On May 28, the Biden-Harris Administration issued the Voluntary Carbon Markets Joint Policy Statement and Principles (Policy Statement). You can find Covington’s analysis of the Policy Statement here. Jointly announced by the U.S. Secretaries of Treasury, Agriculture, and Energy, and senior White House climate officials, the Policy Statement describes a three-pronged approach to responsible carbon market development and participation: (1) credit or supply integrity, including protections regarding climate and environmental justice; (2) demand integrity, to ensure the credible use of credits; and (3) market-level integrity, including facilitating efficient market participation and lowering transaction costs. The Policy Statement builds on other recent federal actions, including the Commodities Futures Trading Commission’s 2023 proposed guidance for voluntary carbon credit derivatives and the Securities and Exchange Commission’s final climate risk disclosure rule, which requires certain disclosures related to carbon offset purchases, in the Administration’s attention to and elevation of the voluntary carbon market as an important element in the nation’s climate policy.
In this post, we dive deeper into the voluntary carbon market landscape, implications for business, and additional recent developments.
The Risks and Opportunities Presented by Voluntary Carbon Markets
Due to issues with monitoring and verification, voluntary carbon markets have struggled to gain traction and the trust of regulators. Core among these issues is the importance of establishing additionality, or certifying that projects truly incentivize the avoidance or removal of emissions that would not have otherwise occurred. Along with additionality is permanence, or how long the emissions removed or avoided will be kept out of the atmosphere. Double counting of these essentially immaterial assets has also been a concern. Finally, there is the need to prevent any negative impacts on communities local to offset projects, both in the U.S. and internationally, and ensure that profits reach these communities, such as through benefits-sharing arrangements. Claiming emissions reductions from unverified offsets can also expose companies to reputational damage and potential legal liability, such as under California AB 1305’s carbon offset disclosure requirements, state consumer protection laws, and the EU’s greenwashing directive and European Sustainability Reporting Standards (ESRS). The EU is also regulating the voluntary carbon market directly through its Regulation on the Certification of Permanent Carbon Removals.
Ensuring that offset credits represent genuine reductions in carbon emissions is key to developing and responsibly engaging in the voluntary carbon market. As highlighted in the Administration’s Policy Statement, as a complement to within-value-chain emissions reductions and with appropriate standards in place, the voluntary carbon market can play a key role in reaching decarbonization and net zero targets.
Federal Carbon Market Incentive Programs
By setting forth principles to guide both sellers and purchasers of carbon offsets, the Policy Statement builds on the Administration’s ongoing efforts to catalyze private sector engagement in the voluntary carbon market. In its fact sheet announcing the Policy Statement, the White House identified several carbon market incentive and integrity programs, namely:
- The Greenhouse Gas Technical Assistance Provider and Third-Party Verifier Program administered by the U.S. Department of Agriculture, which aims to provide technical assistance and carbon credit verification to U.S. farmers, ranchers, and private landowners seeking to generate carbon credits to facilitate their participation in voluntary carbon markets and ensure high-quality credits are produced;
- The Carbon Dioxide Removal Purchase Pilot Prize administered by the U.S. Department of Energy (DOE), which allows companies to compete for the opportunity to deliver carbon dioxide removal credits directly to DOE;
- The Carbon Negative Shot Program, under which DOE committed $100 million in grants for small carbon removal and storage projects as part of its goal of reducing the cost of capturing carbon dioxide from the atmosphere and storing it at gigaton scales to less than $100 per net metric ton of carbon dioxide-equivalent by 2032; and
- The Energy Transition Accelerator, a carbon finance platform launched by the U.S. State Department in 2022 in partnership with the Bezos Earth Fund and the Rockefeller Foundation that seeks to catalyze the transition to renewable energy in developing countries and, from these efforts, create carbon credits for purchase by companies.
Additionally, in June 2023, the Commodity Futures Trading Commission established the Environmental Fraud Task Force to address fraud and other misconduct in both regulated derivatives markets and in voluntary carbon markets related to purported efforts to address climate change and other environmental risks, providing another example of the growing momentum towards guardrails and integrity standards.
