Voluntary Carbon Markets

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On May 28 2024, the Biden administration released the "Voluntary Carbon Markets Joint Policy Statement and Principles". This is one of a number of recent international initiatives to "shore up" the voluntary...
United States Finance and Banking
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On May 28 2024, the Biden administration released the "Voluntary Carbon Markets Joint Policy Statement and Principles". This is one of a number of recent international initiatives to "shore up" the voluntary carbon markets (VCM).

The Joint Statement makes a number of important and supportive points in favor of the VCM, noting that:

  • High-integrity VCMs, as well as carbon credit markets more broadly, have the potential to support decarbonization efforts within the United States and globally.
  • Important questions have emerged about how to ensure that VCMs genuinely drive additional decarbonization action (rather than reward what would have happened anyway) that is sustained over time and does not simply shift emissions elsewhere.
  • Fully achieving the potential of these markets requires further action to address challenges that have emerged.

The principles set out in the Joint Statement (the "Principles") will guide how the US Government engages with VCMs. Through the Joint Statement, the US government encourages the US private sector and other stakeholders in the carbon credit value chain to responsibly participate in the VCM market, consistent with the Principles (see further below). While the focus of the Joint Statement is on VCMs, much of the content speaks to the development and operation of carbon credit markets more generally.

What is the VCM?

The VCM are markets where carbon credits are bought and sold for voluntary use rather than to comply with legally binding emissions reduction obligations. However, the distinction between voluntary and "compliance" markets is becoming increasingly blurred. For example, the aviation sector has introduced a scheme called CORSIA, under which operators offset emissions by canceling "CORSIA Eligible Emissions Units".

The eligibility of credits under CORSIA demonstrates the increasing integration of voluntary and compliance carbon markets. The implementation of CORSIA has been divided into three phases – two initial, voluntary phases (2021-2023 and 2024-2026) and a mandatory phase that would take place from 2027.

Why do people engage with the VCM?

Companies are under pressure to reduce their carbon footprint (and that of their supply chain) from a number of sources. These include governments, NGOs, consumers, regulators, shareholders and other stakeholders, including employees. Many have turned to carbon credits or "offsets" under the VCM as part of this.

What different kinds of projects are there under the VCM?

Projects under the VCM use a wide variety of methodologies. Project types include those in sectors as diverse as cookstoves, renewable energy, and forestry projects, together with those that reduce emissions in industrial processes.

However, there are two main "types" of projects that are important to understand. The first is emission reduction projects. The second is emissions "removal" projects. A "removal" requires the extraction of carbon dioxide or other greenhouse gases from the atmosphere. "Reduction" projects result in fewer emissions relative to what otherwise would have been emitted.

Removal projects are generally seen as having higher integrity and are more costly. However, many argue that reductions projects are also a useful way to fund emissions mitigation and that there are already very many safeguards that are put into place to guarantee their integrity.


Another key concept is that a credit from a VCM project must be "additional". This "ensures" that the applicable emission mitigation activity only takes place as a result of the project and that it would not have happened in any event.

Many have criticized the approach to additionality in the context of the VCM. In the forestry sector, for example, it has been argued that the risks to existing forests have been exaggerated and/or the baselines used to assess the success of projects have been improperly determined.

See our article here The "Integrity" Challenge in Carbon Offsets | Insights | Mayer Brown.

Evolution of prices

Recent controversy over the VCM appears to have given rise to significant volume and price reductions. Ecosystem Marketplace's State of the Voluntary Carbon Market 2024 indicates that the market for carbon offsets shrank dramatically last year, falling from $1.9bn (£1.5bn) in 2022 to $723m in 2023.Further, offsets generated by REDD projects lost 62% of their value between 2022 and 2023.

Interaction with net zero

Many entities have adopted "net zero" strategies. The extent to which carbon credits under the VCM can and should be used towards meeting net zero targets has been the subject of a lot of discussion. There is concern that some organizations use offsets so that they can "continue to pollute" and avoid reducing emissions.

Many entities use Science Based Targets initiative (SBTi) in respect of their net zero targets. The SBTi has announced that they will change their rules to allow for offsets to be considered "valid" for Scope 3 emissions abatement purposes as a way for companies to accelerate the decarbonization of value chains while companies make their way to eliminate carbon emissions at the root through innovation and technology improvements. This announcement has also attracted some controversy.

Attempts to improve the VCM

Over the last few years there have been an increasing number of initiatives to "improve" the VCM.

  • Commodity Futures Trading Commission (CFTC):The CFTC has proposed guidance with factors that should be addressed in the design of a derivatives contract relating to carbon credits from voluntary projects. These include quality standards such as transparency, additionality, and permanence and risk of reversal, and robust quantification.
  • Integrity Council for the Voluntary Carbon Market (ICVCM):The ICVCM has been established to improve integrity, standardization and transparency in VCMs by building on existing governance, procedures and policies to increase comparability and quality.
  • Voluntary Carbon Markets Integrity Initiative (VCMI):The VCMI has published the VCMI Claims Code of Practice, which provides credibility to corporate decarbonization efforts through ratings based on clear requirements on credit use and internal emissions reductions.
  • EU legislation: The EU is putting in place legislation to ban claims that a product has a neutral, reduced or positive impact on the environment because of emissions offsetting schemes. It has also introduced a framework for certifying carbon removals, carbon farming and carbon storage in products generated in the EU.

