Sustainability and Risk Practices

A blueprint for scaling

voluntary carbon markets to
meet the climate challenge
The trading of carbon credits can help companies—and the world—
meet ambitious goals for reducing greenhouse-gas emissions. Here is
what it would take to strengthen voluntary carbon markets so they
can support climate action on a large scale.

by Christopher Blaufelder, Cindy Levy, Peter Mannion, and Dickon Pinner

© MarkPiovesan/Getty Images

January 2021
 More and more companies are pledging to help stop whether they are paying a fair price, and for
climate change by reducing their own greenhouse- suppliers to manage the risk they take on by
gas emissions as much as they can. Yet many financing and working on carbon-reduction projects
businesses find they cannot fully eliminate their without knowing how much buyers will ultimately pay
emissions, or even lessen them as quickly as they for carbon credits. In this article, which is based on
might like. The challenge is especially tough for McKinsey’s research for a new report by the TSVCM,
organizations that aim to achieve net-zero emissions, we look at these issues and how market participants,
which means removing as much greenhouse gas from standard-setting organizations, financial
the air as they put into it. For many, it will be necessary institutions, market-infrastructure providers, and
to use carbon credits to offset emissions they can’t other constituencies might address them to scale up
get rid of by other means. The Taskforce on Scaling the voluntary carbon market.
Voluntary Carbon Markets (TSVCM), sponsored by
the Institute of International Finance (IIF) with
knowledge support from McKinsey, estimates that Carbon credits can help companies to
demand for carbon credits could increase by a factor meet their climate-change goals
of 15 or more by 2030 and by a factor of up to 100 by Under the 2015 Paris Agreement, nearly 200
2050. Overall, the market for carbon credits could be countries have endorsed the global goal of limiting
worth upward of $50 billion in 2030. the rise in average temperatures to 2.0 degrees
Celsius above preindustrial levels, and ideally
The market for carbon credits purchased voluntarily 1.5 degrees. Reaching the 1.5-degree target would
(rather than for compliance purposes) is important for require that global greenhouse-gas emissions are
other reasons, too. Voluntary carbon credits direct cut by 50 percent of current levels by 2030 and
private financing to climate-action projects that would reduced to net zero by 2050. More companies are
not otherwise get off the ground. These projects can aligning themselves with this agenda: in less than a
have additional benefits such as biodiversity year, the number of companies with net-zero
protection, pollution prevention, public-health pledges doubled, from 500 in 2019 to more than
improvements, and job creation. Carbon credits also 1,000 in 2020.2
support investment into the innovation required to
lower the cost of emerging climate technologies. And To meet the worldwide net-zero target, companies
scaled-up voluntary carbon markets would facilitate will need to reduce their own emissions as much as
the mobilization of capital to the Global South, where they can (while also measuring and reporting on their
there is the most potential for economical nature- progress, to achieve the transparency and
based emissions-reduction projects.1 accountability that investors and other stakeholders
increasingly want). For some companies, however,
Given the demand for carbon credits that could it’s prohibitively expensive to reduce emissions
ensue from global efforts to reduce greenhouse- using today’s technologies, though the costs of
gas emissions, it’s apparent that the world will need those technologies might go down in time. And at
a voluntary carbon market that is large, transparent, some businesses, certain sources of emissions
verifiable, and environmentally robust. Today’s cannot be eliminated. For example, making cement
market, though, is fragmented and complex. Some at industrial scale typically involves a chemical
credits have turned out to represent emissions reaction, calcination, which accounts for a large
reductions that were questionable at best. Limited share of the cement sector’s carbon emissions.
pricing data make it challenging for buyers to know Because of these limitations, the emissions-

1
To learn more about how carbon credits and carbon markets work, see Christopher Blaufelder, Joshua Katz, Cindy Levy, Dickon Pinner, and
Jop Weterings, “How the voluntary carbon market can help address climate change,” December 2020, McKinsey.com.
2
Angel Hsu et al., Accelerating net zero: Exploring cities, regions, and companies’ pledges to decarbonize, Data-Driven EnviroLab &
NewClimate Institute, September 2020, datadrivenlab.org.

2 A blueprint for scaling voluntary carbon markets to meet the climate challenge
 reduction pathway to a 1.5-degree warming target As efforts to decarbonize the global economy
effectively requires “negative emissions,” which are increase, demand for voluntary carbon credits could
achieved by removing greenhouse gases from the continue to rise. Based on stated demand for carbon
atmosphere (Exhibit 1). credits, demand projections from experts surveyed
by the TSVCM, and the volume of negative emissions
Purchasing carbon credits is one way for a company needed to reduce emissions in line with the
to address emissions it is unable to eliminate. 1.5-degree warming goal, McKinsey estimates that
Carbon credits are certificates representing annual global demand for carbon credits could
quantities of greenhouse gases that have been kept reach up to 1.5 to 2.0 gigatons of carbon dioxide
out of the air or removed from it. While carbon (GtCO₂) by 2030 and up to 7 to 13 GtCO₂ by 2050
credits have been in use for decades, the voluntary (Exhibit 2). Depending on different price scenarios
market for carbon credits has grown significantly in and their underlying drivers, the market size in 2030
recent years. McKinsey estimates that in 2020, could be between $5 billion and $30 billion at the
buyers retired carbon credits for some 95 million low end and more than $50 billion at the high end.3
tons of carbon-dioxide equivalent (MtCO₂e), which
would be more than twice as much as in 2017.