The Voluntary Carbon Market Landscape and Recent Updates
The Policy Statement and associated federal carbon market incentive programs exist within an ecosystem of international, civil society, and private sector efforts to bolster trust in the voluntary carbon market. We have highlighted three key organizations below, along with some of their most recent initiatives.
Voluntary Carbon Markets Integrity Initiative (VCMI). VCMI is a non-profit that seeks to promote voluntary carbon markets primarily through demand-side initiatives, initiatives that target the buyers of carbon credits. In 2023, VCMI launched its Claims Code of Practice which provides guidance for companies seeking to make claims regarding their use of carbon credits, including a beta Scope 3 Flexibility Claim for those seeking to address their scope 3 emissions.
VCMI is currently seeking feedback and launched a working group for companies interested in trialing the Scope 3 Flexibility Claim. The final version of the claim is anticipated in September 2024.
Integrity Council for Voluntary Carbon Markets (ICVCM). ICVCM is a non-profit that seeks to govern and promote participation in voluntary carbon markets. ICVCM targets carbon credit project developers, serving as the supply-side counterpart to VCMI. Its most significant initiative to date is the Core Carbon Principles (CCP), which set carbon offset standards and thresholds for disclosure. On June 6, ICVCM approved seven specific carbon crediting methodologies as meeting the standards for its high-integrity CCP label, which can now be used on an estimated twenty-seven million carbon credits. Another twenty-seven categories of carbon credits, representing over 50% of the market, remain under active assessment.
ICVCM plans to launch a series of work programs in 2025 for implementation in 2026 to incorporate additional carbon credit considerations, such as Article 6 of the Paris Agreement’s Corresponding Adjustments, the role of carbon credits in the UNFCCC Adaptation Fund, and the requirements for sustainable development, into the updated principles.
Science Based Targets Initiative (SBTi). SBTi is a UN-backed corporate climate action coalition that creates emissions-reductions standards and validates corporate decarbonization targets. In July, SBTi is expected to release draft rules for the use of environmental attribute certificates—defined by SBTi as instruments used to quantify, verify, and track the environmental benefits associated with commodities, activities or projects—for Scope 3 emissions abatement. Companies may provide input to SBTi regarding the rules prior to their release and, potentially, in a subsequent public consultation period.
Engaging in the Voluntary Carbon Market
Ultimately, the regulations, revised guidelines and principles, and formal projects that arise out of these government and voluntary initiatives have the potential to shape future opportunities and the responsibilities of companies that engage in the voluntary carbon market. Companies that are planning on engaging in the voluntary carbon market should consider the following:
Assess the risks of participating in the voluntary carbon market. The voluntary carbon market landscape remains in flux, with no binding requirements that providers or purchasers follow government principles or other industry guidance and best practices. Careful due diligence is essential to participating in these markets and making any corporate disclosures relating to such participation. Before engaging in voluntary carbon markets and using offsets to meet net-zero or other decarbonization goals, companies should assess the risk of voluntary carbon markets to determine whether and how they have a role amidst other emissions-reduction measures.
Leverage government and industry principles and initiatives. Companies should consider using government-issued principles and initiatives, such as those described above, when selecting carbon offset projects. While doing so does not entirely ensure that offsets are up to par, following government-issued principles, voluntary integrity frameworks, and, where relevant, participating in government-led initiatives can serve as components of due diligence.
Participate in shaping forthcoming rules and standards. There are a multitude of organizations developing proposed rules and standards that may influence the voluntary carbon market regulatory landscape. Companies should consider engaging with organizations to shape their proposed guidance so that it is workable in the first instance.
Covington’s Environmental and Energy practices, as well as our unique Carbon Management and Climate Mitigation (CM2) initiative, have extensive experience and capabilities helping clients navigate complex environmental and energy regulatory requirements, including navigating legal risks associated with using carbon offsets. Follow Inside Energy & Environment for more updates and analysis of the future of voluntary carbon markets.
Gabriela Nagle Alverio, Summer Associate, contributed to this blog post.