Local voluntary carbon markets – what they are, how they went at COP26 and what to expect next

By: Jieling Liu & Lurdes Ferreira

1. Why focus on local voluntary carbon markets?

The Paris Agreement of 2015 set forth a global target of limiting the warming in this century to 2o C or even more ambitiously to just 1.5o C, in order to contain the catastrophic impacts of anthropogenic climate change planet Earth is facing. National governments voluntarily made respective emissions reduction targets called Nationally Determined Contributions (NDCs) to implement the Paris Agreement, of which the COP26 this year has welcomed the first update cycle. Voluntary carbon markets (VCM) emerged as a potentially effective tool to support the NDCs under Article 6 of the Paris Agreement as it encourages voluntary contribution.  

VCMs have the potential to encourage and enable emitters outside the top-down compliance-based carbon markets such as the EU Emissions Trading Scheme (ETS) to act on emissions reduction, as concerns grew over the reality that the world has been off-track on the major targets of limiting warming. Local-level VCMs especially, are capable of mobilizing action and accelerating mitigation by small-entity or even individual emitters, and channeling additional finance flows to fund mitigation, adaptation and green development projects.

In this context, the projectMatosinhos by AYR led by CEiiA – Centro de Engenharia e Desenvolvimento, a leading technology Research and Development entity in Portugal, is attempting to build the first ever local VCM in Portugal. The goal is to develop a bottom-up carbon market that is non-compliant based, but voluntary, with a scientific rigor as competent as the compliant top-down national or EU-level carbon markets, eventually involving broadly individual and small business emitters in emissions reductions. A properly developed local VCM not only can promote emissions reduction at greater speed and scale, but also support clean development projects, thereby contribute to the national net-zero goal by 2050.

So far, the Matosinhos by AYR project has pilot-tested an electric bike-sharing scheme, in which emissions avoided (as compared to driving a standard passenger vehicle) are calculated and recorded via blockchain technology. AYR is an innovative platform developed by CEiiA to accelerate cities transition towards carbon neutrality. Instead of charging emitters for their emissions, AYR rewards the non-emitters, through quantifying and valuing the emissions avoided by local individual and business communities, and converting them into transactable tokens. These tokens can then be exchanged by local green goods and services, or used to offset local emissions.

Besides, research work in collaboration with the Center for Environmental and Sustainability Research (CENSE-Nova) has also been conducted to explore scenarios for reaching carbon neutrality in the mobility sector for Matosinhos, using the dynamic linear optimization bottom-up energy system model TIMES_PT. To support the creation of a local VCM, a near-term marginal abatement cost (MAC) approach has been employed to encounter the costs of emissions reduction in Matosinhos´ mobility sector. The MAC is the cost of reducing one more unit of carbon emission ($/tCO2) relative to the business-as-usual baseline (e.g., the Kyoto Protocol considers 1990 as the business-as-usual baseline year). The research work with CENSE-Nova considered 1) the baseline emissions of Matosinhos in 2015 and 2) possible mobility sector transformations for achieving net-zero emissions in Matosinhos by 2030 (near-term). So, a set of prices representing the costs to reduce per unit of carbon emissions (t/CO2) under 16 mobility transformation scenarios in order to reach net-zero emissions by 2030 in Matosinhos´ mobility sector was encountered. The scenarios constructed are consistent with the Portuguese National Roadmap for Carbon Neutrality by 2050 (RNC2050). Some other scientific pathways have also been explored, including nature-based carbon sequestration.

The AYR ecosystem © CEiiA 

2. Major discussion points regarding local voluntary carbon markets

Considering the vast number of actors they can involve, local VCMs are considered to be of great potential. However, like any emerging solution, current local VCM practices are scattered and uncoordinated. They vary in the forms, approaches, scale, size, organization, and actor inclusion. Local VCMs are in need of a solid institutional and legal framework in order to avoid situations of free-riding of emissions reductions, for example, by small businesses actors who wish to avoid or delay emissions they should reduce themselves, or to avoid double counting. If not properly regulated, the operation of local VCMs could become not only useless but even worse – they could sabotage climate mitigation efforts by, for example, degrading the integrity of the approach and the data of emissions reduction.

Besides, current institutions are not yet at the capacity to measure the extent and the impacts of global voluntary carbon markets. Furthermore, the current institutions have also not yet been able to fully resolve the issues of equity and access which exist widely in carbon markets globally. Local VCM designers, practitioners, and regulators need to share knowledge, communicate, and cooperate to agree upon operation standards, legal and administrative, and methodological frameworks. This step is necessary to make local VCMs credible in national NDCs and thereby credible for contributing to the goals of the Paris Agreement.

3. What to expect next

Prior to the COP 26, the UNEP Emissions Gap Report 2021 has shown that even with all the new national climate pledges combined with other mitigation measures, the world was on track for a global temperature rise of 2.7°C by the end of the century. Now, the COP 26 was prepared with the goal to keep the target of 1.5o C warming limit at bay and it did pass the Glasgow Climate Pact which has kept the goal alive, but weak. The gap represents a tremendous emissions challenge. As countries agree to discuss more frequent revisions of NDCs in the next COP in Egypt, this is also where VCMs, especially local VCMs, can play a critical support role to boost the confidence of COP parties to commit to more ambitious NDC targets, thereby surpass the current 2030 emissions reduction goals, strengthen the 1.5o C limit target and make it truly achievable. For that, efforts need to focus on establishing a shared vision, principles, and clear, practical and robust guidance to ensure a proper use of carbon credits by non-state actors as they voluntarily join carbon markets to reduce their emissions. These guidance, principles, legal and technical frameworks need to ensure that transactions in local voluntary carbon markets are transparent, traceable and credible.

Biography : We are two PhD candidates in the program on Climate Change and Sustainable Development Policies (University of Lisbon and New University of Lisbon), in the meantime, we are researchers at the Smart and Sustainable Living Co-Lab of the Center of Engineering and Development (CEiiA) Portugal. In our work, we engage substantially in the project Matosinhos by AYR throughout its design, testing, implementation and policy interactions with the Matosinhos municipality.


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