Web <2021>
<Blueprint for scaling voluntary carbon markets to meet the climate challenge>
Exhibit 1
Exhibit <1> of <3>

Reaching
Reaching the
the 1.5-degree
1.5-degreewarming
warmingtarget
targetcould
couldrequire
requireaalarge
largequantity
quantityof
negative emissions,
of negative including
emissions, some
including generated
some using
generated carbon
using credits.
carbon credits.

Global carbon-dioxide emissions, gigatons (GtCO2) per year

50 McKinsey GEP1 2021 Reference Case
Business-as-usual emissions2 Emissions required for 1.5°C pathway
40 Negative emissions required for
1.5°C pathway
–23 GtCO2 from
current levels
30

20

10

0 Net-zero emissions by 2050

–10
2020 2030 2040 2050

570 GtCO2 cumulative carbon budget3

1
Global Energy Perspective.
2
While emissions fell by a quarter at the peak of COVID-19-related lockdowns, daily emissions have rebounded to be only 5% lower than 2019 levels.
Scenarios to 2050 remain the same. Forster et al., “Current and future global climate impacts resulting from COVID-19,” Nature Climate Change,
August 7, 2020, nature.com.
3
Budget of 570 GtCO2 emissions from 2018 onward offers a 66% chance of limiting global warming to 1.5°C, when assessing historical temperature
increases from a blend of air and sea-surface temperatures.
Source: Corinne Le Quéré et al., “Global Carbon Budget 2018,” Earth Systems Science Data, 2018, Volume 10, Number 4, pp. 2141–94, doi.org; IPCC;
McKinsey Global Energy Perspective 2021; McKinsey analysis

3
Both ranges assume that demand will amount to 1–2 GtCO₂ in 2030 (using the TSVCM survey estimate of 1 GtCO₂ as a lower bound and the
Network for Greening the Financial System scenario estimate of 2 GtCO₂ as an upper bound). The low-end estimate of $5 billion to $30 billion
represents a scenario where buyers purchase the historical surplus of carbon credits and then acquire the lowest-cost credits available; the
high-end estimate of more than $50 billion represents a scenario in which most buyers opt to purchase credits from local suppliers only, even
at a premium.

A blueprint for scaling voluntary carbon markets to meet the climate challenge 3
 Web <2021>
<Blueprint for scaling voluntary carbon markets to meet the climate challenge>
Exhibit 2 of <3>
Exhibit <2>

demand for
Global demand for voluntary
voluntary carbon credits
credits could
could increase
increaseby
byaafactor
factorof 15
of 15 by 2030 and a factor of 100 by
by 2030 and a factor of 100 by 2050. 2050.

Voluntary demand scenarios for carbon credits, gigatons per year

Up to 100×
<7.0–13.0
Commitments to date1
TSVCM2 survey
NGFS3 scenarios
NGFS “immediate action” 1.5°C pathway
with carbon-dioxide removal3

3.0–4.0
~15×
~1.5–2.0 2.0
1.0
0.1 0.2

2020 2030 2050

1
These amounts reflect demand established by climate commitments of more than 700 large companies. They are lower bounds because they do not account
for likely growth in commitments and do not represent all companies worldwide.
2
TSVCM = Taskforce on Scaling Voluntary Carbon Markets. These amounts reflect demand based on a survey of subject-matter experts in the TSVCM.
3
NGFS = Network for Greening the Financial System. These amounts reflect demand based on carbon-dioxide removal and sequestration requirements under
the NGFS’s 1.5°C and 2.0°C scenarios. Both amounts reflect an assumption that all carbon-dioxide removal and sequestration results from carbon credits
purchased on the voluntary market (whereas some removal and sequestration will result from carbon credits purchased in compliance markets and some will
result from efforts other than carbon-offsetting projects).
Source: NGFS; TSVCM; McKinsey analysis

