Recommendations to the Taskforce on Scaling Voluntary Carbon Markets

Aidan Acosta
35 min readDec 10, 2020



First and foremost, I would like to thank Professor Frank Van Gansbeke for his support with this independent study. His academic work, career in finance, and passion for sustainability helped to motivate me during this final term of undergrad. I am grateful to have had the opportunity to work with him not only on this paper, but also on the 2nd Sustainable Finance Unconference. I would also like to thank John Palmisano, who spoke with me about his career and informed my early research. I look forward to maintaining relationships with Frank and John and growing my understanding of sustainable finance as I enter the working world.

Table of Contents

1. Introduction

2. Structure of Markets

3. History

4. Structure of Product

5. Building Blocks

6. Pricing Developments

7. Article 6 of the Paris Agreement

8. Climate Action Now Act (H.R. 9)

9. Review of the Taskforce’s Current Plans

10. Recommendations

11. Conclusion

12. Works Cited

13. Appendix

1. Introduction

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) is a private sector initiative that was convened in September 2020 to create a roadmap for a fully functional voluntary market. The Taskforce is uniquely positioned to help shape this market because it is comprised of experts from more than 20 sectors of the economy with experience in the full history of carbon markets. The Taskforce released its consultation document in November 2020 and is awaiting feedback from the public to be incorporated into the final publication. Through this independent study and my senior economics thesis on the RECLAIM program I have researched carbon markets, brokerages, treaties, and market participants. This paper leverages my research to provide some suggestions for consideration by the Taskforce.

It is well known, certainly by the members of the Taskforce on Scaling Voluntary Carbon Markets, that the climate crisis and the financial sector are inextricably linked. Last year, more than 3,500 U.S. economists and 27 Nobel Prize Laureates demanded a price on carbon. This price is meant to keep the current carbon reserve of approximately 1,050 billion tons of CO2 in the ground while spurring the innovations necessary to eliminate the excess GHGs that are already in the atmosphere (Van Gansbeke, 2020). The director of the Harvard University Center for the Environment has stated that a thousand years from now more than half of the heat-trapping CO2 that humans have released since the industrial revolution will still be there (Shaw, 2020). As such, global emissions will need to be negative in the second half of the century in order to limit warming to 2°C (Shaw, 2020). Voluntary carbon markets can help achieve this goal by providing businesses with the option to become carbon negative, as Microsoft has pledged to do by 2030 (Smith, 2020).

A global market for carbon must be established quickly to offset further emissions and to begin the process of eliminating excess CO2 from the atmosphere. This market must be built with a strong understanding of the pitfalls that have affected those that have preceded it. There must be a balance of supply and demand that facilitates liquidity, the credits must be legitimate and fungible, and there must be measures to prevent extreme volatility in asset prices. The advent of such a market, combined with commitments to the Paris Agreement and private party initiatives, allow us to envision a world where carbon neutral and carbon negative businesses will outperform their peers. Biden’s presidency will likely result in a recommitment to the Paris Agreement, while central banks and private firms have begun to advance plans that will incorporate sustainability into investment and policy decision making. Mark Carney and the Bank of England, alongside the central banks of Europe, Russia, Japan, and China, formed the Network for Greening the Financial System in 2015 (Mackenzie, 2020). Larry Fink’s letter to CEOs this year explicitly stated that BlackRock will avoid investments in companies that “present a high sustainability-related risk” (Fink, 2020). This Taskforce is well poised to help build the world’s first international and voluntary carbon market. My paper seeks to provide some guidance on how to build it.

2. Structure of the Markets

I begin the discussion of carbon markets with a brief overview of their structures. Carbon credits trade on three types of markets: compliance markets, also known as Emissions Trading Schemes (ETS), international markets, and voluntary markets. Compliance markets cover 8% (4.4 billion tons) of the 55 billion tons of CO2 generated per year (Van Gansbeke, 2020; Azlen et al., 2020). They cover 37% of global GDP and trade more than $200Bn annually, making them the most liquid type of carbon market (Azlen et al., 2020). The forthcoming China Emissions Trading System (CN ETS) will cover 3.3 billion tons of CO2 and will grow ETS coverage to 14% of global emissions, augmenting current liquidity (Azlen et al., 2020). The international market, called the Clean Development Mechanisms (CDM), was developed under the Kyoto Protocol to transfer reductions across countries. CDM allows Annex 1 countries (Appendix 3) to invest in projects that reduce emissions in developing countries. CDM is the second-most liquid carbon market with an average of $14Bn traded per year since 2006 (Azlen et al., 2020). Voluntary markets, which are mainly used for corporate social responsibility initiatives, trade only about $300MM per year and are the least liquid (Azlen et al., 2020). Though structures differ across these three types of markets, the credits being exchanged should be fungible if they are to achieve the same goal of offsetting real emissions. While ETS and CDM have operated under relatively stringent monitoring, voluntary markets have thus far operated with little to no certification or rigor, bringing fungibility of carbon assets into question (Discover the Carbon Pricing Scheme, 2020). A potential cause of insufficient rigor in the evaluation of offsets is the abundance of supply in voluntary markets. Supply and demand misalignment leads to price volatility, which is apparent in two price dispersion approximations of $0.10 — $70.00/tCO2 and $0.30 — $10.00/tCO2 for voluntary offsets (Azlen et al., 2020; Discover the Carbon Pricing Scheme, 2020).

