What miners should know about the voluntary carbon credit market

Three years ago, the London-based International Council on Mining and Metals announced a bold commitment: the world’s 28 largest mining companies pledged to achieve net-zero carbon emissions by 2050. This goal is ambitious, particularly because the minerals needed for new clean energy technologies are mined in massive quantities.  

To help meet these climate goals, many companies are turning to carbon offsets as a key tool in their strategy to reduce greenhouse gas emissions. The voluntary carbon credit market (VCM) has grown rapidly as a result. However, this growth has also brought challenges, leaving many questions about VCM’s future role in the mining sector.  

What’s VCM do?

The VCM allows companies to buy credits, each representing one ton of carbon dioxide (CO2) removed or reduced from the atmosphere. These credits come from reforestation, renewable energy, carbon capture and storage, and methane capture projects.  

They are evaluated by certification bodies, such as Verra, Gold Standard, and the Climate Action Reserve. These groups serve as market gatekeepers by determining whether projects meet criteria to earn carbon credits. 

Reforestation and land use projects represent a significant percentage of the certified carbon credit projects to date due to their added benefits for biodiversity and local communities. However, innovative technologies such as direct air capture and carbon capture and storage have started to gain traction in the industry. While these new technologies offer exciting potential for reducing atmospheric carbon, they also come with significant growing pains and cost hurdles. 

Global spread

Over the last five years, I have provided legal counsel on more than a dozen carbon credit projects and witnessed their proliferation throughout the world. Canadian investors and management teams often play leading roles in the quickly evolving market. 

One of the most notable trends shaping the market today is the surge in demand for carbon credits, mainly driven by corporate pledges to reach net-zero emissions. That’s led to price fluctuations. Nature-based credits rose from about US$4 to over US$20 per ton of CO2 between 2021 and 2022 before settling around US$12 to US$18 by late last year. These shifts reflect both market adjustments and growing scrutiny over the quality of credits. 

There are concerns like carbon leakage, where emissions are reduced in one area but increased in another, and non-permanence, where stored carbon could be released again. The London-based market overseer, the Integrity Council for the Voluntary Carbon Market (IC-VCM), has introduced new standards, such as the Core Carbon Principles. These measures should give the VCM a more meaningful positive impact on the environment. They’ll make voluntary carbon credits better aligned with investors focused on environmental, governance and social (ESG) issues. 

Digital technology is also transforming the VCM. The use of blockchain and digital platforms is improving transparency, preventing fraud, and making trading easier and more accessible.  

Market challenges

Despite its recent growth, the VCM faces several issues. Financing remains a primary concern, as developing carbon credit projects requires significant upfront investment. For instance, nature-based projects can cost around US$5 million, while high-tech solutions like carbon capture and storage or direct air capture can exceed US$100 million. Securing sufficient funding for new projects is incredibly difficult given the volatility in carbon credit prices and other uncertainties in the VCM.  

Regulatory inconsistency is another factor that can have a major impact on the viability and profitability of projects. The VCM regulatory landscape is constantly changing, with major upheavals in domestic laws pertaining to carbon credits in Indonesia and other countries in recent years causing chaos.  

Market volatility adds to the complexity. Carbon credit prices fluctuate due to changes in demand, policy shifts and project-specific factors, making it difficult for developers to predict revenue. The process of validating and verifying credits, which helps to ensure they show real and meaningful carbon reduction, is also expensive. It often costs more than US$100,000 per project.  

In addition, the VCM faces broader challenges like a lack of standardization, which leads to varying credit quality and market fragmentation. Multiple standards and registries create confusion and drive up costs, reducing market efficiency. Furthermore, aligning voluntary markets with compliance markets in the United States and the European Union is creating more uncertainty. In the end, the key players in the industry need to adopt a more unified approach to standards in order to increase investor confidence in the market.  

Looking to the future

Despite these challenges, there is optimism about the future of the VCM. Experts believe that stricter regulations and standardized criteria will improve transparency, thereby attracting more institutional investors. As the market matures, stability and growth will inevitably follow. Nature-based solutions are likely to remain popular, and technological innovations in carbon capture and storage and direct air capture could bring more stable pricing.  

In Canada, the focus will likely be on nature-based and renewable energy projects, taking advantage of the country’s rich natural resources. Digital tools like blockchain are expected to continue enhancing market transparency and boosting investor confidence.  

The voluntary carbon credits market is poised for growth in the long term, driven by corporate commitments to sustainability, regulatory developments and technological advances. But for the market to realize its full potential, especially in sectors like mining and oil and gas, government and business leaders must work to maintain investor trust. They should address challenges with standardization, fragmentation and price volatility. Based on the evolution I have observed in recent years, I firmly believe that the VCM has a bright future ahead once it overcomes its growing pains. 

Robert Mason, founder and principal of Toronto-based Mason Law, has been providing legal counsel in mining and corporate finance for more than 20 years, and he assists clients with ESG matters.