With the increasing focus on transitioning to clean energy and a low-carbon economy, companies continue to turn to the voluntary carbon markets, purchasing carbon credits to help decarbonize their operations and achieve their emission reduction goals. However, several factors—the need for additional transparency, standardization, and accountability—may keep purchasers of carbon credits from having full confidence in the voluntary carbon markets, despite their recent growth. In 2021, the voluntary carbon markets quadrupled from 2020 to approximately $2 billion in market value.
Purchasers of carbon credits have raised the need for confidence that the carbon credits that are transacted represent a true reduction or removal of one ton of carbon dioxide emissions from the atmosphere. Many have also voiced the need for harmonization in the voluntary carbon markets, as different standards currently apply in different voluntary carbon markets. The adoption of a common set of standards that are applicable to all carbon credits and that establish what constitutes a high-quality carbon credit can help instill confidence and integrity in the voluntary carbon markets. It can also facilitate the review and assessment of how a carbon credit is generated and ultimately used.
Addressing these factors can spur additional participation in the markets and enable the markets to expand further and be more liquid and resilient.
The voluntary carbon markets are separate and distinct from the mandatory compliance carbon markets in which regulated entities purchase and sell emissions allowances and credits to meet regulatory obligations. The voluntary carbon markets facilitate the purchase and sale of carbon credits for purposes outside of complying with regulatory obligations. For example, companies often purchase carbon credits through the voluntary carbon markets to compensate for or mitigate emissions that cannot otherwise be reduced through direct emissions reductions to meet their climate commitments and emission reduction goals.
The voluntary carbon markets allow for the exchange of carbon credits across many industries including the following:
In 2021, the forestry and land use industry was the largest source of carbon credits traded in the voluntary carbon markets, followed closely by the renewable energy industry.
Efforts are underway to establish a definitive and consistent global benchmark for high-integrity carbon credits that would be applicable to those transacted in the voluntary carbon markets.
Voluntary Carbon Markets Integrity Initiative
The Voluntary Carbon Markets Integrity Initiative (VCMI), a multistakeholder platform to drive credible, net-zero aligned participation in the voluntary carbon markets, released its provisional Claims Code of Practice for stakeholder input in June 2022. Companies have committed to test these draft principles in the second half of 2022 and to work with VCMI to refine them.
The components of the provisional Claims Code of Practice are as follows:
VCMI’s provisional Claims Code of Practice provide broad guidance and basic criteria on what constitutes “high quality” carbon credits and recognize that other initiatives, including one led by the Integrity Council for Voluntary Carbon Markets, will provide detailed guidance on what constitutes a high-quality carbon credit.
Integrity Council for Voluntary Carbon Markets
The Integrity Council for Voluntary Carbon Markets (Integrity Council), an independent governance body for the voluntary carbon markets that was created to set and enforce definitive global threshold standards for high-quality carbon credits, issued its draft Core Carbon Principles, Assessment Framework, and Assessment Procedure in July 2022 for public consultation. The purpose of the Core Carbon Principles, Assessment Framework, and Assessment Procedure is to provide a rigorous and accessible means of identifying high-quality carbon credits that create real, additional, and verifiable climate impact with high environmental and social integrity.
The Integrity Council’s draft Core Carbon Principles include the following high-level principles:
The draft Assessment Framework provides guidance and criteria for the Integrity Council to assess whether carbon credits reach the high-quality threshold, and the draft Assessment Procedure will be used to assess carbon-crediting programs and credit types to determine if they are Core Carbon Principles eligible.
Following the close of the public consultation period on September 27, 2022, the Integrity Council will issue the Core Carbon Principles, Assessment Framework, and Assessment Procedure in the fourth quarter of 2022.
The creation and implementation of these principles, standards, and benchmarks should help address the fragmentation in the voluntary carbon markets and enable buyers to more easily identify high-quality carbon credits at transparent prices.
As many have noted, standardization can help create confidence in the quality of carbon credits and that the carbon credits transacted represent an actual reduction or avoidance of carbon emissions. In turn, this should promote confidence in the price at which the carbon credits are transacted and in the contracts that are related to such transactions. Thus, standardization can help facilitate core carbon futures and spot contracts and encourage additional participation and liquidity in the voluntary carbon markets.
While these standards continue to be reviewed and developed, the US Commodity Futures Trading Commission (CFTC) is currently assessing the extent of its role in regulating carbon credits and carbon markets.
In June 2022, the CFTC held the first-ever Voluntary Carbon Markets Convening to discuss the voluntary carbon markets and issues related to the supply and demand for high-quality carbon credits, and to solicit input from market participants on the CFTC’s role in regulating the carbon credit markets. Multiple carbon credit derivatives contracts are listed on the CFTC’s regulated exchanges, and more are expected to be listed. Given this, the CFTC acknowledged the need to build its capability to ensure the integrity and credibility of the carbon credit markets, to identify and pursue potential fraud or other abusive practices, and to promote responsible innovation and fair competition.
The discussions from the Voluntary Carbon Markets Convening confirmed the need for additional transparency, standardization, and integrity in the voluntary carbon markets and that many market participants believe the CFTC can play a critical role in facilitating standardization and harmonization across the various voluntary carbon markets.
Separately, the CFTC issued a request for information to better inform its understanding and oversight of climate-related financial risk related to the derivatives markets and underlying commodities markets, including the voluntary carbon markets. The CFTC seeks information on the following:
The CFTC may use the information gathered through the request for information, which remains open for public comment until October 7, 2022, to issue new or amend existing guidance, policy statements, and regulations or take other action.