Until recently, voluntary offsetting has been unappealing to most emitters because the benefits to their businesses and the climate are uncertain. Low polluter demand, coupled with illiquid secondary markets, has made offsets equally unappealing to outside investors. For these markets to operate successfully there must be independent verification of the offsets being sold, fungibility of credits across all three market types, balanced supply and demand, and sufficient volume to ensure liquidity. Most of these requirements are met already in compliance markets.

Compliance markets are governed by national or regional institutions, like the Environmental Protection Agency (EPA), the International Civil Aviation Organization (ICAO), or the European Union. Unlike voluntary markets which trade ‘offsets’ or ‘credits,’ compliance markets trade ‘allowances’ (Discover the Carbon Pricing Scheme, 2020). Allowances give the holder the right to emit 1 ton of carbon dioxide, rather than the option to negate the effects of 1 ton of carbon dioxide already emitted. Compliance markets may also allow polluters to purchase a specified amount of credits to offset additional emissions (EU Emissions Trading System, 2016). The three largest exchanges (EU ETS, CA, RGGI) have liquid trading markets because the polluters that operate in their compliance zones are required to reduce their emissions annually by means of allowances or operational improvements. The supply of credits declines annually too, increasing allowance prices and generating potential returns for investors. Nevertheless, investors are generally disinterested in these compliance markets because of price risk management concerns. Allowance prices are not updated on a frequent basis because auctions only occur a few times per year. The recent emergence of futures markets for carbon assets (Appendix 2) may alleviate price risk, but it would be ideal if these firms could all purchase their allowances from a single, international market. The assets required to supply allowances to these three markets and the forthcoming CN ETS would provide a high level of liquidity.

The compliance markets that are currently popping up in emerging markets like China and Korea will vastly increase the value of the international carbon market. China completed a 3-year project in 2017 with the help of the European Commission to help consolidate its seven regional pilot markets into a single, national one (EU Emissions Trading System, 2016). The forthcoming CN ETS will build off of the experience of previous markets to react to unforeseen developments, all while maintaining close communication with EU ETS advisors (EUCHINA-ETS, 2020). The Korea Emissions Trading System (KETS), which launched in 2015, covers 610 of the country’s largest emitters and around 70% of Korea’s total greenhouse gas emissions (Berlin, 2020). It is the first mandatory emissions trading system among non-Annex I countries (Appendix 3) under the United Nations Framework Convention on Climate Change (UNFCCC) and will play an essential role in meeting Korea’s 2030 nationally determined contribution (NDC) of 37% below business as usual emissions (Berlin, 2020). This represents a 22% reduction below 2012 GHG levels (Berlin, 2020).

3. History of Carbon Markets

I continue the discussion of carbon markets with a brief history of past brokerages, exchanges, transactions, and organizations. These institutions and trades can give regulators a view into some of the causes of present market failures, but also future opportunities. Misalignment of offset project standards and low demand for credits have harmed markets and organizations in the past, while an interpollutant swap shows potential for increased trade flexibility and liquidity in the long-term. I discuss the development of offset markets (CCX and CORSIA) through the lens of private party initiatives and the first over-the-counter offset trades. This analysis demonstrates faults and opportunities to consider while making recommendations for a voluntary market.

The first emissions credit brokerage and consulting firm, AER*X Inc., was created by John Palmisano in 1982 and sold to Enron Gas Services in 1992. Though not a market, AER*X brokered the first bilateral (over-the-counter) trades of SO2 credits.[1] The acquisition would allow Enron to capture carbon reductions from projects in transitional economies, such as Russia, Bulgaria and Romania, and sell them to companies in the West (R. Bradley, 2011). Enron believed that AER*X’s SO2 capabilities could be replicated with CO2 credits, allowing its gas business to sell combined gas and offset packages to utilities should cap-and-trade legislation be passed for CO2 (R. L. Bradley, 2018). This would allow utilities to buy power and environmental compliance from the same vendor at the same time. Enron could also leverage this approach to provide comprehensive price risk management services relating to the SO2 allowance trading market. Ultimately, this strategy hinged on cap-and-trade legislation driving a large increase in demand for credits, which did not happen. Thus, Enron’s plan in the 1990s suffered from the same lack of demand that has plagued markets into the present.

The first voluntary trade of CO2 offsets was between Niagara Mohawk Power Corporation (NiMo) and Arizona Public Service Company (APS) in 1997. APS needed CO2 credits to meet its regulatory obligations, and because NiMo had already exceeded its pledged reductions under a voluntary Department of Energy program, the utility was able to transfer excess allowances to APS. The trade, which was conducted by the U.S. Department of Energy with help from the Environmental Defense Fund, allowed NiMo to swap 1.75MM t/CO2 offsets for 25,000 t/SO2 allowances from APS (Rackstraw & Palmisano, 2002). NiMo ultimately donated the SO2 allowances to a nonprofit environmental organization to be retired. This inter-pollutant swap demonstrates new potential for voluntary markets, which could one day trade offsets beyond just carbon (Petsonk, 2002). Although this swap would not have satisfied the current legal requirements of the Paris Agreement, it was an important first step for emissions trading.

The first market for offsets was the Chicago Climate Exchange (CCX). CCX was North America’s only voluntary, binding greenhouse gas reduction and trading system for emissions sources and offset projects in North America and Brazil. The exchange employed independent verification of the offsets traded therein, much like compliance markets today. It operated between 2003 and 2010, when inactivity in the U.S. markets caused the CCX to cease trading (“Chicago Climate Exchange,” 2020). The CCX handled nearly half of the world’s voluntary emissions trading at its peak, so once it closed in 2010 companies resorted to trading over-the-counter (TSVCM Consultation Document, 2020). Over-the-counter trading has resulted in an opaque and illiquid marketplace that remains unappealing to investors today.

