The Rapidly Growing Voluntary Carbon Market: Is It an Opportunity for Domestic Companies?

At the 26th United Nations Climate Change Conference (COP26) held in Glasgow last year, an agreement was reached on the mechanism for carbon emissions trading between countries. This has led to increased corporate interest in the Voluntary Carbon Market (VCM).

VCM is a market where carbon credits, earned through voluntary greenhouse gas reduction activities by private entities, are traded independently of legal regulations. Companies can earn carbon credits through various voluntary carbon reduction activities, such as afforestation or renewable energy projects, and these credits can be traded freely with other companies. Companies that purchase carbon credits through VCM can use them to offset their carbon emissions by the amount of credits purchased. According to a McKinsey report, the VCM market was estimated to be worth $300 million (about 430 billion KRW) in 2020, and it is expected to grow rapidly to exceed $50 billion (about 72.85 trillion KRW) by 2030.

The carbon trading market is broadly divided into the Compliance Carbon Market (CCM) and VCM. CCM, where carbon credits issued by governments are traded between companies, is currently limited to transactions within specific countries, and the price and trading volume of carbon credits can fluctuate significantly depending on market conditions. This can create cost burdens and uncertainties for companies aiming to achieve carbon reduction targets through the purchase of carbon credits.

In contrast, VCM allows global transactions between companies, and various carbon credits with different prices can be issued depending on the type of carbon reduction activity. The supply of these credits can also increase flexibly in response to market price signals, making VCM a potentially stable long-term alternative for carbon reduction.

Despite the rapid growth of VCM, there are ongoing debates about the effectiveness of carbon trading in achieving actual carbon reductions. For carbon credits purchased in VCM to contribute to real carbon reductions, conditions such as additionality, permanence, and avoidance of double counting must be met. In simple terms, it must be proven that the carbon reduction would not have occurred without the sale of the credits (additionality), that the reduction activity will be maintained permanently without the carbon being re-emitted into the atmosphere (permanence), and that the same reduction cannot be claimed or sold multiple times (no double counting).

These conditions can be challenging to fulfill. For example, even if carbon credits are issued based on afforestation, there is no guarantee that the forest will absorb the same amount of carbon in the future as it did at the time of issuance. The forest could be developed due to political instability or damaged by unforeseen events like wildfires.

Even without force majeure, the entity issuing the carbon credits might have overstated the carbon reductions or conducted a project that does not truly reflect the reported reduction. Moreover, the same carbon reduction could be recognized by multiple entities or governments, leading to financial rewards being collected multiple times. To ensure that VCM achieves the desired effects, accurate verification and monitoring, as well as the involvement of stakeholders when necessary, are crucial. However, these tasks are difficult to manage with voluntary mechanisms alone, and these limitations have been cited as major obstacles to the growth of VCM in recent years.

Nevertheless, growing global interest in decarbonization and the rising prices of traditional carbon credits have heightened expectations that matching carbon credit suppliers with willing buyers through VCM could lead to more carbon reduction activities worldwide. As a result, various efforts are being made to address these concerns.

For example, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), launched in 2020, is an international independent monitoring body aimed at enhancing the credibility of carbon credits and encouraging market participants to purchase them with confidence. The UK insurance brokerage firm Howden has partnered with carbon credit sellers to offer insurance products that compensate financially if issues arise with sold carbon credits. The World Bank is researching blockchain solutions to prevent double issuance and manipulation of carbon credits.

Despite the growing global interest and investment in VCM, participation by South Korean companies remains limited. The volume of voluntary carbon credits issued domestically is still small, and South Korean companies appear to be more focused on reductions through traditional carbon markets operated under government initiatives. European and American financial institutions and companies, with long histories of carbon trading and experience with complex financial derivatives, as well as Southeast Asian companies emerging as major players in the carbon credit issuance market through afforestation projects, are leading market growth.

This year, a few South Korean securities firms have expressed intentions to enter the global VCM. Companies like KB Securities, Hana Securities, and Korea Investment & Securities have already formed teams dedicated to investing in or brokering carbon credits issued overseas. The rapidly growing VCM could provide growth opportunities not only for domestic financial institutions but also for industrial and energy companies with high carbon emissions.

For instance, SK Forestry, which is engaged in afforestation, has become the first company in South Korea to secure carbon credits based on afforestation. Building on this experience, it has entered the REDD+ (Reducing Emissions from Deforestation and Forest Degradation) project in countries like Vietnam and the Philippines. The company also plans to open a platform for trading voluntary carbon credits from domestic and international projects by the end of this year. Given South Korea's goal, announced at COP26, to reduce carbon emissions by 40% compared to 2018 levels by 2030, more South Korean companies are expected to enter the VCM and grow in the global market.