The Voluntary Carbon Market Burned Down — What Replaces It?

The United Nations Environment Programme released its Emissions Gap Report 2026: The Point of Return on 21^st October 2026.  The conclusion is unambiguous.  Global greenhouse gas emissions must fall 18 per cent by 2030, 45 per cent by 2035, and 69 per cent by 2040 — relative to 2025 levels — to limit warming to 1.7 to 1.8 degrees Celsius.  The window for 1.5 degrees is closed.  Permanently.

UNEP Executive Director Inger la Cour Andersen stated the position without diplomatic softening: “We have spent decades postponing cuts to emissions, and now we are facing the consequences.”  Every five years of emissions at current levels pushes the global heating forecast up by 0.1 degrees Celsius.  The commitments made at the COP30 climate summit in Brazil were, in UNEP’s assessment, weak — influenced in part by US intransigence under the current administration.  Even full implementation of every current national pledge leaves the world on a trajectory to 2.6 degrees Celsius above pre-industrial levels.  The voluntary carbon market was supposed to be part of the solution.  It became part of the problem.

The Voluntary Carbon Market’s Documented Collapse

The voluntary carbon market peaked at US$2 billion in 2021 and has since contracted by 60 per cent.  This is not a demand problem.  It is a credibility catastrophe — and the evidence for it has been accumulating since at least 2023.

In January 2023, an investigation by the Guardian, Zeit Online, and SourceMaterial examined Verra — the world’s largest carbon credit certifier, responsible for 75 per cent of all voluntary carbon offsets globally.  The investigation found that more than 90 per cent of Verra’s flagship tropical rainforest offset credits were phantom credits — representing no real carbon reduction.  The methodology used to calculate avoided deforestation systematically overstated the threat to forests that the projects claimed to be protecting, thereby inflating the volume of credits that could be issued.

Airlines, oil companies, consumer goods conglomerates, and financial institutions had purchased these credits to support carbon neutrality claims.  British Airways, Gucci, Disney, and numerous other brands appeared in Verra-certified offset portfolios.  The forests the credits claimed to protect continued, in many cases, to be deforested at their historical rates.  The carbon was not offset.  The claims were not accurate.  The credits were not worth what they were sold for.

South Pole — one of the world’s largest carbon project developers, headquartered in Zurich — provides the second case study.  South Pole had developed and marketed the Kariba REDD+ project in Zimbabwe — one of the largest rainforest carbon offset projects in the world, generating US$100 million in credit sales.  In September 2023, South Pole quietly withdrew from the project.  Satellite imagery analysis by independent researchers subsequently found that deforestation rates within the Kariba project area had not declined materially from baseline levels — meaning the carbon reductions the project claimed to have achieved were fictitious.  The corporation that purchased a Kariba credit to offset a tonne of CO₂ had not offset a tonne of CO₂.  It had purchased an accounting entry that made its sustainability report look better without changing atmospheric carbon concentrations.

Barbara Kresch Haya, Director of the Berkeley Carbon Trading Project at the University of California, Berkeley, published research in 2023 finding that forest carbon offset projects — the largest category in the voluntary market — overstated their climate benefits by between 29 per cent and 42 per cent on average.  A more recent analysis by CarbonPlan, a non-profit research organisation, found that across a broader sample of voluntary offset projects, the average credit represented 52 per cent of the emission reduction it claimed.  The voluntary carbon market was not carbon neutral.  It was carbon theatre performed for the benefit of corporate ESG reports and the consulting firms that wrote them.

The market’s participants were not uniformly naive.  Some knew exactly what they were buying.  A credit that cost US$3 per tonne and provided cover for a sustainability claim worth more in brand value was a financially rational transaction — provided the fraud was not exposed.  It was exposed.  The market collapsed.

The Compliance Market: Credible but Inaccessible

The compliance carbon market operates on an entirely different legal and institutional basis.  It is not voluntary.  It is mandatory, government-enforced, and government-audited.  The European Union Emissions Trading System — the world’s largest compliance carbon market, established in 2005 — covers 40 per cent of EU greenhouse gas emissions across power generation, heavy industry, aviation, and maritime transport.  Participants must surrender one EU Allowance for every tonne of CO₂ equivalent emitted.  EU Allowances are government-issued instruments traded on regulated exchanges.  A company that emits without sufficient allowances faces penalties of €100 per tonne — not reputational risk, but statutory financial liability.

The EU ETS traded €751 billion in 2023 — a market larger than the GDP of most European countries.  The price of EU Allowances reached €105 per tonne in February 2023 before declining to €65 per tonne by late 2024 as the energy crisis abated.  The structural mechanism — a progressively tightening annual cap on total allowances — means that as the supply of allowances decreases, the price per tonne rises, strengthening the economic incentive for industrial emitters to invest in decarbonisation rather than purchasing allowances.

The California Cap-and-Trade Programme has been operating since 2013, covering 85 per cent of the state’s greenhouse gas emissions.  California Compliance Offset credits — high-integrity offsets that meet California Air Resources Board standards and can be used to satisfy up to 4 per cent of a covered entity’s compliance obligation — represent the most rigorous offset framework currently in operation.  The California programme generated US$4.7 billion in allowance auction revenue in 2023, directed primarily toward disadvantaged community climate investments.

China’s national Emissions Trading System — launched in 2021 — is now the world’s largest by coverage, covering five billion tonnes of CO₂ annually from the power sector alone.  Its coverage will expand progressively to include steel, cement, aluminium, aviation, and other heavy industries.  As China’s carbon market matures and its price discovers the true marginal cost of abatement in the world’s largest emitting economy, the global carbon price signal will strengthen materially.  Singapore’s carbon tax — set at S$25 per tonne in 2024 and scheduled to rise to S$45 per tonne by 2026 and S$50 to S$80 per tonne by 2030 — creates the domestic compliance framework that positions Singapore as the regional hub for carbon market infrastructure serving Southeast Asian and Asian emitters.