The demise of the CCX is indicative of the larger problem of demand shortages for voluntary offsets, especially during times of financial distress. As more compliance markets are created, overall liquidity will increase, and demand shortages will be mitigated. CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) is one example of a new compliance market that was created to help the ICAO achieve carbon-neutral growth from 2020 onwards. Because growth in air traffic is expected to exceed innovations in fuel efficiency by about 3–4% per year, CORSIA relies on the use of offsets from carbon markets to achieve sustainable aviation. Mandatory participation in CORSIA, which will begin in 2027, will prevent airline emissions from exceeding a baseline equal to the mean of 2019 and 2020 levels and will drive increases in CO2 offset demand by airlines.[2] Decreases in air travel in 2020 due to COVID will likely necessitate a readjustment of this baseline.

A final consideration is the REDD+ treaty (Reducing Emissions from Deforestation and Forest Degradation), which was negotiated under the UNFCCC in 2005 to generate carbon offsets through enhanced forest management in developing countries (“Reducing Emissions from Deforestation and Forest Degradation,” 2020). The program fits into the international market infrastructure by outsourcing carbon sequestration on behalf of nations with high emissions. Under an international, voluntary market, participating countries could sell offsets to private firms to generate revenue. Forty-seven countries in subtropical or tropical regions have signed an agreement to participate in the REDD+ treaty. Participation is currently incentivized by the Green Climate Fund, which disburses results-based financing according to verified reports of emission reductions and enhanced removals of greenhouse gases (REDD+ Country Participants, 2020). Nevertheless, Gold Standard (Appendix 1) has expressed concern about the crediting of stored carbon within the program, which may undermine long-term sustainability by paying people to stop cutting forests rather than generating new reductions (Gold Standard, 2020). The misalignment of criteria between Gold Standard and the Green Climate Fund exemplifies the need for verifiers to consolidate, as discussed in the Recommendations section.

Beyond the functioning of carbon markets, Indigenous Peoples’ rights must also be considered. Indigenous land rights are directly at risk because REDD+ impacts agricultural practices and overlooks the religious value of land. Thus, the success of REDD+ and similar offset mechanisms hinges on stable carbon markets and the fair treatment of the people who inhabit the lands. Because this issue is largely recognized, there could be a Fair-Trade type label for carbon assets that are generated with the betterment of indigenous populations in mind. If economic advancement results from the projects generating the carbon offsets, private firms could use this label as good neighbor marketing. Competition for this label could improve sustainability standards across subindustries. Alternatively, all assets could be required to uphold a strict standard regarding land use in emerging markets.

Demand shortages and misalignment of project standards are pervasive in past markets and organizations. When the CCX closed and over-the-counter trading increased, liquidity suffered, and voluntary markets became unappealing to investors. However, the advent of new compliance markets could augment liquidity soon. The addition of interpollutant swaps could even grow voluntary markets in the long-term. Examining the history of these entities is useful when making suggestions for the voluntary market structure.

4. Structure of the Product

Allowances should represent CO2 emissions reductions or units of carbon sequestration that are real, additional, verifiable, enforceable, and permanent (Offsets Requirements, 2020). The best practice would ensure the projects producing the allowances are independently verified and meet robust and stringent methodology requirements for sustainable development in the local area where they are enacted (Gold Standard, 2020). Allowances are generally scrutinized to a greater extent than offsets, which trade in voluntary markets, but the requirements vary widely by program. This contributes to the challenges of intermarket fungibility. CORSIA, for example, only accepts credits that are independently generated through one of six major institutions. These include the American Carbon Registry (ACR), China GHG Voluntary Emission Reduction Program, Clean Development Mechanism (CDM), United Nations Voluntary Cancellation Platform, Climate Action Reserve (CAR), Gold Standard (GS), and the Verified Carbon Standard (VCS) (CORSIA FAQs, 2020). Each of these programs are described in greater detail in Appendix 1. CA Cap-and-Trade only accepts domestic offsets generated through projects related to U.S. or urban forests, avoided agricultural methane, ozone depleting substances, mine methane capture, and rice cultivation (California Cap-and-Trade Program, 2020). RGGI only accepts domestic offsets generated through projects related to landfill methane capture, sulfur hexafluoride sequestration, forestry or afforestation, end-use efficiency, or avoided agricultural methane (Offsets Requirements, 2020). The EU ETS, which is the largest source of demand for international credits, only allows international credits to be used if they are generated through Clean Development Mechanism (Appendix 4) or Joint Implementation (Appendix 5) (Use of International Credits, 2016). Additionally, EU ETS does not accept credits generated through nuclear energy projects, afforestation or reforestation activities, or projects involving the destruction of industrial gasses (HFC-23, N2O). There is clear conflict between the requirements of these programs, even within the United States (i.e., reforestation).

For credits to trade in a large-scale international market, they must be verifiable, legitimate (through third party verification), and fungible across regions and programs. As such, a set of standards for the product must be jointly developed and agreed upon. This could potentially be accomplished through the consolidation of the institutions that are verified issuers of allowances or through standardization of their accreditation requirements. Standardized pricing with a predetermined floor could incentivize these changes. For example, a minimum carbon price of $40 per ton could make the market more credible and spur venture capital to support the development of GHG reduction technologies (Van Gansbeke, 2020). The resulting potential for synergies could spur merger and acquisition activity within the verification agencies.

