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The rise of Voluntary Carbon Markets (and what CPAs should know now)

Growing pressure drives companies to engage in Voluntary Carbon Markets in Canada, pushing CPAs to understand and advise on carbon trading

It’s not news that the pressure on companies to reduce their greenhouse gas emissions has been mounting. Customers, politicians, lenders and partners all expect an increasing amount of accountability when it comes to the production and/or reduction of greenhouse gasses (GHGs).  And as pressures mount, markets evolve.  

In Canada, Voluntary Carbon Markets (VCMs) are approaching mainstream, and savvy accountancy pros are familiarizing themselves with the ins and outs in anticipation of when they’re required on the balance sheets. 

Simply put, in a carbon market, buyers and sellers trade carbon credits, each representing one tonne of carbon dioxide that has been avoided, reduced or removed from the atmosphere. In most cases, carbon credits are used by purchasers that aren’t able to offset their own greenhouse gas emissions, in order to get them closer to their reduction goals.  

Tracking Voluntary Carbon Markets  

Recently, CPA Canada in collaboration with the International Federation of Accountants and the Institute for Sustainable Finance released their second report on VCMs titled Understanding Voluntary Carbon Markets—KEY CONSIDERATIONS FOR PROFESSIONAL ACCOUNTANTS AND PURCHASERS ON THE CARBON CREDIT LIFE CYCLE.” The report encourages CPAs to keep abreast of the developments in the VCMs so as to be able to appropriately advise clients in the future. It also includes information on the various VCMs and their development, as well as different types of carbon credits and how existing participants are using them.  

“I think climate change mitigation is at the forefront of everyone’s mind right now,” says Marija Loubser, formerly Principal in Research and Thought Leadership at CPA Canada. “Coming from COP28, there’s a real push for corporations to get their emissions down and, at the end of the day, we need to of course prioritize decarbonization of an entity’s operations and its value chains. But there are going to be hard-to-abate emissions. Carbon credits and carbon removal technology, along with avoidance and reduction, is recognized as a way that we’re going to transition to a lower carbon economy.  

Keeping that in mind, we need to develop a market that has integrity and trust…we want our members to know what to look for and how to do their due diligence to make sure they’re mitigating the risk of buying a low quality credit, which could come back to bite them.”  

There are generally two types of credits—avoidance and removal—awarded for moving away from activities that would have emitted GHGs, and for actively removing carbon from the atmosphere, respectively. Due to the complexity of measuring the impact of an avoidance credit, stakeholders have placed a higher value on removal credits. The latest series installment includes a list of key factors for VCM purchasers to consider, including conflicts of interest, emissions reduction calculations, double counting and more.  

VCMs are “Voluntary” 

VCMs differ from compliance carbon markets in that companies are “voluntarily” offsetting their carbon footprint, rather than adhering to external rules. And given the option, not all corporations are buying in. Loubser says they’ve been hearing from some companies that are heavy emitters and that don’t yet have the confidence in the market. Such companies might choose instead to invest in technologies that would actively generate removal carbon credits for themselves rather than purchase what’s in circulation now.  

Institutional investors, on the end of the adoption spectrum, may be leading the VCM movement. Loubser says she’s witnessed some large asset managers give the boot to certain investments that aren’t taking emissions reduction seriously. “If you don’t prioritize climate change and other environmental impacts, your access to capital could be hindered and reputational damages could follow,” she says.

CPA Canada and its partners promise future installments in the series on carbon credits.