While the increase in demand for carbon credits is initial investment and the eventual sale of credits.
significant, analysis by McKinsey indicates that Once these challenges are accounted for, the
demand in 2030 could be matched by the potential estimated supply of carbon credits drops to 1 to 5
annual supply of carbon credits: 8 to 12 GtCO₂ per year. GtCO₂ per year by 2030 (Exhibit 3).
These carbon credits would come from four
categories: avoided nature loss (including These aren’t the only problems facing buyers and
deforestation); nature-based sequestration, such as sellers of carbon credits, either. High-quality carbon
reforestation; avoidance or reduction of emissions credits are scarce because accounting and
such as methane from landfills; and technology-based verification methodologies vary and because credits’
removal of carbon dioxide from the atmosphere. co-benefits (such as community economic
development and biodiversity protection) are
However, several factors could make it challenging seldom well defined. When verifying the quality of
to mobilize the entire potential supply and bring it to new credits—an important step in maintaining the
market. The development of projects would have to market’s integrity—suppliers endure long lead times.
ramp up at an unprecedented rate. Most of the When selling those credits, suppliers face
potential supply of avoided nature loss and of unpredictable demand and can seldom fetch
nature-based sequestration is concentrated in a economical prices. Overall, the market is
small number of countries. All projects come with characterized by low liquidity, scarce financing,
risks, and many types could struggle to attract inadequate risk-management services, and limited
financing because of the long lag times between the data availability.

4 A blueprint for scaling voluntary carbon markets to meet the climate challenge
Web <2021>
<Blueprint for scaling voluntary carbon markets to meet the climate challenge>
Exhibit 3 of <3>
Exhibit <3>

While there
While there is an ample potential
potential supply
supply of
of carbon
carboncredits,
credits,several
severalchallenges
challenges
could prevent this supply from reaching the market.
could prevent this supply from reaching the market.
Potential supply of carbon credits in 2030, gigatons per year
8–12

Technology-based removal
Potential supply impeded by
mobilization challenges2
Additional emissions avoidance/reduction

Nature-based sequestration 1–5

Avoided nature loss

Potential Potential supply after

supply1 accounting for
mobilization challenges

1
Estimates of the potential supply from each category were developed using conservative methodologies. The upper end of the range for “practical”
potential supply (12 GtCO2 per year) slightly exceeds the total of the estimated supplies from each category to reflect the possibility that supply will be
greater than estimated.
2
Key mobilization challenges include the rate and complexity of scaling up carbon-offsetting efforts, the geographic concentration of carbon-offsetting
opportunities, risks to the carbon market, and the difficulty of attracting financing.
Source: Taskforce on Scaling Voluntary Carbon Markets; McKinsey analysis

These challenges are formidable but not Creating shared principles for defining and
insurmountable. Verification methodologies could verifying carbon credits
be strengthened, and verification processes Today’s voluntary carbon market lacks the liquidity
streamlined. Clearer demand signals would help necessary for efficient trading, in part because
give suppliers more confidence in their project plans carbon credits are highly heterogeneous. Each credit
and encourage investors and lenders to provide with has attributes associated with the underlying project,
financing. And all these requirements could be met such as the type of project or the region where it was
through the careful development of an effective, carried out. These attributes affect the price of the
large-scale voluntary carbon market. credit, because buyers value additional attributes
differently. Overall, the inconsistency among credits
Scaling up voluntary carbon markets means that matching an individual buyer with a
requires a new blueprint for action corresponding supplier is a time-consuming,
Building an effective voluntary carbon market will inefficient process transacted over the counter.
require concerted effort across a number of fronts.
In its report, the TSVCM identified six areas, The matching of buyers and suppliers would be more
spanning the carbon-credit value chain, where efficient if all credits could be described through
action can support the scaling up of the voluntary common features. The first set of features has to do
carbon market. with quality. Quality criteria, set out in “core carbon