5. Building Blocks

There are four key aspects to a voluntary carbon market capable of both short-term and long-term success (where short-term success is emissions avoidance and long-term success is emissions sequestration) (TSVCM Consultation Document, 2020). First, there is the governance of the market. Second, there are those who manage the projects that supply credits for sale on the exchange. Third, there are public and private financiers who invest in project development. Fourth, there are the buyers of offsets. I will address all four of these aspects in this section.

The first consideration is market governance. The Taskforce on Scaling Voluntary Carbon Markets has stated that a 15x increase in total offset market capitalization is necessary to achieve the 1.5°C goal (TSVCM Consultation Document, 2020). Simultaneously, the highest level of environmental and market integrity must be upheld. Growing a market this quickly will require robust accounting, registration and verification practices to combat fraud, such as money-laundering, double-dipping and arbitrage, and a strong governance body to determine participant eligibility and address sub-optimal credit verification processes (TSVCM Consultation Document, 2020). It is advisable that the Taskforce implement the use of distributed ledger mechanisms or blockchain technologies to prevent fraud and improve cybersecurity (Van Gansbeke, 2020). A set of Core Carbon Principals, such as those described in the Taskforce’s Consultation Document, should be evaluated by an independent organization. The standards should be determined early and only evolve slowly so that buyers of credits can accurately predict their future value. The independent organization will be responsible for setting a price floor (which should be suggested by the Taskforce) and mitigating volatility by sending demand signals to market participants (Azlen, 2020). Governance is extensively addressed in the Taskforce’s Consultation Document so the remainder of this section will be dedicated to the other three aspects of a successful voluntary market for carbon offsets.

Second, we must consider how the allowances will be generated and the necessary incentives to promote sequestration initiatives. In the short-term it is likely that most offsets will be generated through avoidance and reduction strategies (renewable energy, improved waste disposal such as methane capture) to maximize sustainable financing (TSVCM Consultation Document, 2020). In the medium to long-term, it is important to transition towards removal and sequestration projects (reforestation, technology-driven carbon capture and storage) to limit warming to 1.5°C (TSVCM Consultation Document, 2020). One method to promote different types of offset projects is to sell them under contracts that correspond to their removal attributes (TSVCM Consultation Document, 2020). For example, avoidance vs sequestration, or one location vs another. Although this would not be advisable until a functioning, liquid market is established, it could eventually create demand for the types of offset projects that are necessary in the long run. Removal attributes could also be the basis for awarding a green label to private firms for excellence in credit generation. Regardless of the method by which these offsets are generated though, an appropriate level of supply should be maintained to mitigate price instability in the market.

The third consideration is project financing. Public and private financing is necessary because certifiable projects are often expensive and may not yield credits for several years. Banks and other supply chain financiers should provide capital to project developers based on the expected cashflows from offtake agreements (TSVCM Consultation Document, 2020). These loans could be collateralized by carbon credits or other project assets, such as real estate and PP&E. Public sector support for new energy projects also helps to avoid asset value destruction by investing in new projects rather than taxing existing polluters (Mildenberger & Stokes, 2020). Public sector loans to be used for the deployment of clean technologies could lead to the invention of new carbon avoidance and sequestration methods.

The fourth consideration is buyers, who are arguably the most important aspect of a well-functioning voluntary market. Currently, supply of offsets greatly exceeds demand, disincentivizing offset project development and polluter efficiency initiatives. Perhaps the BlackRock letter to CEOs from last year and the resulting corporate commitments to carbon neutrality will be sufficient to spur this demand. Frank Van Gansbeke has suggested that ‘best-in-class actors’ could create sub-industry competition, which is one way that Larry Fink’s letter could generate some sustainability inertia. For example, Patagonia’s pledge to become carbon neutral could encourage The North Face and Arc’teryx to participate as well. Microsoft’s pledge could similarly persuade IBM and Samsung. If these brands are all ranked accordingly on a widely used platform, such as the Carbon Disclosure Project, voluntary participation may increase. It is important to note that any pressure within sub-industries is wholly predicated on the preferences and resulting influence of the clients and employees. While participation in a voluntary market serves as good neighbor marketing and a public relations boost, more incentives may be necessary to scale the voluntary market to the necessary level. Article 6.4 of the Paris Agreement, which adds international private sector entities to carbon pricing programs, could create this demand. As firms compete to lower emissions sufficiently, per NDC goals, demand for credits will increase disproportionately by companies that fail to innovate. This market mechanism would be an ideal outcome of the Paris Agreement and could result in increased demand for offsets in the short term if NDC goals are ambitious enough.

6. Pricing Developments

For a large-scale international market to function there must be frequently updated prices for the assets traded therein. Investors are unlikely to purchase carbon credit contracts if pricing models are based on auctions that take place only a few times per year. This is exemplified by the lack of investor interest in offsets following the closure of the CCX, when the only spot prices were from over-the-counter trades. Fortunately, April 2020 marked the introduction of a futures market for carbon based on the world’s three largest markets: EU ETS, the California Cap-and-Trade regime, and RGGI. The futures trade on ICE markets, the parent company of the NYSE, under contract names EUA, CAX, and RGS (contract specifications in Appendix 2). Lynn Martin, President of ICE Data Services, believes that “this is a first step in producing an accurate, transparent global price for carbon, and one that utilizes a market-based mechanism for the evaluation of that price” (Leavell & Gardiner, 2020). If augmented by the introduction of a new, large scale voluntary market, carbon credits could become a more liquid asset and provide depth to the futures exchange. A transparent global price for carbon would also attract new investors to the market. This section will provide recent price and value estimates from the three markets, which vary widely.

