Introduction: A Withdrawal With Broad Implications
On January 20, 2025, President Donald Trump issued a series of executive orders on energy and environmental topics that included initiating a US withdrawal from the Paris Climate Accord, a move consistent with his previous term’s policy and a central promise of his campaign.
This order was an anticipated “day one” action, as President Trump withdrew from the Paris Agreement during his first term and clearly stated his intention to repeat the action upon taking office again. The executive order references Trump’s distaste for international agreements that do not properly balance domestic economic and energy-sector development with environmental goals.
To formally pull the United States out of the Paris Agreement, the Trump administration will need to formally submit a withdrawal letter to the United Nations, which administers the pact. The withdrawal would become official one year after the submission. The formal withdrawal of the United States and subsequent changes to agreements under the UN Framework Convention on Climate Change cannot be transmitted to the United Nations until President Trump’s nominee to be US Ambassador to the UN, Rep. Elise Stefanik (R-NY), is confirmed by the Senate. She appeared before the Senate Committee on Foreign Relations on January 21, 2025, for a confirmation hearing, and the Senate is expected to vote on her confirmation this week.
This announcement coincided with the declaration of a national energy emergency under another executive order, as well as several other executive orders issued on the same day or since that together emphasize a refocus on hydrocarbon production and energy independence without mention of any correlative offset commitments.
Indirect Impacts on the Voluntary Carbon Market
The withdrawal raises key questions about the future of the voluntary carbon market (VCM), particularly in light of the Paris Climate Accord’s role in driving offset demand.
Under the Biden administration, the US government’s strong support for carbon markets included endorsement of guiding principles to bolster integrity, CFTC guidance to facilitate the scaling of carbon credit trading on derivative markets and fostering private sector confidence in the VCM. In contrast, the Trump administration’s decision to withdraw from the Paris Agreement and its general dissatisfaction with ESG and climate disclosure initiatives may undermine confidence in the VCM by reducing the impetus for corporate and national net-zero commitments.
Without the federal endorsement of climate goals, corporate strategies might shift away from investing in carbon offsets, diminishing demand for carbon credits. Furthermore, uncertainty surrounding federal support could delay or derail the development of new VCM projects that depend on long-term revenue from carbon credit sales. If federal support for the VCM is lacking, the private sector may follow suit.
Lessons From the First Withdrawal: Resilience of the Market
Under President Trump’s first term, the VCM subsisted under an administration that did not support the Paris Accord from the beginning. In that period, the United States was actually only “out of” the Paris Agreement for about 100 days — despite the withdrawal being initiated at the beginning of that term — with the federal messaging to the market clear from the outset (if not fully in effect). The delay was due to the signatory countries only being able to give a notice to withdraw from the Paris Agreement within the first three years of its start date — which, for the United States, was November 4, 2016 — with a subsequent one-year withdrawal process to follow. The United States therefore formally withdrew on November 4, 2020, the day after Joe Biden won the election, and re-entered the Paris Agreement under President Biden on February 19, 2021.
It should be emphasised that President Trump’s first withdrawal from the Paris Climate Accord did not significantly hinder the VCM. In fact, the market grew during that period, with robust private-sector demand for offsets driving progress. Between 2016 and 2021, the VCM experienced notable expansion, both in terms of transaction volume and the range of projects receiving funding. Carbon credit issuances from the four main registries increased in volume significantly from 2017 to 2021 (by more than 300 percent). There was then a dip after 2021 with the chief causal suspects being the scrutiny over market robustness, slow progress under the annual UN COP gatherings (in particular regarding the roll out under Article 6.4 of an international UN-backed trading mechanism for carbon credits) as well as the expected market vagaries of a young, developing trading system. Few attributed the cause to the delayed impact from the first US withdrawal from the Paris Climate Accord years before the dip. The resilience of the VCM suggests that federal policy is not the sole determinant of its trajectory.
Furthermore, the market is global in nature and likely to grow with international offset trading, further insulating it from shortfalls in federal support. The increasing integration of international carbon trading mechanisms provides additional stability and opportunity for the VCM, independent of domestic policy shifts. COP 29 made significant advances with respect to the Article 6.4 trading mechanism and, when operational, this is expected to bolster the VCM globally.
Additionally, the voluntary nature of the VCM means it operates largely outside regulatory frameworks, relying instead on private-sector leadership and investment. In this context, a lack of government support could incentivize corporations to independently bolster the market, particularly as international competition for climate leadership intensifies.
A Pro-Market Administration: Contradictions and Possibilities
To be sure, the Trump administration’s broader climate stance creates potential headwinds for the VCM, a point that is underscored by the administration’s other early moves to pull back from federal initiatives that underpin investment in projects that could generate voluntary carbon credits (discussed below). However, in addition to the points outlined above, there are other reasons to believe that the VCM could thrive despite what might be perceived to be a federal withdrawal. As a “pro-markets” administration, Trump’s economic policies prioritize private-sector growth and innovation. The VCM represents a burgeoning industry with significant economic potential, aligning with the administration’s stated commitment to fostering successful markets. In this context, the VCM should not pose a risk to the economic interests or energy security of the United States, which are the main concerns that the executive orders seek to address.
Supporting the VCM could also serve as a strategic response to growing foreign competition in the carbon trading space, ensuring US companies remain competitive globally.
Other Potential Executive Order Headwinds for VCMs
In addition to withdrawing the United States from the Paris Climate Accord, President Trump has so far directed the government not only to emphasize and clear the way for new hydrocarbon production and infrastructure, but also to take aim at Biden-era regulations, grants and loan programs that encourage non-hydrocarbon energy and energy transition projects.
For example, President Trump has issued executive orders and related memoranda:
- pausing federal funding streams under existing law and the disbursement of additional funds through the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) (including some that currently flow to energy transition projects);
- withdrawing offshore areas from future wind energy leasing;
- freezing, at least for now, the issuance of awards and permits for wind projects; and
- rescinding the Biden administration’s priorities and coordination efforts for implementing the IIJA and the IRA.
However, within a few days of the announcement of the pause on federal funding streams, this action was temporarily stayed by at least two federal judges pending review and a memorandum detailing the funding to be frozen was subsequently rescinded by the White House.
The pause in authorized and appropriated clean energy spending has been criticized on constitutional grounds. As noted above, preliminary court challenges have resulted in some setbacks for the new administration on this front. However, it is anticipated that the administration will continue to press its agenda calling into question new governmental expenditures for certain disfavoured technologies or projects.
The above actions may reduce developer appetite (and if the actions are fully realized, federal funding) for projects that could play a role in generating credits for the VCM, and that may in turn reduce its liquidity and viability. However, the reasons for potential resilience of the VCM discussed above also apply to these administration actions. Due in part to the differences in how voluntary carbon offsets are generated as compared with federal tax credits, not all transactions and projects involved in the creation or trading of offset in the VCM are impacted by these actions, and the administration’s pursuit of new infrastructure and energy production may ultimately benefit such projects.
Conclusion: Competing Factors and an Uncertain Future
The US withdrawal from the Paris Climate Accord under President Trump and the new administration’s actions seeking to roll back existing incentives for energy transition and climate-focused new projects introduces potential challenges for the VCM, from reduced federal support to weakened corporate commitments to offsets. However, the market’s unregulated nature, historical resilience and alignment with private-sector growth could offset these challenges. The ultimate trajectory of the VCM will depend on the interplay between federal initiatives, private-sector leadership and international climate efforts. As the global demand for carbon offsets continues to rise, the US VCM may well find pathways to growth despite a shifting domestic policy landscape.
