 regulates direct intergovernmental cooperation and Article 6.4 describes a new crediting mechanism, the Paris Agreement Crediting Mechanism, PACM (see: Article 6.4 as a source of carbon credits). Article 6.8 provides for results-based financing of climate protection projects without the issuance of credits and is therefore not one of the market-based instruments of the Paris Agreement.

A key feature of the Paris Agreement, which brings about a fundamental change in international climate policy in general and the global carbon market in particular, is the universal scope of the agreement: for the first time, it obliges all Parties to protect the climate and submit a nationally determined contribution (NDC) – including developing countries. This universal scope fundamentally distinguishes the Paris Agreement from its predecessor, the Kyoto Protocol.

The Kyoto Protocol only set emission reduction targets for industrialised countries. As a result, a large part of the global economy and the associated emissions were unregulated in this respect (uncapped environment).

In the past, reduction potentials in non-industrialised countries and the United States were the main source of reduction certificates for the voluntary carbon market within this uncapped environment. It was particularly attractive for countries without internationally binding reduction targets to act as hosts for climate change mitigation projects. This is because the host country benefited in many ways from the investments made on its territory, for example in terms of technology transfer, labour market effects and other sustainability impacts associated with most climate protection projects. At the same time, the export of emission reductions could not have a negative impact on the implementation of national climate targets, as countries were not contractually obliged to do so. This situation has changed fundamentally under the Paris Agreement, as former host countries are now also obliged to develop and communicate NDCs.

In order to achieve the temperature targets, the Paris Agreement also stipulates that the Parties must revise their respective NDCs every five years. These targets must not fall short of the targets in force at that time and should reflect the highest possible ambition. This increase in ambition is a fundamental quality criterion for the intergovernmental carbon market under Article 6, but also for the voluntary carbon market. The crucial question is whether a particular measure on the carbon market is additional: against the backdrop of dynamic NDCs, it must be ensured that a climate change mitigation project goes beyond what the country in which the project takes place would not have to implement anyway according to its maximum ambition.

The Paris Agreement obliges all countries to set national climate protection targets and implement measures that contribute to achieving these targets. If a mitigation project is carried out in a country, this project reduces the country's greenhouse gas emissions and thus contributes to the implementation of the national climate protection target. If, at the same time, a company wants to use the carbon credits generated to achieve its climate target, the emission reduction would be used twice. This raises the question of double counting for the voluntary market: can the mitigation impactachieved by the project be claimed by both the country and the company? Or should such double counting be prevented by robustly accounting for the  emission reductions exported?

The different forms of double counting

Double counting occurs when a single emission reduction (or CO₂ removal from the atmosphere) is counted more than once towards the achievement of reduction commitments or financial commitments for the purpose of climate protection. As a rule, three different forms of double counting are distinguished: 

• Double issuance occurs when an emission reduction leads to the issuance of more than one carbon credit.
• Double use occurs when a carbon credit is used twice to achieve reduction targets.
• The term double claiming describes a situation in which two actors (countries or companies) claim the same emission reduction for the achievement of reduction targets: once by the company or country using the carbon credit to meet its target, and once by the host country in whose inventory the corresponding emission reduction appears and thus contributes to the implementation of the NDC. 

Double counting of emission reductions is the form of double counting that is at the centre of negotiations on Article 6 and discussions on the future of the voluntary carbon market.

Under the international market mechanism pursuant to Article 6.4 of the Paris Agreement, there will be carbon credits without corresponding adjustments in addition to units that are backed by corresponding adjustments. In the decision of the Climate Change Conference in Sharm el-Sheikh in December 2022, the latter were now referred to as ‘mitigation contribution A6.4ER’ (meaning that the emission reduction contributes to NDC implementation in the project country and is reported by that country to the UN).

The international community thus acknowledges that there can be two different types of carbon credits and also opens up the possibility for the voluntary carbon market to report transparently and truthfully on the climate impact of the activity. 

With the climate crisis intensifying, many companies are formulating their own climate targets and sustainability strategies. Companies want to live up to their responsibility to actively contribute to solving the climate crisis and achieving the goals of the Paris Agreement.

According to the mitigation hierarchy, i.e. first avoiding emissions, then reducing ongoing emissions and finally supporting external climate action, corporate climate change mitigation should focus on reducing emissions along the company's own value chain. Greenhouse gas accounting is the basis for a robust climate strategy and a plan for how and when a company can achieve a specific climate target. It serves as a reference point for setting climate targets. The GHG Protocol is, one of the most widely used standards for calculating and reporting company-related greenhouse gas emissions.

In the final step of the reduction hierarchy, reduction certificates can be purchased on the voluntary carbon market. In principle, there are two different models for using reduction certificates as part of climate strategy:  

1. Climate claims with offset credits

In carbon offsetting, reduction certificates are purchased with the intention of balance ongoing emissions and achieving net carbon neutrality.

2. Climate claim with contribution credits

This approach supports climate change mitigation measures outside the company's own value chain without offsetting the emission reductions achieved against the company's own emissions.

How both approaches can be embedded in a company's climate strategy is illustrated by a company's net-zero strategy: a company sets itself a scientifically based net-zero target for a specific target year (e.g. 2035) by committing to reducing its emissions by, for example, 90% compared to the reference year. To achieve this goal, the company pursues a reduction path that provides for the gradual reduction of all direct and indirect emissions. Once the net-zero target has been achieved, most companies will continue to generate emissions that are technically or economically unavoidable. These unavoidable emissions are offset (or neutralized) in the target year and thereafter. The Science Based Targets initiative (SBTi, see box) stipulates neutralisation through permanent carbon removal for this purpose.

In addition to this special form of carbon offsetting in the target year, companies already have the opportunity to support climate change mitigation outside their value chain on the way to achieving their net-zero target. This can be done either through carbon offsetting (with balancing of ongoing emissions) or through contribution claims (without offsetting emissions). 

In the recent past, doubts have been raised about the credibility of the voluntary carbon market, and companies seeking to achieve their climate targets with the help of reduction certificates have faced public criticism. The criticism focused in particular on the poor quality of the carbon credits used by companies, but also on the use of potentially misleading advertising claims and the lack of transparency in the market.

While not all press reports covered the voluntary carbon market in its entirety, for example with regard to different project types or the diversity of crediting programmes, clear shortcomings in the robustness of the methods used in voluntary standards, particularly in the forestry sector, have nevertheless become apparent. Companies' climate change mitigation statements must be based on a robust climate strategy, and the use of carbon credits must be geared towards high-quality projects. Transparency and traceability are essential in this regard. Key aspects in this regard are explained in more detail below.

To ensure a high level of integrity in the VCM, a robust market infrastructure is needed that guarantees environmental integrity and increased ambition while safeguarding sustainable development on the part of the host countries. The German government is therefore committed to ensuring that international market activities on the voluntary carbon market are also registered under Article 6.4 in order to guarantee transparency and quality in the global carbon market and to drive forward the transformation in the implementing countries.

Crucial to integrity on the supply side is that the reduction certificates originate from a high-quality crediting system. This must ensure the following points:

• Robust and reliable methods for calculating the emission reductions achieved and the additionality of the measure. A transparent, realistic and conservative baseline must be used to avoid overestimating the reductions when comparing with the status quo, taking into account the respective NDCs.
• Avoidance of double counting (see above)
• In the case of carbon dioxide removal  projects (e.g. afforestation projectds), the permanence of emissions storage must be ensured; furthermore, in the case of natural sinks, the ecological integrity of restoring near-natural forest landscapes and protecting biodiversity must be taken into account and strengthened.