Voluntary carbon markets are not regulated in the same way as mandatory carbon markets. Mandatory carbon markets, such as the European Union Emissions Trading System, are established and regulated by governments and the financial regulation authorities. In contrast, voluntary carbon markets are typically created and operated by private entities, such as businesses, non-governmental organizations, or other groups.
However, this does not mean that voluntary carbon markets are completely unregulated. Many voluntary carbon markets have established rules and standards that participants must follow in order to participate in the market. These rules and standards may be developed and enforced by the market operators, or they may be based on external standards, such as those established by the International Carbon Reduction and Offset Alliance or the Verified Carbon Standard.
In addition, voluntary carbon markets may be subject to certain regulations and oversight by government agencies. For example, in the United States, the Internal Revenue Service has established rules for the use of voluntary carbon offsets for purposes of tax compliance. In other countries, voluntary carbon markets may be subject to regulations related to financial markets or consumer protection. Additionally, Colombia where a carbon tax has been implemented for high emission sectors like fuel use, are allowing the use of locally produced voluntary carbon credits to be use to offset the tax burden companies have, but this process required robust reporting to the regulator.
While voluntary carbon markets are not regulated in the same way as mandatory carbon markets, they are not completely unregulated. Many voluntary carbon markets have established rules and standards that participants must follow, and they may also be subject to certain regulations and oversight by government agencies.
The AAVA Climate Performance Tokens are being designed to accommodate and comply with mechanisms that are likely to be introduced and to become a leading initiative in bringing regulation to climate markets for increased confidence and transparency to new entrants in the market.
Indicators for the future
There have been indications that regulation may be coming to the voluntary carbon market. Many countries, organizations and companies have been making efforts to reduce their carbon footprint and mitigate the effects of climate change. In this context, Voluntary Carbon market is one of the ways for companies and organizations to offset their carbon emissions by purchasing carbon credits from projects that reduce or remove greenhouse gas emissions.
However, there are concerns that the voluntary carbon market may be vulnerable to fraud, lack of transparency, and lack of sufficient understanding of the standardization, especially when referring to the quality of carbon projects. As a result, there have been calls for greater regulation in the voluntary carbon market to ensure that carbon credits are legitimate and that projects are actually reducing or removing greenhouse gas emissions.
While the leading voluntary carbon standards, such as the Verified Carbon Standard (VCS) and the Gold Standard aim to provide assurance that carbon offset projects are real, permanent, and additional, additional labelling for quality assurance have been under development. Several private sector and non-profit actors are developing standardized contracts and additional quality focused labelling in order to bring more transparency to the buyers.
Additionally, governments and organizations are also working to establish regulatory frameworks for the voluntary carbon market. For example, the European Union is working to establish a Carbon Market Transparency Framework, which would provide more transparency and accountability in the voluntary carbon market.
In that respect, while the voluntary carbon market is currently unregulated, there are indications that regulation may be coming in the near future to ensure the integrity of carbon credits and the effectiveness of offset projects. The regulation may not cover the whole market, but we feel the labelling to ensure certain quality labels are likely to become dominant among the buyer organizations.
