This summer, the Biden Administration released a policy statement aimed at strengthening the nation’s voluntary carbon markets (VCMs). The Voluntary Carbon Markets Joint Policy Statement and Principles provides seven “principles for responsible participation” in VCMs in an effort to ensure that carbon credits genuinely reflect carbon emissions reductions, shoring up the integrity of the market system. These principles reflect helpful guidance for credit suppliers, buyers, and policymakers as they seek to use VCMs to generate revenue and reach carbon reduction goals.
What Are VCMs?
While many industries and companies are working to reduce their climate impacts, some carbon dioxide emissions that are unavoidable will continue to occur. VCMs allow companies to offset – essentially reduce a corresponding amount of carbon – by purchasing “credits” generated by projects that reduce carbon emissions or remove carbon from the atmosphere. The purchased credits can act as a bridge to support buyers’ decarbonization goals until more efficient or lower-emitting technologies become more widely available or cost effective. Demand for carbon credits is expected to increase significantly as companies work toward their stated commitments to reduce carbon emissions.
Each carbon credit corresponds to the equivalent of one tonne of carbon dioxide removed, reduced, or avoided and can be used by a buyer to offset carbon emissions in the same amount. Once a credit is used for an offset, it is “retired” and can no longer be sold or traded. Some VCMs are run and regulated by governments or international bodies, while others are entirely operated by nongovernmental organizations. Carbon credits can be traded through exchange marketplaces or through private contracts (“over the counter”). The Biden Administration has been a strong supporter of VCMs, seeing them as a means to support decarbonization efforts, unlock capital and support sustainable economic development, and keep climate warming below 1.5° C.
What Is the Integrity Problem?
Critics of VCMs have alleged that the markets suffer from an “integrity crisis.” Specifically, unlike markets for many other commodities, the commodity being traded on VCMs is effectively the absence of carbon emissions or carbon in the environment. Carbon credits represent something that is not tangible, cannot be seen with the naked eye, and, in certain cases, not easily measured. Critics further allege that some carbon removal projects may not actually achieve the reductions claimed or be permanent, while others may receive credit for carbon reductions that would have occurred even without the suppliers’ efforts.
Particularly when VCMs lack substantial regulation, oversight, and consistent measuring methodologies, these criticisms lead some to ask how market participants can transact transparently and verify that their credit purchases reflect actual carbon reductions. As the policy statement notes, “put simply, stakeholders must be certain that one credit truly represents one tonne of carbon dioxide … reduced or removed from the atmosphere, beyond what would have otherwise occurred.”
How Does the Policy Statement Help?
The Administration’s policy statement, which was authored by the heads of several agencies, including the Departments of Treasury, Energy, and Agriculture, is aimed at restoring confidence to the marketplace to ensure that VCMs can effectively help reduce carbon emissions. Along with additional federal efforts at increasing transparency through climate disclosure rules, the statement lays out seven principles for responsible participation in VCMs for policymakers, credit generators, and credit users to shore up supply integrity, demand integrity, and market integrity.
Supply integrity principles
Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization. Credits should only be generated for activities that result in carbon emission reductions that are unique, real, quantifiable, permanent, and reviewed against robust baselines. In addition, credit certification bodies, which register credits and verify carbon reductions, must ensure that they have transparent, verifiable, and equitable processes in place for addressing risks like double-counting and conflicts of interest.
Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing. Project developers should consider and address environmental justice concerns and the potential for negative impacts on the communities where they operate. Developers should put in place safeguards to protect local communities, resources, and biodiversity and strive where possible to generate co-benefits like economic development and habitat restoration.
Demand integrity principles
Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains. As the policy statement notes, “achieving long-term climate goals requires transforming business models across economies.” Companies should use the credits they purchase to complement, rather than replace, measurable efforts within their own supply chains to reduce carbon emissions. Suggested efforts identified in the policy statement include inventorying and regularly reporting Scopes 1, 2, and 3 emissions, setting near- and longer-term emissions reductions targets, and adopting and implementing transition plans.
Credit users should publicly disclose the nature of purchased and retired credits. Companies should regularly (at least annually) disclose credit purchases and retirements. These disclosures should be easily accessible and should provide enough detail for outside observers to assess for themselves whether the credits meet the supply integrity principles.
Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards. VCMs should incentivize credit buyers’ purchase of high-integrity credits without reducing incentives for companies to pursue carbon reductions within their own operations. When credit emissions reductions have been reversed, found to be inflated, or determined to fail environmental or social safeguards, those credits should not be used to support a company’s emission reduction claims unless those issues have been addressed.
Market integrity principles
Market participants should contribute to efforts that improve market integrity. While the policy statement does not presuppose or favor any one VCM structure over another, stakeholders should aim to improve market functionality to make VCMs accessible to a variety of participants. This includes creating incentives to produce and purchase high-quality credits, improving transparency and publicly available data, promoting equitable treatment of suppliers, controlling for potential conflicts of interest, and preventing fraud and other bad behaviors. These efforts on the part of all market participants (policymakers, suppliers, and users) will help boost a VCM’s integrity.
Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs. Generating credits can be a long-term and investment-heavy effort. Policymakers should address barriers, including high transaction costs and market uncertainty, to credit generation from less common entities such as farmers, ranchers, forest owners, small businesses, developing countries, and others.
Key Takeaways
While the policy statement does not lay out specific requirements for VCM participation, the principles provide useful guidance for maximizing credit integrity and efficiency for both credit generators and credit users. Project developers and other credit generators can potentially generate substantial revenue streams by ensuring that their decarbonization efforts lead to verifiable, high-integrity carbon reductions. Credit users can use the tools and criteria described to compare credits offered and shop smarter – using their resources to purchase only high-integrity credits that will reliably support their carbon reduction claims. Once selected, the policy statement’s principles – particularly the supply integrity principles – are useful guidelines upon which credit users can craft terms and conditions for carbon offset contracts. As credit users look to communicate the benefits of their carbon offsets, following the demand integrity principles can help reduce greenwashing risk through substantiation, disclosure, and accurate claims.
While the policy statement and its principles are not novel, they provide a helpful compilation and guidelines. They should be carefully considered in conjunction with legal requirements, nongovernmental guidelines, and stakeholder demands, which may be more prescriptive. Credit users making carbon reduction claims in California, for example, must disclose all components of offsets required by the Voluntary Carbon Market Disclosure Act. Further, credit users should be mindful that carbon offsets can be viewed as a stopgap and that carbon neutrality is increasingly viewed as exclusive of carbon offsets. Credit users must be careful to craft claims accordingly, and the principles provide a helpful start in that endeavor.
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