Integrity seen as key for future expansion of voluntary carbon market

While the voluntary carbon market (VCM) enjoyed rapid growth in recent quarters, an increasing number of industry participants have come to believe enhanced integrity will be key for a further scale-up.

The self-regulated market's liquidity exceeded $1 billion for the first time last November before expanding to $1.4 billion earlier this year, according to Ecosystem Marketplace, an initiative by US-based nonprofit Forest Trends.

But many in civil society have questioned whether the issuance and voluntary purchases of carbon offsets can actually lead to GHG emissions reduction and help cap global warming at 1.5 degrees Celsius to avoid climate disaster.

Critics like Carbon Market Watch (CMW) cite questionable methodologies for offset projects, purchases of offsets with low quality, and opaque marketplaces as their main concerns, saying the VCM risks becoming little more than a greenwashing exercise without greater integrity.

"So many companies now claim carbon neutrality that the term is in danger of becoming meaningless," CMW recently tweeted, referring to how companies claim to achieve zero carbon footprint with voluntary purchases of carbon credits. "Legislation can help prevent false green claims and greenwashing."

At the European Climate Summit earlier this week, carbon market veterans agreed integrity would be essential for VCM development, but highlighted how the sector's own initiatives could play a significant role.

These include the Integrity Council for the Voluntary Carbon Market (ICVCM), which aims to set criteria for high-quality carbon offset projects, and Voluntary Carbon Markets Integrity Initiative (VCMI), which wants to establish a sustainability guideline for buyers.

Rachel Kyte, co-chair of VCMI, admitted there are claims from civil society and scientific community that "many of the activities within the voluntary markets are pure greenwashing."

"The pressure on the voluntary market … has been quite intense," Kyte said. "If we can get integrity right, this market can grow. If we try to grow it without integrity, things are going to come to a crashing halt."

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance, estimates that the voluntary market could be scaled up to $50 billion in 2030.

"This place is gonna explode … to do that we need to lower friction costs. We need to convince the world that these are genuine credits," said Lars Kroijer, founder of carbon data firm AlliedOffset.

Meanwhile, nonprofit Environmental Defense Fund's Senior Climate Director Pedro Martins Barata observed that there are mixed signals in the market despite recent growth.

"On one hand, a huge boom. But on the other hand … the usual bad press we've had in the carbon markets," Martins Barata said. "If we can get assurance that would enable more participants to come into the market."

Mark Kenber, who sit on the boards of both the council and the task force, cautioned that the expectations for industry initiatives should be realistic as a perfect market doesn't exist.

"The broader stakeholder community would like us to be able to say that we've addressed all these issues perfectly. We know very well that's impossible," Kenber said.

"We need to be grown-ups and sensible about this. We can't predict the future with certainty—we won't be able to say with 100% certainty about the carbon credit quality," he added.

Supply-side integrity

Building on the TSVCM's work, the council is developing the Core Carbon Principles and Assessment Framework with the aim of establishing a definitive global threshold standard for high-quality carbon credits.

This will take into consideration various factors including carbon sequestration science, and the rights of indigenous peoples and local communities.

"The work … is absolutely essential if we want to have a market that is built on integrity," said Kenber, adding that there should be "end-to-end" transparency from project planning and development, credit issuance, to the usage of offsets.

The council will publish draft proposals and begin a 60-day public consultation in July. It is targeting releasing a final version by the end of this year.

Under current practices, carbon registries like Verra and Gold Standard develop methodologies for offset projects, which determine credit issuance, reporting and monitoring requirements, and other matters.

Margaret Kim, CEO of Gold Standard, which was founded in 2003 by NGOs including WWF, said ICVCM is working with registries to improve the quality of offset projects and "there's a huge room for complementarity."

But she warned that there is no point in demolishing the current registry system.

"I'm not saying the market is perfect … there is room to improve. But we cannot dismiss all the hard work that was put in on these projects over the two decades and try to reinvent the wheel," Kim said in the summit.

Registries guarantee "some level of quality," but projects can still be disputed, said Yuejia Peng, an associate director at S&P Global Commodity Insights.

"This is especially true for emission avoidance projects where you have to rely on some counter-factual baseline to calculate the would-be benefit of the project," Peng told Net-Zero Business Daily, citing the recent controversies over some US forestry projects as an example.

Integrity in purchases

On the demand side, several speakers at the summit suggested businesses should not only purchase high-quality credits but also make credible climate claims aligned with the Paris Agreement.

End-users in the VCM, those who will retire the credits to meet their emissions targets, often buy offsets with mixed qualities to reduce costs.

"A lot of end buyers are buying high-quality offsets, paying a premium. But they [also] have a large percentage of their portfolio" coming from lower quality projects, said Aymeric de Condé, director of carbon and renewables at trading house Strive by Vertis.

VCMI, whose work is being coordinated by US-based nonprofit Meridian Institute, is scheduled to release a Claims Code of Practice on 7 June. This aims to address how companies can use carbon offsets to make climate claims, such as net-zero production and products, in a science-based manner and achieve actual decarbonization.

"We need companies to be able to articulate what their strategy is towards net zero, how they're going to reduce their emissions, how they're going to remove emissions, and then why they would enter into the voluntary carbon market," Kyte said.

"We will need integrity on the demand side. Companies … need to be able to back up their claims and need to be able to show how the voluntary carbon market is adding to the [emissions] reduction," she added.

Posted 26 May 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.