White House Releases Voluntary Carbon Markets Guidelines

In an attempt to boost the credibility of the voluntary carbon markets (VCM) and to prepare for the 29th Conference of the Parties (COP 29) in Azerbaijan in November, the White House released on May 28 a policy statement and set of guidelines for both VCM credit/offset generators and users. Although these guidelines lack the force and effect of law, the mere fact that the Department of Treasury, the Agriculture Department, the Energy Department, and the White House’s climate and economic advisors combined to show support for the VCM could help to blunt some of the criticism of those markets as effective tools to achieve long-term greenhouse gas emissions reductions. Many of the principles in the White House document have been articulated and employed by multiple offset accreditation entities, even those criticized as crediting unsubstantiated emissions reductions. Others are designed to limit the use of offsets and place offset users in a more active role to ensure offset integrity. Carbon offset generators, users and other VCM participants should continue to track this and other developments leading up to the COP 29 in Azerbaijan in November.

Background

The idea of using emissions offsets to achieve environmental objectives reaches back to an early 1980s rule allowing refineries to trade and bank emissions reduction credits to remove lead from gasoline.^[1]The cap and trade sulfur dioxide emissions reduction program to combat acid rain enacted in the Clean Air Act Amendments of 1990 was so successful that it resulted in emissions reductions well below statutory requirements and at a fraction of the original estimated cost to achieve those reductions without cap and trade.^[2]

This success, in part, led to the incorporation of the Clean Development Mechanism (CDM) into the 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCC). The CDM allowed developed countries with emissions reduction obligations under the Protocol to sponsor emissions reduction projects in less-developed countries and count those reductions toward their national emissions reduction targets under the Protocol. The CDM established a set of rules for developing and receiving Certified Emissions Reductions (CERs) from projects that led to an ecosystem of validated emissions reductions methodologies, project validators and verifiers, and project developers. CERs were used and purchased at that time in the European Union (EU) and Japan. In the first Kyoto Protocol crediting period of 2006 – 2012, nearly 6,600 projects were registered and more than 1.2 billion CERs were generated. The CDM price collapsed in 2012 due to internal EU and Japanese policies that cratered demand. Demand for CDM credits started to rebound in 2016 when the system was opened up to other users outside the EU and Japan, but the CDM is not surviving under the Paris Agreement.^[3]

Beginning in 2015, the members of COP 21 created the Reducing Emissions from Deforestation (RED) program, which later added prevention of Forest Degradation (REDD) and other aspects (REDD+) to incentivize investments in forest protection programs through an international crediting program.

In parallel with the revival of the CDM and implementation of REDD and REDD+ was the growth of the VCM. Fueled primarily by corporate net zero and other greenhouse gas emissions reductions commitments and building on the expertise gained through the CDM, the VCM spawned its own ecosystem of credit issuing authorities, credit trading platforms, project developers, verifiers and validators. The VCM was valued at US$103.8 billion in 2023 with a projected value of $343.6 billion in 2032.^[4]

However, criticism of carbon trading programs also began to arise. Articles in the press began to appear, arguing that the emissions reductions, particularly in the VCM, did not represent actual reductions that would not have happened anyway (a concept called “additionality”) and that the VCM allowed corporate emitters to continue to emit without taking necessary steps to transition away from carbon-intensive production and products. Other criticisms were that some credit projects resulted in other adverse environmental impacts and negatively impacted local communities. Carbon offsets were even the subject of a 2022 John Oliver takedown, and a 2023 article in The Guardian claimed that the top 50 emissions carbon offset projects were either likely junk, problematic or of an efficacy that could not be determined.

However, the members of COP 28 in the United Arab Emirates (UAE) cited the VCM as part of the toolbox that could help spur private investment in global decarbonization.

Along with nongovernmental efforts to shore up VCM integrity, such as the Integrity Council for the Voluntary Carbon Markets, the Biden administration is trying to enhance the credibility of the VCM and prepare for COP 29, arguing that VCM has a valuable role to play in achieving U.S. and global decarbonization.