EU ETS (79% of global market share):

Futures prices on the EU ETS market reached an all-time high of €29.74/tCO2 on December 7, 2020 after dropping around 40% recently from €25/tCO2 to €15/tCO2 (Quandl, 2020). One reason for the devaluation was surplus allowances. The EU ETS caps emissions from Europe’s industry, power, and aviation sectors, and some retired power plants are still receiving credit issuances (Dufrasne, 2019). The EU ETS Market Stability Reserve (MSR) was created to absorb excess allowances off the market to allow prices to increase. The MSR has been very effective, allowing the market to grow in value by 30% in 2019 to €169Bn despite a 12% decrease in volume over 2018 levels (Szabo, 2020). The MSR will not be able to continue absorbing surplus credits from plant closures unless its budget increases by 2021 or it is given the ability to cancel allowances (Van den plas, 2020). This issue is pertinent, as allowance price drops reduce revenues to the member states that auction them off. As these revenues are used for sustainability initiatives, a rebalancing of supply and demand in the EU ETS is necessary to prevent member states from withdrawing or banking their credits in the near term.

U.S. and Canadian Markets (11.5% of global market share):

When combined, U.S. carbon markets are ranked second globally by volume and value at 1,670 billion tons CO2 and $24.8Bn (Szabo, 2020). Allowances in the CA Cap-and-Trade market most recently cleared at $17.87/tCO2; $1.19 above the floor price[3] and $0.87 above the previous record high price (Sutter, 2020). The February 2020 joint auction with Quebec (most recent) sold 57,090,077 allowances, which was 10,000,000 (15%) less than the November 2019 auction (second most recent). This was the lowest volume sold since the first joint auction in November 2014. This is partially due to the direct allocation of credits under AB398[4] which decreased allocation of allowances to auctions to prevent emissions leakage (Appendix 6) (Sutter, 2020). 8,672,250 future vintage allowances[5] were also cleared at $18.00/tCO2 in February 2020; $1.32 above the floor price. This volume represents a decline of 350,000 credits over the November 2019 auction (Sutter, 2020).

In the RGGI market prices rose 31% on year to $6.82/tCO2 with 16,192,785 allowances sold at the September 2020 auction (Micek, 2020). This is the highest price since December 2015. New Jersey rejoined REGGI after an eight-year hiatus in January 2020 and Virginia will join RGGI on January 1, 2021. This will increase the coverage of the program by 30%, augmenting allowance liquidity. Pennsylvania is considering joining as well, as their Governor recently issued an executive order to “establish a CO2 budget consistent in stringency to the one established by RGGI states and be sufficiently consistent with the RGGI Model Rule to allow allowances to be traded with holder of allowances from other states, according to the executive order” (Micek, 2020). The addition of both these states to RGGI would increase U.S. demand for credits and demonstrates another growth opportunity for a large-scale carbon market.

China Pilot Markets (0.1% of global market share):

China’s national ETS, which is set to launch in 2020, will include 1,700 entities in the power sector that collectively emitted roughly 4,500 billion tons CO2 in 2019 (Szabo, 2020). The market is poised to become the world’s largest despite the current small size of the pilot markets. Allowances in the Chinese market are expected to be initially priced around €10/tCO2, according Refinitiv (Szabo, 2020).

In 2019 the China’s eight pilot programs saw collective trading of 136 billion tons CO2 and €272MM, increases of 35% and 40% over 2018 figures (Szabo, 2020). This growth is attributable to policies released in 2019 which attracted liquidity providers and led to increased carbon repo deals and futures transactions (Szabo, 2020). These pilot markets account for around 1.6% of global GHG trading volumes and just 0.1% of the total value, illustrating the misalignment of prices and quantities being traded across international markets (Szabo, 2020).


Prices across global carbon markets are strongly divergent, primarily because of demand and supply factors. CA CAT has decreased supply by limiting allowances and RGGI has increased demand by adding new market participants, increasing allowance prices. EU ETS prices have recovered after declining because of surplus credits. Price divergences demonstrate market inefficiencies and could create opportunities for arbitrage. A standardized asset that trades on a single, international market would help to alleviate these issues. A standard price floor (of $xx) that increases annually (by yy%), as in the CA CAT program, would be beneficial to meeting the carbon budget and could bring the value of credits traded on international markets into relative parity.

7. Paris Agreement Article 6

Article 6 of the Paris Agreement encourages the establishment of an international carbon credit market. Specifically, Articles 6.2 and 6.3 allow countries to transfer emissions reductions internationally to meet their Nationally Determined Contributions (NDC) (Paris Agreement, 2015). The scale and resulting cost-effectiveness of this system makes it possible for nations to set more ambitious goals. Article 6.4 expands this mandate by including international private sector entities in the scope of carbon pricing programs (Paris Agreement, 2015). It establishes a mechanism for countries to mitigate emissions and contribute to sustainable development while attaining NDC goals. For participant nations these mandates would be a strong force for innovative climate solutions, as the reward for developing efficient alternatives will be increased by the prospect of monetizing the resulting credits. However, international emissions cannot be transferred without a well-functioning market for offsets. The mandates thus encourage the formation of a new market.

Article 6 could also spur innovations in the airline (3% of total GHG emissions) and maritime industries (1% of total GHG emissions), which are regulated by the International Civil Aviation Organization (ICAO) and International Maritime Organization (IMO) rather than the UNFCCC (Paris Agreement, 2015). These international emissions are not included in NDC totals, but each governing body has adopted its own methods for reducing emissions.[6] If private firms exceed the required reductions, they could potentially sell credits on the voluntary market (Rackstraw & Palmisano, 2002). Mandatory participation in CORSIA by member states begins in 2027, so airline industry players may seek to innovate early to gain a competitive advantage.[7] The Taskforce has specified that it will not address international rules for market-based cooperation or national accounting related to Article 6, including CORSIA, but Article 6 and CORSIA are still beneficial forces for the creation of a voluntary, international carbon market (Explanatory Note, 2020). Innovations by airlines, manufacturers and shipping companies could drive sub-sector competition and increase demand for credits by those firms that fall behind, ultimately greening the economy through market forces. This would be an ideal result of the Paris Agreement.

