Given the number and increasing severity of climate-related events, combating climate change is urgent. Under the auspices of the United Nations Climate Change Secretariat, members of its Conference of Parties (COP) agreed that nations would take actions to limit emissions of greenhouse gases (carbon dioxide, methane, nitrous oxide, and various fluorinated gases, often conveniently lumped together as “carbon”) to keep global temperatures from rising, ideally by no more than 1.5 degrees centigrade but more realistically 2 degrees centigrade, above pre-industrial levels by 2100. Meeting this goal requires global annual carbon emissions to be cut by 50 percent by 2030 and reduced to net-zero by 2050.

Yet even these cuts may not be enough. Even with the latest announced plans by some countries to adopt more stringent climate measures, the Climate Action Tracker—a widely respected nongovernmental organization—projects that global temperatures would increase by 2.4 degrees C by 2100, well above the Paris target for 2050 (Climate Action Tracker, 2021). The UN-mandated Intergovernmental Panel on Climate Change (IPCC) was even more pessimistic, projecting that even with national commitments to reduce emissions, global temperatures are projected to rise by at least 3 degrees C above 1900 levels by the end of the century, with potentially catastrophic impacts, including even more extreme weather events and rapid sea level rise (IPCC, 2021).

One way to reduce carbon emissions is to tax carbon or put a cap on carbon emissions by polluters and allow them to trade those permits. Such so-called “compliance carbon markets” have the effect of inducing those able of most inexpensively reducing carbon emissions—or to capture it from the atmosphere or oceans—to do so.

Over the past several years, efforts have been made by various companies to establish voluntary carbon markets (VCMs) that, supporters say, in principle can be as or nearly as effective as compliance markets. VCMs are venues—exchanges or typically broker-arranged “over the counter” matches—where companies or individuals buy carbon credits for purely voluntary reasons, not because they are required to do so. In recent years, the trading volumes on VCMs have been increasing, and they are forecasted to explode in the next decade.

A private-sector task force composed of business, environmental, and other organizations and chaired by the former head of the central banks in Canada and the United Kingdom Mark Carney (now U.N. Special Envoy on Climate Change) and Standard Chartered Bank CEO Bill Winters, has been hard at work over the past few years developing standards to help ensure that VCMs make a real difference toward addressing climate change. We applaud this effort, which we describe in detail below.

Read the full article about establishing voluntary carbon markets by Robert O. Mendelsohn, Robert E. Litan, and John Fleming at Brookings.