The Principles

The policy sets forth seven principles for responsible participation in the VCM applicable to both carbon credit generators and users. Many of these principles are well known and have guided implementation of the CDM and other carbon credit programs. Some are in response to the recent criticism of the VCM.

-Principle One: Credits should meet atmospheric integrity standards and represent real decarbonization.

This includes the basic principles that emissions reductions should be additional, unique, real and quantifiable, validated and verified, permanent, and compared to robust baselines. The principle also sets forth subprinciples for the successful operation of certification standards bodies.

-Principle Two: Credit generating activities should avoid environmental and social harm and should, where possible, generate co-benefits and be transparent and include benefits sharing.

This includes the commitment to avoid negative impacts to other key areas such as land use and tenure rights, food security, ecosystem integrity and biodiversity. It also includes transparency regarding impacts and co-benefits and equitable distribution of co-benefits.

-Principle Three: Corporate credit buyers and users should prioritize measurable emissions reductions in their own value chains.

This principle positions the use of credits as supplementing emissions reduction through business model transformation and supply chain decarbonization rather than as an emissions reduction strategy itself, regardless of overall costs to achieve reductions.

-Principle Four: Credit users should publicly disclose the nature of purchased and retired credits.

This principle calls for credit buyers and users to disclose the nature of purchased and retired credits and the extent to which they comply with Principles One and Two even if such disclosure is not required by applicable law.

-Principle Five: Credit users’ public claims should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards.

This principle calls for a code of conduct for credit buyers and users that defines what is required to make claims regarding an entity’s greenhouse gas emissions and what steps the user has taken to reduce emissions. The principle calls for users to reduce emissions from their supply chain first, regardless of cost, and use credits only to offset their “scope 3 emissions associated with science-aligned emissions pathways in cases where it would be unreasonable to expect a company to be able to fully abate those emissions within a given time frame.”

-Principle Six: Market participants should contribute to efforts that improve market integrity.

This principle calls for all market participants — credit creators, brokers, buyers, etc. — to contribute to the integrity of the market by, among other actions, incentivizing high credit quality; improving transparency regarding credit generation, transaction volumes and prices; promoting fair and equitable treatment of credit suppliers and equitable distribution of credit revenues; controlling for conflicts of interest; preventing fraud and market manipulation by bad actors; ensuring interoperability of markets; and other actions.

-Principle Seven: All stakeholders should seek to lower transaction costs by facilitating efficient market participation.

This principle sees credit generators as principally farmers, ranchers, forest owners, small businesses, and developing country jurisdictions and calls for policymakers and credit buyers to enhance market certainty for credit generators, especially those making long-term and significant investments, through the use of scientifically robust models.

Conclusion

There will always be sectors of the economy where complete decarbonization will pose significant scientific challenges or will require material resources that could result in greater carbon reductions if deployed elsewhere. Developing countries will not be able to make the investments necessary to decarbonize without significant investment from developed countries. Carbon credits and carbon markets can be an efficient mechanism to solve these problems if carbon credit and market integrity can be reasonably ensured and reduction projects don’t create other externalities. Building on the “UAE Consensus” at COP 28 in 2023, which included VCM as one of the key mechanisms to enhance private sector funding for decarbonization, these principles will help inform the discussion of how best to move toward global decarbonization at COP 29 in Azerbaijan in November. Carbon market participants should track these developments closely to strategically position themselves in the future carbon markets that will be shaped by these developments.

^[1]_{See, “The U.S. Experience with the Phasedown of Lead in Gasoline,” Richard G. Newell and Kristian Rogers Discussion Paper, June 2003, Resources for the Future.}

^[2]_{See, “The U.S. Environmental Protection Agency’s Acid Rain Program,” Juha Siikaaki, Dallas Burtraw, Joseph Maher and Clayton Munnings  Resources for the Future, November 28. 2012.}

^[3]_{See, “Collapse of the Clean Development Mechanism scheme under the Kyoto Protocol and its spillover:  Consequences of ‘carbon panic,’” Kazunari Kainou, VoxEU, March 16, 2022}

^[4]_{See, https://www.gminsights.com/industry-analysis/carbon-credit-market.}