A tractor with a subsoiler loosens the earth and carves out deep holes. A dozen men follow, dropping tree seedlings into them. This industrious scene in a deforested part of the Amazon is more reminiscent of the paper-and-pulp industry than the voluntary carbon market, in which companies buy carbon credits to offset their greenhouse-gas emissions. Brazil can be to carbon removal what Saudi Arabia was to carbon production, claims Peter Fernandez of Mombak, the company that runs the project. “And I want Mombak to be the Saudi Aramco of that,” he says.

This is big talk for a market with a serious reputation problem. In 2023 the volume of credits traded on the voluntary carbon market was less than half that in 2022; and the market’s value shrank from $1.9bn to $723m (see chart). Corporate buyers have been put off by scandals: some project developers claimed credits for protecting forests that were not at risk of being cut down.

Yet in Brazil optimists like Mr Fernandez abound. Rather than protecting standing forest, as many carbon-credit projects do, they are focusing on large-scale reforestation. A ten-hour drive from Mombak’s farm, re.green, another Brazilian firm, is planting trees on 8,500 hectares (21,000 acres) of degraded pastureland. In May Microsoft, which plans to be carbon negative by 2030, signed a deal to buy 3m tonnes of carbon credits over 15 years from re.green for an undisclosed price (the company has a similar agreement with Mombak). Google is expected to announce a deal with Mombak at the end of this month, its first foray into reforestation credits.

Believers say there are two reasons to bet on the market. First, most of the world’s big listed companies now have targets to reduce their emissions, as shareholders and regulators press them to become greener. Heavy industry, airlines and energy-hungry technology firms cannot fully cut their emissions, so to achieve net zero they will need to pay to remove carbon dioxide from the atmosphere.

Second, many governments are regulating emissions more aggressively. The World Bank tallies 75 carbon-pricing schemes around the world, covering an estimated 24% of global emissions, up from 7% a decade ago. Although the voluntary market is separate from the compliance market, the two do sometimes dovetail. California’s cap-and-trade system allows participants to use some credits issued on the voluntary market.

Only 2bn tonnes of carbon dioxide per year are being removed from the atmosphere by human-led efforts, mostly through reforestation. In order to limit global warming to 1.5°C above pre-industrial levels, the rate of extraction needs to rise to between 5bn and 10bn tonnes per year by 2050, researchers at the University of Oxford estimate. At 10bn tonnes, the size of the carbon-removal market would be between $300bn and $1.2trn, according to McKinsey, a consultancy.

Carbon-dioxide removal can be done through natural methods—such as planting trees or restoring wetlands—or tech-based ones, such as direct air capture and storage (DACS), in which machines claw carbon dioxide from the air. Tech-based projects are less prone to scammers. They are designed to put carbon dioxide away indefinitely, for example by storing it underground, whereas forests can be burned or cut down. However, they are expensive. To sequester a tonne of carbon dioxide using DACS costs around $1,000, compared with $10-40 by planting trees.

This makes reforestation, and Brazil, attractive in the short term. Brazil is home to vast tracts of degraded land and its tropical climate favours quick tree growth. Mombak and re.green’s projects are on former cattle ranches whose owners sold their land when it became unproductive. Others may be tempted to follow suit. Assuming a carbon credit price of $30 in 2030—a price already being used or exceeded in high-quality reforestation deals today—it would become more financially attractive to swap cattle-raising for reforestation on roughly half of Brazil’s pastureland, according to calculations by McKinsey.

Rebuilding Earth’s lungs

All told, restored Brazilian forests could account for 15% of the world’s potential for carbon removal through reforestation (the only other country that could plausibly match this is Indonesia). Brazil—currently the world’s sixth-largest emitter of greenhouse gases—could be the only large country to become carbon negative.

There is excitement in Brazil. The national development bank thinks that the country could lease 2.5m hectares of public land to reforestation companies, generating a huge number of carbon credits (their value would depend on the market). Brazil’s Congress is discussing a law that would create an emissions-trading system.

Developments beyond Brazil also offer reasons for hope. It is becoming easier to tell good credits from junk. Since 2020 rating agencies have popped up to evaluate projects. Rival credit issuers are challenging Verra, the dominant one. Insurance firms have emerged to protect buyers against events like wildfires.

Yet formidable challenges remain. The greatest is finding land to buy. Land-grabbers in Brazil often forge titles in cahoots with local authorities, and many private owners lack deeds. It will take re.green years to carry out due diligence on the nearly 2,000 farms it is considering buying. To scale up reforestation, industrial seed production and sapling nurseries producing Amazonian trees are needed.

A trillion-dollar market is unlikely to emerge without a lot more transparency. Most decisions on pricing remain confidential. Rating agencies publish overall scores for projects but often charge hefty fees for the underlying data. That is fine for the likes of Microsoft, which enjoys monopsony power in carbon removal. The firm, which has bought credits to remove at least 5m tonnes of carbon dioxide, has a department dedicated to finding projects. Smaller companies, by contrast, will struggle to do the same.

Doubts also linger about how to measure sequestration. Many credit issuers use methodologies based on temperate forests in Scandinavia and California, which capture less carbon than tropical jungles. Some companies are beginning to use satellite imagery and lidar–laser scans that build three-dimensional images to estimate carbon stocks. But such sophisticated tools are not yet widespread.

Market-watchers are waiting for one law that could rev up the industry. Since the Paris agreement on climate change in 2015, countries have been negotiating rules for an integrated global carbon market to allow them to buy credits from one another to offset their emissions—possibly including from the voluntary carbon market. The last and most complicated part of the agreement to be hashed out is how to avoid double-counting offsets. If that ever gets done, restoring the Amazon will be good for business and for the world.