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December 5, 2023

Carbon markets standard setters back unity to deliver cohesive guidance

Iosco hopes standardisation could help the voluntary carbon market. It is still recovering from reputational problems, such as Zimbabwe’s Kariba project, which has been accused of over-issuing credits (Photo by Zinyange Auntony / AFP via Getty Images)
Iosco hopes standardisation could help the voluntary carbon market. It is still recovering from reputational problems, such as Zimbabwe’s Kariba project, which has been accused of over-issuing credits (Photo by Zinyange Auntony / AFP via Getty Images)

Standard setters say ‘end-to-end integrity framework’ for carbon markets proposed at COP28 should drive clarity on climate action, as Iosco consults on tighter regulation

Standard setters for carbon markets have indicated their support for greater collaboration as part of a COP-driven push towards an “end-to-end integrity framework”, just as the International Organization of Securities Commissions launches a consultation into tighter regulation of the carbon markets.

Standard setters for carbon markets were brought together at a COP28 meeting on December 4, with the aim of delivering an integrity framework covering the whole voluntary carbon markets value chain, which would receive mutual endorsement of the organisations’ respective roles and guidelines for companies on the use of carbon credits. 

Attendees included the Voluntary Carbon Markets Integrity Initiative, the Integrity Council for Voluntary Carbon Markets, the Greenhouse Gas Protocol and the Science-Based Targets initiative.

“Unity across the standard setters will give companies the direction and clarity needed to spur on increased high-integrity climate action,” said VCMI executive director Mark Kenber in a press statement. And in a co-authored blog published on December 4, Kenber and ICVCM chair Annette Nazareth said: “Together, we are working hand in glove to deliver clear, cohesive standards for corporate climate action.”

The meeting took place a day after Iosco, the global umbrella organisation for securities regulators, published a consultation, which said regulators should consider imposing stricter standards and disclosure requirements on voluntary carbon markets. The consultation – which sets out 21 “good practices” for those overseeing VCMs – builds upon a discussion paper published last year and its corresponding feedback, which revealed concerns about the market’s weaknesses. 

Verena Ross, chair of the European Securities and Markets Authority, said in Iosco’s consultation announcement: “As we delved into VCMs, we realised that in addition to environmental integrity vulnerabilities, these markets also lacked some characteristics of fair, efficient and transparent markets that protect investors.” 

Setting standards

Standard setters have shouldered much of the burden in driving standards in voluntary carbon markets, which are largely unregulated and have been described by some as a “Wild West”.

In July, the ICVCM published a framework on how companies can qualify for its core carbon principles label, with the intention of demonstrating credible use of credits. It told Sustainable Views in August that VCMs were being held back by a lack of consistency and clarity. The VCMI, meanwhile, published its own code of practice this year, which it recently updated.

The market is still recovering from a series of scandals. “We’ve seen fairly significant demand destruction and some big buyers walking out of the market,” Eron Bloomgarden, CEO of forest conservation non-profit Emergent, told Sustainable Views. He highlighted reputational issues, such as those stemming from the failed Kariba project in Zimbabwe, which has been accused of overcrediting, and scrutiny of those buying credits.

According to Bloomgarden, standard setters are partly responsible for the uncertainty in carbon markets. 

“We’ve had standard setters emerge last year, specifically like VCMI, ICVCM, SBTi, all well-intentioned,” he said, however their work “created uncertainty in the market, because without actually announcing what those standards were going to be… buyers didn’t know if what they were buying was going to meet those [standards]. In a realm of uncertainty, the easiest thing to do is not act”.

In a statement made in response to Bloomgarden’s remarks, ICVCM’s Nazareth said: “There is no shortcut to integrity. We have consulted extensively to build widespread consensus around our ‘core carbon principles’.”

“In the current market the quality of credits is inconsistent. This has created confusion, undermined confidence and led buyers to defer decisions.”

A SBTi spokesperson pointed to a statement made by the organisation at the end of November, in which it said: “Defining success under science-based and standardized approaches is essential to enable effective action and subsequently measure progress towards success.” The VCMI has been contacted for comment.

Regulatory intervention

Meanwhile, regulators are stepping up their interest in voluntary carbon markets. In September, the EU provisionally agreed to ban advertisements that make claims “based on emissions offsetting schemes that a product has neutral, reduced or positive impact on the environment”.

Iosco’s recommended good practices include suggestions on improved standardisation and disclosure in primary market issuance, as well as proposals to improve the functioning of secondary markets, with potential enforcement actions against market abuse. 

Its proposals “are crucial to increase transparency and disclosure”, carbon credit rating agency BeZero Carbon’s chief innovation officer Seb Cross told Sustainable Views. However, he warned that “the measures risk straying into treating carbon credits as commodities and imposing binary standards on the sector,” which would remove any flexibility. 

He added: “Standards alone cannot solve the challenge of market integrity. No two carbon credits are equal, and quality varies significantly. If the Iosco safety measures are to succeed, there must be an acknowledgement that carbon credits are instruments of risk.”

Iosco issues

The Iosco report also highlighted challenges within carbon markets at a project level, noting concerns about “the environmental integrity of the carbon credits and the manner in which carbon credits are issued to a registry”.

It pointed to “issues relating to the characteristics of the trading environment in which these credits are transferred from one party to another, and the behaviour of market participants in doing so”, as well as “issues regarding the use and disclosure of use of carbon credits by buyers”.

Iosco proposed improved regulation of credits covering their issuance, trading and retirement, better alignment between regulators, and greater clarity on the scope of regulators. For example, it observed that while derivatives linked to carbon credits would normally fall within the regulation used for commodity derivatives, there is less certainty surrounding the credits themselves. 

Standardisation, such as through a taxonomy of carbon credit attributes, could help to increase the credibility of the primary market, as well as stronger regulatory requirements surrounding disclosures, the accuracy of carbon credit registries and due diligence, Iosco said.

Kristian Rönn, chief executive officer of carbon accounting software provider Normative, said that carbon projects “might not make any difference whatsoever in terms of actually protecting the environment unless you have some standardisation in place”.

Iosco had “lingering doubts over whether some carbon credits represent actual emission reductions”, and said that “the use of credits in decarbonisation efforts remains an area of concern”. 

“In a similar vein, there are doubts as to whether firms will take steps to reduce their own emissions if carbon credits are readily available to offset those emissions,” it added. It suggested that regulators and authorities consider how to encourage or mandate disclosures about entities’ use of carbon credits to meet their greenhouse gas emissions targets.

Iosco’s proposals to improve the VCM secondary market included the release of public reports from registries that set out data covering trading volumes and price transparency. They also suggested rules on conflicts of interest to cover relationships between project developers, carbon crediting bodies and bodies that verify carbon credits; enforcement action on fraudulent behaviour such as misleading statements concerning the attributes of carbon credits; and better market surveillance.

A service from the Financial Times