Building long-term integrity in the voluntary carbon market

This article was co-authored with Charlie Bevis.

In recent years, an important question has arisen in relation to the voluntary carbon market (VCM) as it continues to expand: how do we elevate and maintain its integrity? The current dialogue on this issue, key to any growing market, is a constructive one designed to ensure the VCM remains fit for purpose in the coming decades and is able to contribute to the global economy-wide net zero transition required under the Paris Agreement.

In this article, we address why the VCM is so crucial to achieving net zero, what integrity means at different stages of the carbon credit supply chain, and which high-integrity initiatives have been implemented in recent months.

• Why do we need the VCM?
• Supply side initiatives
• Demand side initiatives
• The future of the VCM

Why do we need the VCM?

To understand the necessity of these new high-integrity initiatives, it is relevant to consider why the continued growth of the VCM will be so fundamental to the net zero transition over the coming decades.

A key component of the VCM is its ability to support the financing of emission reduction and removal activities, including new or emerging climate-related technologies and solutions. Often this funding is directed to those jurisdictions where the government's ability to fund such projects is limited, such as the emerging markets in the 'global south' or to new technologies which require revenue from carbon finance in order to be viable. With the cost of the net zero transition expected to be staggering (estimates suggest that transitioning energy and land use systems alone will require hundreds of trillions; a cost well beyond the capabilities of public funding alone)¹ it is critical that we harness the ability of the VCM to unlock private financing that will facilitate ambitious emissions reductions targets.

The VCM is also uniquely positioned to advance nature recovery and repair. With the aims established under the Kunming-Montreal Global Biodiversity Framework (which we wrote about here), including the goal of protecting 30% of Earth's land, oceans, and coastal areas by 2030, nature-based solutions that provide revenue generation have a key role to play. Nature-based solutions implemented with VCM funding can achieve dual purposes of both emissions reductions or removals and enhancement of natural capital, and the World Economic Forum estimates these alone may provide up to 30% of the mitigation required to limit global warming to 1.5 degrees above pre-industrial levels.²

Enabling companies to use carbon credits as a way to offset their emissions is particularly useful in the context of emissions that might currently be beyond the influence of their internal decision making, such as scope 3 emissions. The concept of 'beyond value chain mitigation' (BVCM) has found recognition under the SBTi and research has identified that those companies that are utilising the VCM are reducing their emissions more quickly than those that are not.

Further, the VCM is vital not just for facilitating emissions reductions but for supporting climate justice more broadly. The growth in the value of the VCM has been impressive: estimated at $1.2 billion in 2022 and projected to reach as high as $50 billion by 2030.^3,4 Through high-integrity schemes which incorporate strong environmental and social safeguards, the market will be able to funnel a consistent stream of investment into projects that are predominantly located in the global south whilst ensuring significant benefits for local communities that are often on the frontlines of the climate crisis.

Finally, VCM engagement is being driven by the lack of progress in the UN Article 6.4 negotiations (the Paris Agreement provisions which will set up the successor platform to the Clean Development Mechanism to be known as the Sustainable Development Mechanism). As we transition away from the Clean Development Mechanism without an alternative option in place, governments are likely to continue relying on the VCM to help meet their emissions reductions targets. For example, Singapore's National Environment Agency has recently confirmed that carbon tax liable entities can now offset 5% of their emissions using specified VCM credits (discussed further below).

The importance of the VCM to address the climate crisis underscores the need to ensure it meets the highest standards of integrity. Below, we consider some of the initiatives doing just that. Whilst each elevates the overall integrity of using carbon credits to offset emissions, they tend to focus on either the supply side or the demand side of the market and we have split them accordingly.

Supply side initiatives

At the heart of the supply side of the market are the project developers: entities which use a prescribed methodology to abate carbon dioxide emissions and generate carbon credits. At this stage, integrity requires achieving emissions reductions which are:

• additional (they would not have been abated 'but for' the project);
• permanent (they will remain abated for a set timeframe, and any risk of reversal is monitored and mitigated against);
• real (they are reliably calculated using estimates that are robust and conservative);
• verifiable (independent and accredited third parties can confirm the project's claims); and
• unique (credits are individually identifiable, such as through the use of serial numbers).

