Draft Core Carbon Principles for the Voluntary Carbon Market released

• Drivers for reform of the voluntary carbon market
• Integrity Council for the Voluntary Carbon Markets
• The Core Carbon Principles and Assessment Framework
• Next steps
• Our carbon markets practice

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.

Integrity Council for the Voluntary Carbon Markets

The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body for the voluntary carbon market which was established as an outcome of the Taskforce on Scaling Voluntary Carbon Markets. The ICVCM's purpose is to ensure the voluntary carbon market plays a legitimate role within, and accelerates, a just transition to 1.5 degrees Celsius, and it has released its draft Core Carbon Principles (CCPs), along with an accompanying Assessment Framework and Assessment Procedure (Assessment Framework) for public consultation. Following the public consultation which ends in September 2022, the Assessment Framework is intended to be used to assess carbon-crediting programmes and credit types against the CCPs, commencing in 2023.

The CCPs aim to establish a consistent and standardised guide to assess the recognition of high quality carbon credits issued under voluntary schemes, such as Verra and Gold Standard, with the purpose of creating a market which achieves real verifiable climate change impact with environmental and social integrity. The aim is to drive alignment across the voluntary carbon market programmes to establish a definitive and consistent global benchmark for high-integrity carbon credits.

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

Additional attributes

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

Assessment Framework

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

Assessment Procedure

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.

Next steps

Consultation regarding the CCPs and Assessment Framework is open to the public until 27 September 2022. The public consultation will be overseen by the British Standards Institute (BSI) and all comments and submissions need to be made through the BSI website. The ICVCM have made it clear that no pre-formed views have been made at this stage and invite the community to contribute their expertise and provide feedback on the carbon credit framework. Collaboration between relevant stakeholders and input from market participants is critical if the CCPs and Assessment Framework are to be accepted as the global threshold standard for high quality carbon credits.

The final CCPs v1.0 together with the finalised Assessment Framework and Procedure, are targeted for Q4 2022. Carbon crediting programmes will then be invited to be assessed in Q1 2023, with assessment expected to take four to six months.

Our carbon markets practice

In order to maintain the legitimacy of 'off-setting' or the use of carbon credits to support net zero or carbon neutral goals, it is critical that integrity is at the heart of future market development. Increasingly, there will be greater focus from regulators, investors and broader civil society on the quality of the credits that are being used for these purposes. As stated earlier, corporates looking to purchase carbon credits, particularly for use in the future, need to be mindful of the increased scrutiny that is likely to occur, not only in relation to claims about the use of credits, but the quality of the credits that underpin those claims. This was covered in our recent legal update on the draft Claims Code of Practice.

Our carbon markets practice has a deep understanding of the voluntary carbon market, having been advisors to both purchasers and sellers of voluntary carbon credits, as well as developers of carbon projects across a large range of jurisdictions, for almost 20 years. We are well placed to advise on all aspects of carbon projects, including assisting corporate buyers to navigate their approach to a procurement strategy for the purchase of carbon credits which is consistent with the proposed CCPs.

Footnotes