Voluntary Carbon Markets Joint Policy Statement

Against this backdrop, the Principles set out in the Voluntary Carbon Markets Joint Policy Statement and Principles are that:

  1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.
  2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.
  3. Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains.
  4. Credit users should publicly disclose the nature of purchased and retired credits.
  5. 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.
  6. Market participants should contribute to efforts that improve market integrity.
  7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

We look at these in further detail below.

Integrity standards

The Principles suggest that activities should be additional, unique, real and quantifiable, validated / verified by an independent third party, permanent (for a specified timeframe) and subject to robust baselines.

These criteria are already met at a high level by numerous independent VCM standards, including some of those subject to recent criticism. The question will therefore be, to what extent do the regulators feel that existing practices and procedures are inadequate, and what should be done to remediate such inadequacies.

Avoiding harm and co-benefits

The Principles suggest that safeguards should be put in place to identify and avoid potential adverse impacts on people and the environment, including as they relate to local communities, land use and tenure rights, food security, nature, and biodiversity. The Principles also reference "Free, Prior and Informed Consent".

This is an area where, until now, existing standards have largely left it to the market to implement checks and controls. It remains to be seen whether VCM projects, which can often be much smaller in scale to traditional protein financing transactions, for example, are willing or able to implement more rigorous controls such as those implemented by the IFC's Performance Standards. Host country protections will always be a minefield, particularly in certain jurisdictions.

Prioritizing measurable emissions reductions

As referenced above, there is currently no uniform methodology for how "net zero" should apply to businesses. Further, a move to net zero is not generally a legal requirement that applies at the private company level. Instead, companies are incentivized by tax breaks, RECs, etc. (the carrot) and subject to emissions performance standards, disclosure requirements and emissions trading schemes (the stick).

In the absence of insisting on a more robust framework for how "net zero" should be applied, it seems awkward to specify how one element of a potential net zero strategy (in this case, the use of offsets) should be implemented / achieved.

There is a strong understanding that businesses seeking to reduce their emissions should prioritize within-value-chain emissions reductions. Nonetheless, it remains difficult to unpick at what stage such decarbonization activities are "adequate" and as such when it is possible for businesses, within the meaning of the Principles, to no longer "prioritize" measurable emissions reductions within their own value chains.

Public disclosures

A suggestion that entities should publicly disclose the nature of purchased and retired credits is consistent with the direction of travel in respect of sustainability disclosures more generally. The SEC's climate disclosure rules and those of the EU and ISSB all require enhanced disclosures in this area.

Credits that meet high integrity standards

It is unlikely to be controversial that carbon claims should rely only on the impact of credits that meet current high integrity standards at the time the claim is made. As trailed above, what will prove more challenging is to define what standards are "high integrity" and what lengths must be gone to in order to ensure that broader harms are avoided.

Efforts that improve market integrity

The Joint Statements set out a number of lofty ambitions for those that participate in the carbon markets. At a high level, this is unlikely to be challenging. The carbon markets are rife with standard setters, registry hosts, validators, verifiers (to name but a few), and subject to significant public scrutiny.

The kinds of initiatives suggested by the Joint Statements – to name but a few: incentives to develop and purchase high-integrity credits; improving transparency and the publicly available data of credit-generating projects and programs, including transaction volumes and prices; promoting fair and equitable treatment of suppliers involved in credit generation, including fair distribution of revenue; controlling for potential conflicts of interest among VCM service providers; preventing fraud and manipulation – are much more redolent of regulated markets.

It seems overly optimistic to be able to properly regulate these matters on a voluntary basis. Surely, if the Principles espoused in the Joint Statement are to be adhered to, a much more actively formal regulatory stance needs to be adopted by the relevant agencies.

Efficient market participation / lower transaction costs

Policymakers and buyers are encouraged to consider ways to enhance market access and also promote certainty for credit providers undertaking long-term and often significant investments in decarbonization that plan to rely on VCM revenues to finance their actions.

Indeed, this has been a priority of the carbon market and climate finance protagonists more generally for several decades. Many of these issues have also been extensively discussed as part of the ongoing international climate negotiations for many years. Highlighting the principle is of course important. But implementing regulations and systems that get there in reality is beyond tricky. It also requires a significant degree of extra-territorial regulation in the context of international climate mitigation.

The good news

The good news is that many elements of the Principles have already been considered extensively by the Taskforce on Scaling Voluntary Carbon Markets (see our article Scaling Voluntary Carbon Markets: Taskforce Releases Core Carbon Principles and Roadmap | Insights | Mayer Brown).This effort morphed into the ICVCM's Core Carbon Principles. These (different, but not so different) principles are: effective governance, tracking, transparency, robust independent third-party validation and verification, additionality, permanence, robust quantification of emissions reductions and removals, no double counting, sustainable development benefits and safeguards and contribution to net zero transition.

The most significant part of the Voluntary Carbon Markets Joint Policy Statement and Principles is probably the (relatively) unwavering support for the carbon markets, tethered to a commitment to improve integrity.This may help the current negotiations over Article 6 of the Paris Agreement which are hoped to conclude at COP 29 in November of this year.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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