Integrity Council for the Voluntary Carbon Market

The first supply side initiative is the Integrity Council for the Voluntary Carbon Market (ICVCM), which assesses projects generating carbon credits and signposts those which are meeting the highest standards of integrity. In April last year, the ICVCM produced ten Core Carbon Principles (CCPs) following an extensive public consultation involving project developers, academics, NGOs, and indigenous groups. The CCPs set out rigorous thresholds (designed to be "ambitious but achievable") that intersect each element of the crediting program. The CCPs are split into three categories:

• Governance, which asks if the governance structure of the project provides transparency and accountability; if it is possible to track the project's mitigation activities; if there is publicly available and accessible information on its activities; and if there is robust third-party verification?
• Emissions reductions, which considers if the project demonstrates additionality and permanence; if the calculation of the emissions reductions is robust and conservative; and if there are measures to prevent double counting throughout the whole lifecycle of the credit (ie no double issuance by the project, and no double claiming by the end users)?
• Sustainable development, which enquires if the project implements social and environmental safeguards and creates a positive sustainable development impact; and if it avoids technologies and practices which will lock in emissions as we transition to net zero?

The ICVCM's assessment framework measures projects against the CCPs, bringing in external experts where a methodology raises complex issues, to determine which credits can be classed as "CCP-eligible". Each decision will be published on its website so that it is accessible to the entire market.

The first decisions by ICVCM were issued on 5 April 2024 when the ICVCM confirmed that it had approved three of the largest carbon credit programs: Gold Standard, ACR and Climate Action Reserve. Collectively, these standards account for about one quarter of the credits on the VCM. The largest standard, operated by Verra, is still under review. Future decisions will be made on specific methodologies that operate under these schemes or standards (the ICVCM has stated it is reviewing over 100) and these decisions are expected later in the year.

The impact of the ICVCM's decisions will be fundamental in standardising the VCM, which has grown organically to include a range of different standards and credits. Its impact will be far-reaching too given its claim that the crediting programs which have applied for its assessment represent 98% of the VCM. The ICVCM has been endorsed by the UK Government and Singapore's Monetary Authority, and both Climate Impact X and Xpansiv are already developing standardised contracts for trading CCP-eligible credits.

International Carbon Reduction and Offset Alliance

In March, the International Carbon Reduction and Offset Alliance (ICROA) released the latest version of its Endorsement Review Criteria (Endorsement Criteria),⁵ which sets out the process by which VCM service providers can be included in ICROA's Code of Best Practice (ICROA Code).⁶ The term 'VCM service providers' includes those managing credit certification (the 'standards') and those providing for the transaction and retirement of credits (the 'registries'), both of which are key safeguards on the type of credits in the market.

The process to join the ICROA Code is strict. Following a conflict check with ICROA's pool of assessors, the service provider undergoes an audit by a third-party assessor to determine if it satisfies the Endorsement Criteria. ICROA imposes strict constraints on who can be an assessor: barring anyone who is a project developer (or earns any income from programmes), and assessors cannot complete more than two sequential assessments of the same service provider. Ultimately, each applicant has three chances to be successfully reviewed (receiving feedback and suggestions for improvement between each round) before it must re-apply.

The Endorsement Criteria assesses each component of the programme, including its:

1. Independence (it must have sufficient conflicts policies; and not be involved in buying or marketing carbon credits, or brokering transactions in carbon credits);
2. Registry (it must be linked to a registry which provides publicly available information about the projects, individually identifies credits using unique serial numbers and provides a credit status such as "issued" or "retired");
3. Validation and Verification (it must only issue credits that have undergone independent third-party verification; it must list its approved validation and verification bodies (VVBs) and provide information as to how it provides oversight of its VVBs);
4. Carbon Crediting Principles (it must have procedures in place to ensure that each credit is real, permanent, additional, unique and measurable); and
5. Environmental and Social Impacts (it must undertake risk assessments for social and environmental impacts (to be checked by the VVBs); and it must, at minimum, ensure each project fulfills the 'no net harm' principle).