8. Climate Action Now Act (H.R. 9)

Under the new Biden administration, the United States will reenter the Paris Agreement. This will provide an opportunity for U.S. firms to compete globally to reduce greenhouse gas emissions and trade resulting credits on the forthcoming international market. The Climate Action Now Act, which passed the House of Representatives on May 2, 2019, requires the President of the United States to develop and update annually a plan for the nation to meet its NDC under the Paris Agreement (Castor, 2019). The plan must include steps to reduce 2005-level emissions by 26%-28% by 2025 and to confirm that other major economies are fulfilling their announced contributions. The bill also prohibits federal funds from being used to withdraw from the agreement. This obligation will boost federal funding for efficiency and clean energy projects, encouraging innovations aligned with the Paris Agreement goals.

H.R. 9 also requires the President to, within 6 months, contract with the National Academy of Sciences to report on the potential impacts of a withdrawal by the United States from the agreement on the global economic competitiveness of the U.S. economy and on U.S. workers (Castor, 2019). The Trump administration has not fulfilled its obligations under H.R. 9, but Biden has pledged to. Clean energy job development, especially in rural communities, is a priority of the bill that could advance the U.S. economically and environmentally. As an important steppingstone towards Paris Agreement compliance, H.R. 9 is a key consideration for the development of an international market for carbon. The bill is also well aligned with the goals of the Green New Deal, as clean energy development would mobilize American workers and promote sustainable economic growth.

9. Review of the Taskforce’s Current Plans

First and foremost, the Taskforce will not create the voluntary carbon market itself. Rather, it will provide “open-source solutions for private-sector organizations to take forward” (TSVCM Consultation Document, 2020). The Taskforce has acknowledged that the regulatory requirements for an international carbon market are still in flux. Nevertheless, the United Nations Framework Convention on Climate Change negotiations at the 26th United Nations Climate Change Conference (COP26) in late 2021 will provide an opportunity to agree on international accounting and transfer rules that will facilitate the market’s formation. Because regulatory clarity will not be provided in the short-term, the Taskforce has focused on building market infrastructure that will allow private-sector organizations to scale the market appropriately. These solutions are meant to work alongside existing and parallel initiatives to support the larger goal of emissions mitigation (TSVCM Consultation Document, 2020).

The TSVCM recognizes in its Consultation Document that carbon markets have “occasionally allowed projects that generate carbon credits to harm local communities and ecosystems,” primarily by snubbing local land rights. As such, the Key Principles also state that its solutions will be beneficial for local communities and should preserve or strengthen ecosystems (TSVCM Consultation Document, 2020). Additionally, the Taskforce has stated that the existence of a voluntary carbon market will not undermine incentives for emissions mitigation (TSVCM Consultation Document, 2020). Companies and nations should still be incentivized to reduce their absolute emissions to achieve Paris Agreement targets, while the market should allow businesses to reach even more ambitious goals, like becoming carbon negative.

This paper will not address all the Taskforce’s proposed solutions, as they are available in the Consultation Document. Rather, it will focus on the points that have traditionally presented challenges to carbon markets and other organizations that operate in the same sphere. Perhaps the most important of these points is demand for voluntary credits. During the 2008 financial crisis, annual trading volume in voluntary markets dropped by around 50% due to tight corporate budgets (TSVCM Consultation Document, 2020). To prevent companies from abandoning their commitments during times of instability in the future, there should be transparent and public tracking of their progress. This would create a new sense of obligation for these corporations to meet their goals. The Taskforce has suggested creating a buyer commitment registry to improve market transparency and help to scale credit supply for new project development (TSVCM Consultation Document, 2020). This registry could be hosted by standard setters (e.g., Science Based Target Initiative (SBTi) or CDP) or a data provider. Many large companies have pledged to achieve carbon neutrality between 2030 and 2050, which should increase demand significantly moving forward. If these companies were listed in a registry, their compliance would be easily comparable against their peers.

Perhaps the next largest mandate of the Taskforce is to provide guidance on the Core Carbon Principles (CCPs). These CCPs are the quality criteria that all carbon credits should meet and are exhibited in the Consultation Document. Among these requirements, projects should be free of leakage and the registries should be publicly accessible (TSVCM Consultation Document, 2020). The TSVCM suggests that a third party should host the CCPs and task verification agencies to approve offset projects. Among the largest of these verification agencies are American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard (GS), and the Verified Carbon Standard (VCS). To speed up the verification process, a digital project cycle should be built to collect project data and allow verification entities to continuously monitor the integrity of the projects (TSVCM Consultation Document, 2020). Satellite imaging and digital sensors would improve the speed, accuracy, and integrity of the approval process.

The third and final suggestion that this paper will address is the introduction of a secondary market for carbon spot and futures contracts. Exchange traded spot market contracts with transparent price signals could enable a forward price curve to develop. This would allow futures markets to develop contracts, based on the reference contract, that are fungible across markets. Thus, pricing would need to be aligned with that of compliance markets’ futures contracts on ICE Markets. The futures market would increase liquidity and facilitate bolstered financing because banks can finance against the futures prices (TSVCM Consultation Document, 2020). These contracts could then trade in an active secondary market, allowing investors, buyers, and sellers to manage their risk exposure. This would also provide a convenient point of entry to the carbon market for inexperienced investors (TSVCM Consultation Document, 2020).