A blueprint for scaling voluntary carbon markets to meet the climate challenge 5
 principles,” would provide a basis for verifying that Post-trade infrastructure, comprising
carbon credits represent genuine emissions clearinghouses and meta-registries, is also
reductions. The second set of features would cover necessary. Clearinghouses would support the
the additional attributes of the carbon credit. development of a futures market and provide
Standardizing those attributes in a common counterparty default protection. Meta-registries
taxonomy would help sellers to market credits and would provide custodian-like services for buyers
buyers to find credits that meet their needs. and suppliers and enable the creation of
standardized issuance numbers for individual
Developing contracts with standardized terms projects (similar to the International Securities
In the voluntary carbon market, the heterogeneity of Identification Number, or ISIN, in capital markets).
carbon credits means that credits of particular types
are being traded in volumes too small to generate In addition, an advanced data infrastructure would
reliable daily price signals. Making carbon credits promote the transparency of reference and market
more uniform would consolidate trading activity data. Sophisticated and timely data are essential for
around a few types of credits and also promote all environmental and capital markets. Transparent
liquidity on exchanges. reference and market data are not readily available
now because access to data is limited and the OTC
After the establishment of the core carbon market is difficult to track. Buyers and suppliers
principles and standard attributes described above, would benefit from new reporting and analytics
exchanges could create “reference contracts” for services that consolidate openly accessible
carbon trading. Reference contracts would combine reference data from multiple registries, through APIs.
a core contract, based on the core carbon principles,
with additional attributes that are defined according Creating consensus about the proper use of
to a standard taxonomy and priced separately. Core carbon credits
contracts would make it easier for companies to do A measure of skepticism attends the use of credits
things such as purchasing large quantities of carbon in decarbonization. Some observers question
credits at once: they could make bids for credits that whether companies will extensively reduce their
meet certain criteria, and the market would own emissions if they have the option to offset
aggregate smaller quantities of credits to match emissions instead. Companies would benefit from
their bids. clear guidance on what would constitute an
environmentally sound offsetting program as part of
Another benefit of reference contracts would be an overall push toward net-zero emissions. Principles
the development of a clear daily market price. Even for the use of carbon credits would help ensure that
after reference contracts are developed, many carbon offsetting does not preclude other efforts to
parties will continue to make trades over the mitigate emissions and does result in more carbon
counter (OTC). Prices for credits traded using reductions than would take place otherwise.
reference contracts could establish a starting point
for the negotiation of OTC trades, with other Under such principles, a company would first
attributes priced separately. establish its need for carbon credits by disclosing its
greenhouse-gas emissions from all operations, along
Establishing trading and post-trade with its targets and plans for reducing emissions over
infrastructure time. To compensate for emissions from sources that
A resilient, flexible infrastructure would enable the it can eventually eliminate, the company might
voluntary carbon market to function effectively: to purchase and “retire” carbon credits (claiming the
accommodate high-volume listing and trading of reductions as their own and taking the credits off the
reference contracts, as well as contracts reflecting a market, so that another organization can’t claim the
limited, consistently defined set of additional same reductions). It could also use carbon credits to
attributes. This, in turn, would support the creation of neutralize the so-called residual emissions that it
structured finance products for project developers. wouldn’t be able to eliminate in the future.

6 A blueprint for scaling voluntary carbon markets to meet the climate challenge
Installing mechanisms to safeguard the developers to buy carbon credits from future projects.
market’s integrity Medium-term demand might be recorded in a registry
Concerns about the integrity of the voluntary carbon of commitments to purchase carbon credits.
market impede its growth in several ways. First, the
heterogeneous nature of credits creates potential Other potential ways to promote demand signals
for errors and fraud. The market’s lack of price include consistent, widely accepted guidelines for
transparency also creates the potential for companies on accepted uses of carbon credits to
money laundering. offset emissions; more industry-wide collaboration,
whereby consortiums of companies might align
One corrective measure would be establishing a their emissions-reduction goals or set out shared
digital process by which projects are registered and goals; and better standards and infrastructure for
credits are verified and issued. Verification entities the development and sale of consumer-oriented
should be able to track a project’s impact at regular carbon credits.
intervals, not just at the end. A digital process could
lower issuance costs, shorten payment terms,
accelerate credit issuance and cash flow for project
developers, allow credits to be traced, and improve Limiting the rise of global temperatures to
the credibility of corporate claims related to the use 1.5 degrees Celsius will require a rapid, drastic
of offsets. reduction in net greenhouse-gas emissions. While
companies and other organizations can achieve
Other improvements would be the implementation of much of the necessary reduction by adopting new
anti-money-laundering and know-your-customer technologies, energy sources, and operating
guidelines to stop fraud, and the creation of a practices, many will need to use carbon credits to
governance body to ensure the eligibility of market supplement their own abatement efforts to achieve
participants, supervise their conduct, and oversee net-zero emissions. A robust, effective voluntary
the market’s functioning. market for carbon credits would make it easier for
companies to locate trustworthy sources of carbon
Transmitting clear signals of demand credits and complete the transactions for them. Just
Finding effective ways for buyers of carbon credits to as important, such a market would be able to
signal their future demand would help encourage transmit signals of buyers’ demand, which would in
project developers to increase the supply of carbon turn encourage sellers to increase supplies of
credits. Long-term demand signals might arrive in the credits. By enabling more carbon offsetting to take
form of commitments to reduce greenhouse-gas place, a voluntary carbon market would support
emissions or as up-front agreements with project progress toward a low-carbon future.

Christopher Blaufelder is a partner in McKinsey’s Zurich office, Cindy Levy is a senior partner in the London office,
Peter Mannion is an associate partner in the Dublin office, and Dickon Pinner is a senior partner in the San Francisco office.

The authors wish to thank Joshua Katz, Jared Moon, Erik Ringvold, and Jop Weterings for their contributions to this article and
to McKinsey’s research collaboration with the task force.

Designed by McKinsey Global Publishing

Copyright © 2021 McKinsey & Company. All rights reserved.

A blueprint for scaling voluntary carbon markets to meet the climate challenge 7