Following a successful application to join the ICROA Code, each member must undergo an ongoing annual independent audit to ensure its continued compliance with international best practices.

Credit standards reforms

In addition to these external measures, the top-ranking credit standards have also led their own internal reforms to boost integrity in the VCM.

At COP28 in Dubai, six of the leading standards - Global Carbon Council; Gold Standard; Verra; Climate Action Reserve; ACR; and Architecture for REDD+ Transactions - announced a new collaboration. They pledged to establish a framework by which they will:

1. support the ICVCM's independent assurance work;
2. seek to align their standards for the quantification and accounting of emissions removals and reductions; and
3. work together to promote the co-benefits of projects for local communities on the ground.

Crucially, by aligning themselves with each other and the ICVCM, the standards will bring greater clarity to the market and help to more clearly distinguish poor and high quality credits within the VCM.

As an example of action being taken, in November 2023 Verra announced a new 'reducing emissions from deforestation and forest degradation' (REDD) methodology. Whilst there will always be difficulty in assessing the emissions from a hypothetical scenario in which the project does not exist, the new high-intensity baseline approach will calculate emissions using satellites and other sophisticated technologies to create a "single deforestation dataset for a given jurisdiction" (to improve the quality of the baseline against which it calculates the emissions that the project has avoided). The new methodology will also require the baseline to be reassessed every six years (reduced down from ten) to incorporate changes to local deforestation rates into offset calculations in a more timely manner.

Demand side initiatives

Once generated, and unless sold directly to an end user under a bilateral agreement, credits may be traded on the VCM. They are often bought and sold many times before eventually being retired. When doing so, the end user will likely make a public claim as to its offsetting. High-integrity behaviour at this stage is defined by:

• provable claims (the end user should only make claims which are objective, verifiable and not misleading);
• emissions reductions (end users should retire offsets in addition to emissions reductions, not as an alternative to doing so); and
• transparency (information about the credit's issuing project, standard and current status should be publicly available and accessible).

Science Based Targets initiative

The Net Zero Standard (NZS) was launched by the Science Based Targets initiative (SBTi) at COP26 in Glasgow to establish a "clear, consistent and science-based definition of net-zero", in response to the wide-scale (and often arbitrary) use of the term "net zero". The most recent version of the NZS took effect from 13 March 2024.

Since launching, the NZS has had a rapid uptake in the market and over 3000 companies are now committed to it.^7,8

The definition of "corporate net zero" set out by the NZS contains two elements:

1. "Reducing scope 1, 2, and 3 emissions to zero or a residual level consistent with reaching net-zero emissions at the global or sector level in eligible 1.5°C-aligned pathways; and
2. Permanently neutralizing any residual emissions at the net-zero target year and any GHG emissions released into the atmosphere thereafter."

Crucially, the NZS requires that offsetting is not reported as part of a company's greenhouse gas (GHG) inventory or used in place of emissions reductions. It states that credits "do not count as reductions toward meeting near-term or long-term science-based targets" and should only be used to neutralise residual emissions (ie those remaining once all feasible emissions reduction options have been exhausted). In a recent announcement the SBTi opened the possibility that it might allow offsets to be used for scope 3 abatement in certain circumstances (and new rules and thresholds are intended to be released in July 2024).

Through the NZS, the SBTi is tackling one of the most common fears surrounding the VCM: that companies will use offsets as an alternative to reducing their own emissions, allowing them to continue operating a business-as-usual strategy. To aid this strict approach, the SBTi released two reports in February this year to advise companies on the "design and implementation of high-integrity and high-impact BVCM strategies",⁹ and to provide policy insights on reforming the broader corporate ecosystem to incentivise private-sector BVCM.¹⁰

Voluntary Carbon Market Integrity Initiative

Another initiative, the Voluntary Carbon Market Integrity Initiative (VCMI), was established to raise the standard of offsetting claims. It has produced the Claims Code of Practice (VCMI Code) (version 2 of which was released in November 2023), which outlines principles for credible, high-integrity claims and is intended to go "hand in hand" with the ICVCM's Core Carbon Principles.