10. Recommendations

A voluntary market’s success hinges on the resolution of political blocks and consensus on international accounting and transfer standards for allowances. As such, the most important attribute of this market should be adaptability. Previous and existing markets have consistently suffered the consequences of supply and demand misalignment, leading to volatility. The Taskforce has outlined some methods to address this concern, but due to the voluntary nature of the program it is difficult to ensure they would be completely successful. One method to solidify the carbon supply and demand curve would be to introduce a Federal Reserve Bank managed “bad bank for stranded assets” (Appendix 7). This adaptable method to keep supply and demand of carbon assets in alignment could be suggested to the Fed by the TSVCM. The appointment of Janet Yellen as Treasury Secretary by President Elect Joe Biden makes this plan more plausible. By keeping fossil fuels in the ground, the bad bank would eventually decrease demand for offsets and lower the carbon price. The mandate of the bad bank could be extended, however, to act as a central market maker. Setting a minimum carbon price as a function of the remaining carbon budget would lessen volatility.

The first step would be to establish a holding company to serve as an umbrella shell for each U.S. bank willing to offload its fossil fuel assets. The Fed would buy up fossil fuel leverage from banks and the banks would be allowed to amortize any resultant losses over a 5-year (negotiable) period (Van Gansbeke, 2020). According to the consultancy firm Rystad Energy, 150 fossil fuel exploration and procurement firms are expected to file for Chapter 11 bankruptcy by the end of 2022 (Abramov & Karagiannopoulos, 2020). This is not surprising, as fossil fuel investments are often unprofitable for decades (Kaufman, 2020). These fuels will need to stay in the ground to avoid climate catastrophe, meaning that investments in the companies promising to turn a profit on oil and coal in the middle of the century are creating a multi-trillion-dollar bubble (Kaufman, 2020). The popping of this bubble “could be more calamitous to the financial system than the mortgage-backed securities collapse of 2007” (Kaufman, 2020). Projections such as this could make an opportunity to offload fossil fuel assets appealing to banks. The assets could be offloaded for an estimated price of $1.2 — $1.4 trillion, assuming an average 5-year maturity and 10% discount rate (Van Gansbeke, 2020). The initial funding could be provided through a Green Bond issue by the Treasury. The Fed could bar share buybacks and dividend payouts by fossil fuel corporations until the loans are paid back, and any Chapter 11 filings could result in a Fed equity position. The stranded assets could be used as portfolio collateral for a Central Bank stable coin, potentially designed as a new “gold standard” against which fiat currencies would be priced and benchmarked. Eventually, the portfolio would consist of renewable energy assets along with exposure to forests, mangroves and topsoil regenerated agricultural land, making the stable coin a significant store of value (Van Gansbeke, 2020).

Trump’s Treasury Secretary Steven Mnuchin has clashed with the head of the ECB, Christine Lagarde, over whether it is worth it to forecast climate risks to the financial sector and has directed billions to struggling fossil fuel companies this year (Kaufman, 2020). Yellen has recognized the severity of the crisis and should reallocate this funding towards industries that will help the U.S. meet its climate goals (Kaufman, 2020). This change in leadership, assuming Yellen is confirmed, could pave the way for the successful implementation of a bad bank for stranded assets. As such, I recommend that the Taskforce support this path in its open-source solutions and communications with the Fed.

Additionally, the TSVCM should suggest that the verified issuers of allowances standardize their respective accreditation requirements. If credits are going to trade in a large-scale international market, they must be fungible across regions and programs. The product that currently trades on all existing carbon markets denotes 1 t/CO2 sequestered from the atmosphere, but the criteria for generating this product are not consistent across markets. Consolidating the institutions that are verified issuers of allowances (i.e., Gold Standard, Climate Action Reserve, etc.) could help standardize this process. Mergers and acquisitions in this space would also generate synergies that would increase the efficiency of the businesses, ultimately reducing the cost of verifying offset projects and augmenting environmental benefits.

The TSVCM should also recommend a reasonable price floor to ensure that the Paris Agreement goals are met and that project developers have some estimate to base their business models on. The CA Cap-and-Trade price floor has been in the range of $16/tCO2 most recently (Sutter, 2020). Frank Van Gansbeke has stated that a minimum carbon price of $40/tCO2 should be set to spur venture capital resources into the development of GHG reduction technologies (Van Gansbeke, 2020). The World Bank had previously stated that a price between $40 — $80t/CO2 was necessary to meet Paris Agreement targets, though this pricing is now rather outdated (Lecocq, 2005). Mike Azlen stated in his presentation at the Sustainable Finance Unconference on November 16, 2020 that an average price of $113/tCO2 is necessary to achieve targets (Azlen, 2020). The Taskforce should suggest a price floor that encourages innovations in sustainability but does not threaten businesses’ ability to survive. The price floor should increase annually. Perhaps starting the floor at the middle of the aforementioned range (around $65/tCO2) and increasing it more quickly would be preferable, as it would give businesses time to prepare but would also spur investment in sustainability initiatives to avoid high expenses in year t+1. Businesses will lobby for the lowest price floor possible while offset project developers will lobby for a high price floor. Striking a balance that encourages both project development and private sector innovations is crucial. The Taskforce should suggest a price floor and a few years of rate increases in its open-source solutions to encourage project financing in the short term and spur the VC resources necessary to trigger real reductions.