The compliance market has what the voluntary market lacked: mandatory participation, regulatory enforcement, governmental audit, and legally established environmental integrity.  It also has a structural problem: it is inaccessible to the private capital that needs to flow into climate transition at scale.

The Liquidity and Accessibility Gap

The EU ETS is an institutional market.  The participants are the large industrial emitters who must comply with the cap, the financial institutions that provide hedging services to those emitters, and the investment banks running proprietary trading desks.  The barriers to participation — regulatory approval, minimum trade sizes, custody arrangements, counterparty requirements — exclude the private capital that represents the largest pool of available climate finance.

The world’s family offices manage US$6 trillion in assets.  Institutional investors — pension funds, insurance companies, sovereign wealth funds — manage US$115 trillion.  High-net-worth and ultra-high-net-worth individuals control a further US$80 trillion in investable assets globally.  This capital is not flowing into compliance carbon markets at the scale the climate emergency requires.  It is not flowing because the market infrastructure — the secondary market that would allow a Singapore family office or an Asian institutional investor to hold compliance carbon credit exposure as part of a diversified portfolio — does not yet exist at the required scale and accessibility.

The secondary market gap is the structural failure that the UNEP’s 18 per cent by 2030 target exposes.  The compliance market has the credibility the voluntary market destroyed.  It does not have the secondary market infrastructure required to direct private capital — at the speed and scale the target demands — toward the emission reduction that governments alone cannot deliver.

The Blue Carbon Opportunity

Blue carbon — the carbon sequestered by coastal and marine ecosystems including mangroves, seagrass beds, and salt marshes — represents the most compelling supply-side opportunity in the compliance carbon credit market.  Mangroves sequester carbon at rates of 6 to 8 tonnes of CO₂ per hectare per year — compared to 1 to 2 tonnes per year for tropical forests.  They do so in the most biodiverse and economically productive coastal zones in the world — the same zones where most of the world’s population lives, where fisheries productivity is concentrated, and where coastal protection against storm surge and sea level rise is most urgently required.

The Indo-Pacific contains 42 per cent of the world’s mangrove area — concentrated in Indonesia, Australia, Malaysia, Myanmar, and the Philippines.  Indonesia alone contains 23 per cent of the world’s mangrove forests.  These ecosystems are being lost at a rate of 0.5 to 3 per cent per year — releasing the carbon they have sequestered over decades back into the atmosphere.

The IPCC’s Sixth Assessment Report identifies blue carbon conservation and restoration as among the most cost-effective nature-based climate solutions available.  The Science Based Targets initiative and the Taskforce on Nature-related Financial Disclosures have both identified coastal ecosystem conservation as a priority for corporate biodiversity and climate strategies.  The investment opportunity is the gap between the ecological and climate value of blue carbon ecosystems and the current market’s capacity to monetise that value through compliance-grade credit generation.

The Secondary Market Architecture

The secondary market that compliance carbon needs — and that blue carbon is positioned to supply — requires four components.

The first is a science-based, independently verified methodology for quantifying the carbon sequestered by blue carbon projects.  The Verified Carbon Standard and the Gold Standard both have approved methodologies.  The International Blue Carbon Initiative has published scientific guidance.  The methodology challenge is solved.

The second is a regulatory framework that recognises blue carbon compliance credits as eligible instruments within national and regional carbon trading systems.  Singapore’s International Carbon Exchange and the Climate Impact X platform — a joint venture between DBS Bank, Singapore Exchange, Standard Chartered, and Temasek Holdings — are building the exchange infrastructure.  The MAS carbon market regulatory framework is developing compliance recognition.

The third is the financial structuring that allows compliance carbon credits to be held as investable assets — through structured products, funds, or direct credit positions — by the family offices, institutional investors, and HNW individuals whose capital the market needs.

The fourth is the secondary market liquidity mechanism — the exchange or platform through which compliance credits can be bought, sold, and priced transparently, providing the price discovery and liquidity that makes carbon credit exposure accessible to a broader investor base.

Singapore is positioned to build all four components.  The ecosystem — SGX, Climate Impact X, MAS, Temasek, DBS — has the institutional infrastructure.  The Indo-Pacific blue carbon resource base provides the supply.  The growing Asian compliance market — China’s ETS, Singapore’s carbon tax, emerging ASEAN frameworks — provides the demand.

The UNEP’s 18 Per Cent is Not a Target; It is a Price Signal.

An 18 per cent emission reduction by 2030 requires capital deployment at a speed and scale that government budgets cannot provide.  The International Energy Agency estimates that achieving net zero by 2050 requires annual clean energy investment of US$4.5 trillion by 2030 — more than three times the current level.  Private capital will not flow at that scale into unpriced, untraded, illiquid environmental outcomes.  It will flow into well-priced, liquid, regulated market instruments with credible environmental integrity and a structural price appreciation mechanism.  The compliance carbon credit — specifically the blue carbon compliance credit within a Singapore-anchored secondary market — is that instrument.

The voluntary market failed because it was built on voluntary integrity.  The compliance market will succeed because it is built on mandatory enforcement.  The secondary market that connects private capital to compliance credit supply is the infrastructure that the UNEP’s 18 per cent target now makes commercially imperative.  The UN has identified the gap.  The market now needs to build the bridge.  And the bridge needs to be built in the next four years.

---

Terence Nunis | Executive Chairman, Equinox Zenith & Red Sycamore | Author, The 1% Playbook: The Billionaire Cheat Code | Author, Carbon Credit is the New Oil