As an overview, the VCMI Code envisions a holistic commitment to climate action, requiring that a company's targets be based on its complete GHG inventory (meaning it cannot rely on just one part of the business going 'carbon neutral') and it must refrain from any lobbying which contravenes its targets. Furthermore, the VCMI Code integrates independent transition models by requiring alignment with the Intergovernmental Panel on Climate Change's model pathways and Nationally Determined Contributions. Finally, those making a claim are required to be contributing towards a wider positive impact than just emissions reductions: the supply and use of the credits must have a net-positive impact on affected local communities, and the entity making the claim must be working towards a nature positive state of recovery.

The VCMI has established a four-stage process for making a claim:

1. Comply with the Foundational Criteria (which involves disclosing an annual GHG inventory, and setting SBTi-aligned near-term emissions reduction targets covering scope 1 to 3 emissions (and demonstrating progress towards these)).
2. Select a VCMI Claim (as a baseline, the entity must be making progress on its emissions reduction targets; it can then make a claim based on the percentage of its outstanding emissions it is offsetting (Silver is more than 10%; Gold is 50% or more; and Platinum is 100% or more)).
3. Retire eligible carbon credits (each of VCMI's Claims require that these must be high-integrity CCP-eligible credits).
4. Obtain third party assurance (this must be in accordance with the VCMI Monitoring, Reporting and Assurance Framework).

Further detail of the VCMI Code requirements can be found in our earlier update, accessible here.

IETA's Guidelines for High Integrity Use of Carbon Credits

This month, the International Emissions Trading Association (IETA) released Guidelines for High Integrity Use of Carbon Credits (IETA Guidelines), which have been developed by the IETA Demand Task Force over the previous two years. These state that they have been prepared following a review of best practices and existing guidance in the VCM and are intended to assist in building towards a market consensus.

The IETA Guidelines are as follows:

1. Demonstrate support for the Paris Agreement goals.
2. Quantify and publicly disclose scope 1-3 emission profiles.
3. Establish a net zero decarbonisation pathway and near-term targets (companies should set an internal carbon price and adopt a decarbonisation pathway that is science-aligned).
4. Use carbon credits in line with the mitigation hierarchy (the focus must be on decarbonisation and those in hard-to-abate sectors should contribute to the research, development and deployment of emission reducing technologies).
5. Only use high-quality carbon credits (which have received independent quality assurance from a third party such as the ICVCM and are from reputable and experienced programmes, including those endorsed by ICROA).
6. Transparently disclose use of carbon credits (companies should provide sufficient details to identify the credits they have retired and ensure that all claims are robust and accurate).

Notably, the IETA Guidelines differ from the approach of similar initiatives, such as the SBTi and the VCMI, in one key respect: companies may use offsets to compensate for unabated scope 1-3 emissions in order to meet their interim targets. They provide that this should be limited to where there is a "particular risk of missing an interim target" and that companies should publicly disclose why they are offtrack. IETA justifies giving companies this option on the basis that those using offsets are more likely to be taking additional climate action (discussed further below).

Tighter regulations on offset claims

VCMI's work is complemented by more stringent regulations being implemented by governments regarding the claims that companies can make about their offsetting, including:

1. In California, AB 1305: Voluntary Carbon Markets Disclosures Act took effect from the start of 2024. This legislation established tough annual disclosure requirements for those: (i) selling carbon offsets; or (ii) purchasing carbon offsets in order to make a net-zero claim (or similar). Details to be disclosed include the name and location of the project, the estimated emissions reduction, the durability period and if there has been independent verification. The penalty for contravening the law is a fine of up to $2,500 per day.
2. On 17 January 2024, the European Parliament adopted an EU law to empower "consumers for the green transition through better protection against unfair practices and better information". From 2026, it will ban the use of claims such as 'carbon neutral', 'carbon positive' and even 'reduced climate impact' where these are based on offsets, as opposed to the "actual lifecycle impacts of the product". This will be complemented by the EU's Green Claims Directive, which, whilst still being drafted, is intended to tackle greenwashing by making green claims "reliable, comparable and verifiable across the EU".
3. In 2023, Singapore tightened its International Carbon Credit (ICC) framework with a strict new Eligibility Criteria. Under its Carbon Pricing Act 2022, companies which are liable to pay carbon tax can offset up to 5% of their emissions through ICCs, however the new Eligibility Criteria will now require that ICCs used for this purpose align with the Paris Agreement's timeframe and seven additional principles, including that the credits are additional, real and permanent.

Climate litigation

Lastly, higher standards in the VCM are being driven by climate litigation, which is exposing misleading offsetting claims.

For example, in October 2022, Solutions for our Climate (SC) sued South Korean company SK Lubricants for claiming that some of its products were "carbon neutral". SC alleged that the company had purchased insufficient offsets to satisfy this claim and that some of the offsets did not meet the threshold of additionality (after crediting agency Renoster found that the project's trees would have been planted anyway).

Last year, the Swiss advertising regulator found that FIFA had misled customers over its claims that the Qatar World Cup was "carbon neutral". Analysis from Carbon Market Watch found that FIFA's offsetting relied heavily on renewable energy projects, which were likely to have been built anyway, and artificial tree nurseries in the desert, which were unlikely to permanently abate emissions.¹¹ The regulator warned FIFA against making similar statements until it had "full proof of the calculation . . . of all CO2 emissions caused by the tournament, and proof that these CO2 emissions have been fully offset".

More recently, a Dutch court ruled that the airline KLM had misled customers through a range of environmental statements, one of which suggested that customers could offset the emissions of their flights through reforestation programmes to "reduce [their] impact". The judgment found that the claims had given "the wrong impression that flying with KLM is sustainable".¹²

The list of similar claims is expanding and includes other high-profile litigation currently on foot, such as the class action against Delta Air Lines for marketing itself as "carbon-neutral" and the pending lawsuit against EnergyAustralia for its "Go Neutral" products.^13,14

As this litigation further clarifies the distinction between high- and low-integrity offset claims, companies should be alert to the increased likelihood that they will be the target of climate litigation should they make offsetting claims which are misleading or cannot be verified.

The future of the VCM

The above developments demonstrate several trends in the VCM. Firstly, the expectation that credits should be used in addition to actual emissions reductions, not as an alternative to doing so (shown by the VCMI's claims and the SBTi's NZS). Secondly, that new initiatives are increasingly collaborating with one another (eg the VCMI incorporates the work of the SBTi and ICVCM into the VCMI Code), to ensure a comprehensive approach is taken across the supply and demand sides of the market. Finally, there is a focus on clarifying market standards to enable purchasers and users of credits to distinguish what credits should be used and in what way.

As stated succinctly by the VCMI:

"All VCM activity must be high integrity. Every credit originated and purchased must be high quality. Use of carbon credits must be in addition to - not instead of - decarbonization. There cannot be a slip back to the ways of the past where low-integrity approaches damaged the VCM's reputation and ability to deliver financing to emerging and developing economies."

For the reasons set out earlier, participation in, and expansion of, the VCM is essential to achieving the Paris Agreement goals. A recent report by We Mean Business Coalition also captured the VCM's multiplier effect upon climate action: finding that more than 70% of surveyed companies agreed that participating in the VCM enabled them to take climate action beyond what they would otherwise be doing.¹⁵ Further, almost two thirds stated that purchasing high-integrity, high-value credits incentivised them to invest in decarbonisation. Reaffirming this, analysis by Ecosystem Marketplace found that offsetting companies are more likely to report lower gross emissions year-on-year, have science-based targets and disclose their scope 1-3 emissions.

It is therefore to be hoped that the integrity initiatives discussed above will ensure that the VCM is fit for purpose and continues to be a fundamental pillar of the net zero transition in the coming decades.

Footnotes