To build a successful market for voluntary offsets the Taskforce will need to avoid repeating the pitfalls of previous markets. Among the most prominent of these pitfalls have been supply and demand misalignment, illiquidity, and a lack of pressure on businesses to make real reductions. The Taskforce’s existing plans should provide enough liquidity to the market, especially if nations adhere to their Paris Agreement NDCs. The implementation of a bad bank for stranded assets and a price floor could help to solve the issues of supply and demand misalignment and inaction on the part of private firms.

11. Conclusion

I believe that the world is ready to adopt an international carbon pricing scheme and that a voluntary offset market is an excellent method to facilitate this transition. The Taskforce’s Consultation Document was very thorough, and I support the blueprint, but I do believe that additional measures should be pursued. To avoid the issues that have hindered past markets, like an oversupply of credits and a lack of liquidity, I suggest that the Taskforce pursue a bad bank for stranded assets and a price floor for credits with predetermined, annual price increases. A bad bank for stranded assets will help offload fossil fuel assets and prevent further investment in the fossil fuel industry, all while balancing the supply-demand curve. A price floor would spur investment toward the development of efficient technologies and offset projects by enabling them to estimate revenues from their emissions reductions. Additionally, I suggest the consolidation of the third-party verification agencies, or at least a standardization of their approval criteria. This would lessen the cost of credit production and ensure that the offsets are fungible across markets. Consolidation would also generate synergies that could be channeled toward sequestering GHGs. By incorporating these three features into the Taskforce’s recommendations I believe that a voluntary market could be even more successful.

Thank you for your consideration.


Aidan Acosta

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13. Appendix

1. Gold Standard
Gold Standard serves as an independent verifier of carbon offsets. The organization was established in 2003 by WWF and other international NGOs to ensure that offset projects feature the highest level of environmental integrity and support sustainable development.

American Carbon Registry

The American Carbon Registry is a nonprofit enterprise of Winrock International that was founded in 1996 as the first private voluntary greenhouse gas registry in the world. It is approved to supply credits for markets including the ICAO CORSIA initiative and the California Cap-and-Trade program.

China GHG Voluntary Emission Reduction Program

China GHG Voluntary Emission Reduction Program was established in 2012 by China’s national climate authority, National Development and Reform Commission (NDRC). It is now administrated by the Ministry of Ecology and Environment, China’s climate authority. The rules, procedures, technical standards, and methodologies of the program follow, to the greatest extent possible, those of the clean development mechanism (CDM) of the Kyoto Protocol.

United Nations Voluntary Cancellation Platform

The United Nations Voluntary Cancellation Platform allows anyone to support UNFCCC certified projects that reduce, avoid, or remove GHG emissions from the atmosphere by purchasing Certified Emission Reductions (CERs). The projects are implemented in developing countries and the full contributions go directly to the projects.

Climate Action Reserve

The Climate Action Reserve establishes standards for carbon offset projects, oversees independent third-party verification bodies, issues carbon credits generated from such projects, and tracks the transaction of credits over time in a transparent, publicly accessible system. It is the premier carbon offset registry for the North American carbon market.

Verified Carbon Standard

The Verified Carbon Standard Program is the world’s most widely used voluntary GHG program. It has certified over 1,600 projects globally that have collectively reduced or removed more than 500MM t/CO2 from the atmosphere.

2. Futures Contracts
(EUA Futures | ICE, n.d.)

(California Carbon Allowance Vintage 2020 Future | ICE, n.d.)

(Regional Greenhouse Gas Initiative Vintage 2020 Future | ICE, n.d.)

3. Annex 1 Nations
Annex I Nations are industrialized countries with a greenhouse gas reduction commitment. They include the industrialized countries that were members of the OECD (Organization for Economic Co-operation and Development) in 1992, plus countries with economies in transition (the EIT Parties), including the Russian Federation, the Baltic States, and several Central and Eastern European States (Parties & Observers, 2020).

4. Clean Development Mechanism (CDM)
CDM allows Annex 1 countries to invest in projects that reduce emissions in developing countries.

5. Joint Implementation (JI)
JI allows industrialized countries to meet part of their required cuts in greenhouse gas emissions by paying for projects that reduce emissions in other industrialized countries.

6. Carbon Leakage
Carbon leakage occurs when strict environmental policies in one nation cause a neighboring one to increase its emissions. This can happen when production is shifted across borders but net demand for a product is unchanged.

7. Stranded Assets
Stranded assets are those that have had their economic lives shortened because of the transition to a low-carbon economy. As such, they are no longer able to earn a financial return.

[1] The firm also conducted trading-based energy and environmental studies for entities such as the U.S. Congress, the Canadian government, the U.S. EPA, the OECD, and the World Bank.

[2] All states with an individual share of international aviation activity in 2018 above 0.5% of total activity or whose cumulative share reaches 90% of total activity, are included in CORSIA. Least Developed Countries, Small Island Developing States and Landlocked Developing Countries are exempt unless they volunteer to participate (CORSIA FAQs, 2020).

[3] The 2020 floor price is 5% higher plus inflation than the 2019 floor price. This happens each year to ensure that even if demand for allowances drops off, as it did in 2016, there is still a minimum price on those allowances.

[4] The state board shall apply a declining cap adjustment factor to the industry allocation equivalent to the overall statewide emissions declining cap using the methodology from the compliance period of 2015 to 2017, inclusive (Bill Text — AB-398, 2017).

[5] These allowances cannot be used until 2023.

[6] IMO does not currently employ a carbon trading scheme, but the creation of a large-scale international market could encourage IMO participation.

[7] Participants can bank credits to be used later.