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Explainer: Improving standards in the voluntary carbon market

Tropical rainforest
An investigation earlier this year found that 90 per cent of rainforest credits do not amount to actual carbon reductions (Photo: Yakov_Oskanov/Envato)

US and European policymakers are proposing tougher rules over the use of carbon credits, while industry bodies continue their work to raise standards in the voluntary carbon market

Improving standards in the voluntary carbon market — where companies and individuals can buy credits from initiatives designed to reduce or remove greenhouse gas emissions, which  — has typically been left to industry bodies.

This year, organisations such as the Voluntary Carbon Markets Integrity Initiative and the Integrity Council for the Voluntary Carbon Market have published guidelines aimed at restoring confidence in this area. 

The VCMI’s code of practice covers companies’ use of credits for offsetting purposes, focusing on the demand side of the market, while the ICVCM’s core carbon principles set expectations over permanent emissions reductions, concentrating on the supply side. 

Regulators have focused on compliance markets, which set carbon prices that restrict the supply of allowances to typically energy-intensive sectors, but some anticipate a greater interest in the VCM from authorities in the future. 

“It’s such a niche, highly complex, technical area that you’ll see policymakers defer to these industry initiatives,” says Sam Gill, co-founder of carbon credit rating platform Sylvera.

“They’re a good place to see where things are moving,” he says, but adds: “I’m not sure that any of these are providing a persuasive or complete model for what future regulation [could] look like.”

What’s happening in the US?

In the US, however, policymakers and regulators have begun to impose themselves on VCMs. The Securities and Exchange Commission last year proposed including carbon credits among its sweeping plans for climate-related disclosures. 

Some US federal departments and agencies are exploring setting standards by establishing procurement guidelines for any credits they purchase from the voluntary market, says Gill, declining to specify which departments these would be. 

At the state level, California approved a landmark bill on credits in October. “California took leadership on this,” says Finn O’Muircheartaigh, director of policy and markets at rating agency BeZero Carbon.

California governor Gavin Newsom — who is viewed as a potential Democratic presidential candidate — signed into law the Voluntary Carbon Market Disclosures Act. From the start of next year, companies active in the state that make climate-related claims must disclose information on their use of carbon credits.

The rules have not been universally well-received. “While well intentioned, the bill creates confusion and may have the unintended consequence of driving well-intentioned people away from much needed action,” warns John Melby, president of voluntary carbon credit trading platform Xpansiv.  

Newsom did, however, veto a separate bill, the Voluntary Carbon Offsets Business Regulation Act, which would have forbidden the sale or marketing of voluntary credits that do not meet sufficient quality standards. 

The governor held concerns that this bill “could inadvertently capture well-intentioned sellers and verifiers” by “imposing civil liability for even unintentional mistakes about offset quality”, according to a briefing note by law firm Kirkland & Ellis.

There is appetite for federal leadership on the regulation of carbon markets. “Comprehensive cap-and-trade legislation or a carbon tax at the national level would be ideal in the US,” says Carbon Policy and Markets Initiative managing director Alexia Kelly. 

Under a typical cap-and-trade mechanism, a cap is imposed on greenhouse gas emissions that gets stricter over time, while companies within the scope of the mechanism trade allowances that permit them to emit a set amount of carbon.

Anthony Catachanas, chief executive of private equity firm Tower Peak Partners, says that carbon markets regulation is a unique example of Europe being more aligned over an issue than the US. “That’s very rare,” he says.

Why Europe’s view matters

The EU and the UK are laying the groundwork for concrete rules on the use and marketing of carbon credits. 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”.

Following the agreement, non-profit Carbon Markets Watch policy lead Gilles Dufrasne said that the bloc “is sending a powerful signal to the voluntary carbon market: the era of offsetting is over, and carbon credits can’t make up for buyers’ pollution”.

The EU is not stopping here. The bloc is negotiating its Carbon Removal Certification Framework, which would set rules for monitoring, reporting and verifying carbon removals within the EU and European Economic Area, notes law firm Covington.

The bloc’s Corporate Sustainability Reporting Directive, meanwhile, will oversee companies’ disclosures over their carbon credit use, including emissions offsets.

Eager not to fall behind the EU, earlier in October the UK government-founded Transition Plan Taskforce released a disclosure framework that included guidance on carbon credits. The recommendations made within the framework are not currently part of UK law.

The framework “does include fairly comprehensive disclosure requirements, and is being pushed as the standard to follow”, says Fiona Ross, legal director at law firm Pinsent Masons. 

When the framework was launched, the VCMI and the ICVCM told Sustainable Views that it supported the TPT’s proposals.

“The UK may be a leader” on carbon markets, says O’Muircheartaigh, observing that it has “signposted a big consultation towards the end of this year on regulating the voluntary carbon market in the UK”. 

In its Green Finance Strategy, published in March, the government said it “will consult on the specific steps and interventions needed to support the growth of high integrity voluntary markets and protect against greenwashing”, and “position the UK to serve as a global hub for voluntary carbon trading”.

The consultation will be run jointly by the Department for Energy Security and Net Zero, the Department for Environment, Food and Rural Affairs, and the Treasury, according to O’Muircheartaigh. A UK government spokesperson said that officials are still developing plans for the consultation.

What are the main concerns over quality?

While policymakers consider rules for the disclosure and marketing of credits, concerns remain over the quality of VCMs. It has been a turbulent period for the market’s reputation. 

Earlier this year, a joint investigation by The Guardian, Die Zeit and SourceMaterial, which analysed “a significant proportion” of projects certified by Verra — a leading carbon verification setter — found that 90 per cent of rainforest credits do not amount to actual carbon reductions.

Media interest in VCMs has “probably increased the level of nervousness around the use of them”, says Ross at Pinsent Masons.

She notes that there is “huge variance” in the quality of projects accredited under different standards for VCMs, adding that companies are sceptical about whether accreditation of a standard under the ICVCM’s CCPs will provide much reassurance on its quality.

Barbara Haya, director of the Berkeley Carbon Trading Project at the University of California, Berkeley, says: “The registries that are writing the rules and registering projects and issuing credits…aren’t doing their job to ensure quality.” 

Carbon offsets are commonly over-credited, she observes, meaning that a significant amount of credits in the offset market only represent a small fraction of their claimed emissions benefits, while many credits do not offer any benefit at all. 

“There’s a quality crisis right now in the offset market,” adds Haya, who advocates a move away from an offset market that “might be unregulatable” and a shift towards companies prioritising direct emissions reduction. “I’m having the same conversations now about poor quality as I had 20 years ago,” she says.

O’Muircheartaigh says the market needs incentives in order to improve quality, and that projects need to be assessed “at the project level”. “There are very few incentives to ensure that the project is of the utmost quality,” he says.

“As with all markets, they’re driven towards efficiency. Naturally, producers will try to reduce costs, and that’s a part of the market being efficient. We need a race to the top, and up until now, there hasn’t been a way to drive that,” he adds.

A service from the Financial Times