Drivers for reform of the voluntary carbon market
The demand for voluntary carbon credits is rapidly expanding. The voluntary carbon market surpassed US$1 billion in 2021, more than doubling in value from 2020.1 A robust and well-governed voluntary carbon market enables the essential funding of carbon reduction and removal projects predominantly located in developing jurisdictions. Without this funding, such projects may never eventuate – projects involving nature based solutions may never happen and new carbon removal technologies may lack the necessary funding needed to become viable.
However, the impacts of carbon financing move beyond this. The market for voluntary offsets also complements and drives forward other forms of climate finance, redirecting investment flows towards the broader sustainable development needs of emerging markets.
The expansion of the voluntary carbon market has not been without spectator concern. Inconsistent governance due to multiple voluntary programmes, a lack of basic standardised rules or documents, and mixed views on what makes a quality carbon credit are amongst the key challenges that the voluntary carbon market currently faces – particularly given the surge in interest from stakeholders around the world.
The quality and integrity of carbon credits is a particular concern for corporates considering entering into long-term offtake agreements for the purchase of credits. Uncertainty regarding the legitimacy of certain project types in the future and the complex issues of corresponding adjustments or double counting for voluntary credits are two key issues also impacting the market. All of these factors can significantly impact the price paid per credit, particularly in a prepayment context where a project requires financing upfront with resulting delivery and performance risk.
Generally, common criteria used to assess the quality of carbon reductions and removals are for actions to be viewed as ‘real’, ‘additional’, and ‘verifiable’. However, a more holistic ‘high-quality’ assessment tends to go beyond these threshold requirements. More robust indicators of quality include projects that also contribute to climate resilience, biodiversity, and local community engagement and wellbeing.
The Core Carbon Principles and Assessment Framework
Core Carbon Principles
The ICVCM has identified ten proposed CCPs to inform and guide the assessment of carbon credit programmes and different types of carbon credits. The CCPs comprise:
1 - Additionality
‘The greenhouse gas emission reductions or removals from the mitigation activity shall be additional, i.e., they would not have occurred in the absence of the incentive created by carbon credit revenues.’2
An assessment of financial additionality, barrier analysis, performance-based tests and common practice analysis are several ways in which additionality may be addressed. The Assessment Framework will firstly assess the overall likelihood of additionality; and as a second step, the Framework will assess the thoroughness and accuracy of the carbon-crediting program’s approach to assessment of additionality.
2 - Mitigation activity information
‘The carbon-crediting program shall provide comprehensive and transparent information on all credited mitigation activities. The information shall be publicly available in electronic format, and scrutiny of mitigation activities shall be accessible to non-specialised audiences.’3
The publicly available information should allow customers to view information such as social and environmental impacts, additionality assessment, and the quantification of emission reductions or removals.
3 - No double counting
‘The greenhouse gas emission reductions or removals from the mitigation activity shall not be double-counted, i.e., they shall only be counted once towards achieving mitigation targets or goals. Double counting covers double issuance, double claiming, and double use.’4
Examples of double-counting are where the same carbon credit is retired by two companies, or the same emission reduction is credited under two programmes, or if two countries claim the same emissions reduction towards their Nationally Determined Contributions under the Paris Agreement. The ICVCM separately refers to the issue of ‘double claiming’ which concerns the intersection between the Paris Agreement and the voluntary carbon markets, and which is subject to ongoing debate and analysis.
4 – Permanence
‘The greenhouse gas emission reductions or removals from the mitigation activity shall be permanent, or if they have a risk of reversal, any reversals shall be fully compensated.’
The permanence core principle is essential for the reduction of carbon emissions in line with the long term goals of the Paris Agreement.
5 - Programme governance
‘The carbon-crediting program shall have effective program governance to ensure transparency, accountability and the overall quality of carbon credits.’
6 - Registry
‘The carbon-crediting program shall operate or make use of a registry to uniquely identify, record and track mitigation activities and carbon credits issued to ensure credits can be identified securely and unambiguously.’ 5
Registries perform essential functions related to the integrity of carbon credits, including the application of accounting rules to avoid double counting. The ICVCM expects a registry system to uniquely identify each carbon credit, the associated mitigation activity, and identify any other associated attributes.
7 - Robust independent third-party validation and verification
‘The carbon-crediting program shall have program-level requirements for robust independent third-party validation and verification of mitigation activities.’6
The auditing requirements for the carbon-crediting programs need to include structure, management, resources, and process and information requirements for verification and validation bodies.
8 - Robust quantification of emission reductions and removals
‘The greenhouse gas emission reductions or removals from the mitigation activity shall be robustly quantified, based on conservative approaches, completeness and sound scientific methods.’7
9 - Sustainable development impacts and safeguards
‘The carbon-crediting program shall have clear guidance, tools and compliance procedures to ensure mitigation activities conform with or go beyond widely established best industry best practices on social and environmental safeguards while delivering on net positive sustainable development impacts.’
10 - Transition towards net-zero emissions
‘The mitigation activity shall avoid locking in levels of emissions, technologies or carbon intensive practices that are incompatible with achieving net zero emissions by mid-century.’8
Carbon credits can also be tagged with ‘additional attributes’ that point to a carbon credit’s specific quality features. The additional attributes are designed to allow the market to classify credits so buyers may more readily identify credits to match their preferences. This approach aligns with a separate consultation launched by Verra’s Verified Carbon Standard.9
The additional attributes identified by the ICVCM for CCPs comprise:
1 - The type of mitigation activity
‘This attribute could refer to whether the outcome of the mitigation activity constitutes a net reduction (“emission reduction”) or a net enhancement of removals by sinks (“removal”) and what type of removal process is employed (biological versus technological removals). Another attribute could relate to whether the mitigation activity constitutes an “emergent” or “break-through” technology.’10
2 - Authorisation for Article 6 purposes
‘This attribute can be assigned if the carbon credit’s associated mitigation activity is authorised by the participating host party (or where applicable, the relevant country) for uses towards “other purposes” under Article 6.2 of the Paris Agreement.’11
3 - Quantified SDG impacts
‘This type of attribute can be assigned if the mitigation activity can quantitatively demonstrate a substantive net positive contribution to Sustainable Development Goals (SDGs) in addition to SDG13.’12
4 - Adaptation co-benefits
‘This attribute can be assigned if the proponent of the carbon credit’s associated mitigation activity wishes to inform on contributions to adaptation consistent with the host country’s provisions under Article 7.1 of the Paris Agreement.’13
The draft Assessment Framework provides guidance and criteria for the ICVCM to assess whether carbon credits and carbon-crediting programs reach the high-integrity threshold outlined in the CCPs. The draft Assessment Framework provides for a distinct approach for jurisdictional REDD+ mitigation activities.
Carbon credits will only be able to be tagged under the oversight of the ICVCM as CCP-approved if:
a) ‘they are issued by a carbon-crediting program that meets the requirements set out in the CCPs and Assessment Framework; and
b) their methodologies for verifying different types of carbon credits meet the requirements for carbon credits, the CCPs and Assessment Framework.’14
The draft Assessment Procedure proposes a process for assessing CCP-eligibility, and determining how eligible carbon credits will be tagged; and how the ICVCM will continue to oversee and enforce the CCPs, thus enabling assurance and continual improvement. The ICVCM intends to facilitate the continual and phased development of the voluntary carbon market and embedding of these standards.