🌍 Laying down the law in the Wild West of the VCM

This week, the Biden administration waded into the hot waters of the voluntary carbon market (VCM) debate for the first time with the release of new principles defining “high-integrity” carbon credits, following in the footsteps of the EU’s Carbon Removal Certification Framework (CRCF) announced in February.

Until this year, this long-time marketplace where private buyers and sellers trade carbon credits representing tons of atmospheric greenhouse gasses avoided or removed has been largely decentralized and voluntarily driven — leaving registries and rating agencies to self-organize and regulate. Meanwhile, activity in the space has increased five-fold, in part due to increased corporate interest in offsetting GHG emissions (which we previously wrote about here). This rapid growth has created a  Wild West in the VCM, with at times controversial emissions accounting, questionable credit quality, ineffective offsets, and even contentions that the market shouldn’t exist at all.

Now, the sheriffs are coming into town to lay down the law — or, at least, principles and frameworks — and affirm that yes, the VCM is here to stay, if everyone can play nice. The EU is taking a stricter regulatory approach with the CCRF, while also separately running the EU emissions trading scheme as a trade measure that could potentially be tied to it in the future. The US, on the other hand, is adopting a more flexible, market-driven approach by introducing high-level guiding principles aimed at encouraging impact and participation. And although the White House’s new guidelines are neither legally binding nor enforceable, they’re a strong signal that the US government recognizes that half the battle in carbon credits is credibility. Top White House climate advisors, and the cabinet secretaries for the Department of Agriculture, Department of Energy, and the Treasury all signed the principles that include:

1. Carbon credits should meet credible standards with real decarbonization impact.
2. Activities that generate credits should avoid environmental and social harm.
3. Buyers should prioritize measurable emissions reductions in their own value chains.
4. Credit buyers should publicly disclose purchased and retired credits
5. Buyers’ claims should accurately represent the climate impact of retired credits and should only use credits that meet high integrity standards.
6. Market participants should continue to work to improve market integrity. 
7. Long-term, policymakers and market participants should seek to lower transaction costs.

But what are the implications of this announcement and how will they be implemented? We sat down with the sheriff in chief himself Josh Zoffer, Special Assistant to the President for Economic Policy, to dive deeper into the new principles.

This interview has been edited for length and clarity. 

CTVC: What’s the goal of this new announcement?

Josh Zoffer: Our goal here is to accomplish three things: One, to put a marker in the ground that we’re focused on the voluntary carbon market. We see its challenges: In too many cases, credits haven’t lived up to the emission savings that they promised. We see that as a problem that merits real attention from market participants to fix it.  

Second, our view of this market is that we want to see it overcome these issues and achieve its potential. We think that with the right incentives and guardrails in place, it can be an important tool to combat climate change. It can channel capital to available, low-cost solutions today, from nature-based solutions to innovative technologies, provided that these projects and credits genuinely achieve the decarbonization they claim.

Third, we want to lay down our view of what that would look like — what a responsible voluntary carbon market, on the supply and the demand side, looks like in terms of credits that are high-integrity, unique, additional, real, verifiable, and permanent. That includes the roadmap of all the actions that we, as the US government, are undertaking to bring that market to fruition.

CTVC: Why make this announcement now?

Zoffer: In the past few years, the VCM has been at an inflection point. Last year, we saw a huge amount of work from multi-stakeholder initiatives, like ICVCM on the supply side and VCMI on the demand side. But it was also a year of intense scrutiny and pressure on the market. So, from the perspective of development and whether it can achieve its potential, we felt like it was an important time for this intervention.

The US government has long had several touch points in this market, and those touch points are only increasing. The Office of the Special Presidential Envoy for Climate and the State Department have been involved in negotiating Article Six of the Paris Agreement for a decade, which is important for the international portions of this market. And with the passage of new legislation, like the Inflation Reduction Act and the Growing Climate Solutions Act, we have new tools and authorities that enable the US government to come in and shape this market in a way that we think aligns with these principles. 

CTVC: These principles are still pretty high-level and not binding, so how do you make sure they’re followed? 

Zoffer: Fundamentally, we are driving toward a world where market participants and stakeholders are confident that one carbon credit issued means one ton less carbon in the atmosphere. So these principles are about what conditions need to be in place for that to happen.

We are not establishing new protocols for project developers through these principles or rating different credits individually. But these rating agencies are continuing to help bring transparency to this market for buyers, and we encourage buyers to use them. 

These principles are a high-level articulation of what we think “good” looks like. There are several ways we are interfacing directly with this market in line with these principles. We actively take part ourselves in ways that reflect that vision. 

This week, the DOE announced the semi finalists in its $35m Commercial CDR Purchase Pilot Prize. The agency is now for the first time buying CDR credits as a direct purchaser, which we hope can guide the market toward quality and show what high-integrity purchasing looks like. Similarly, the USDA is building out new and exercising new authorities under the Growing Climate Solutions Act, including a registry of recognized protocols and tools to help farmers and forest owners access this market.

Additionally, the Commodities Futures Trading Commission (CTFC) is providing guidance on the listing for trading of voluntary carbon credit derivative contracts. It’s also standing up an environmental fraud task force with a mandate to look at fraud and other manipulative market practices in environmental markets, including voluntary carbon markets. So enforcement tools are available. 

CTVC: What role do you expect CDR to play in this market?

Zoffer: The most recent IPCC report shows we’ll need CDR. And right now, the market for CDR and CDR-based credits requires the voluntary carbon market, in order to provide revenue to these technologies and enable companies to continue investing and innovating, bringing costs down and improving the technology. So, we expect the voluntary carbon market to shift more toward a removals market over time, because we need that to be the case to hit our targets. 

Again, we want this market to succeed, to grow, and to support CDR and other technologies.

 CTVC: How do technologies like MRV play in? 

Zoffer: We view robust MRV as critical to getting this market right. Understanding how credit-generating activities are interfacing with and affecting the climate is essential to meeting that goal of giving the market confidence that one carbon credit means one ton of carbon reduced or removed from the atmosphere. 

One thing you’ve seen over the last year is a real focus from the Biden administration on investing in MRV and building out new tools, from releasing a national strategy to advance greenhouse gas measurement systems, to investments across the US government, like the DOE, the Department of Commerce, and elsewhere.  

CTVC: Principle four states that credit users should publish their purchasing and retirement of carbon credits, which isn’t something that many corporates do today. What is the aim with that? 

Zoffer: It’s definitely not a uniform practice, but it’s something that leading organizations and leading buyers are doing, and something we want to see more of.

When we think about what makes this market “high integrity,” one piece on the supply side is that the credits themselves need to actually deliver the decarbonization they claim. 

At the same time, we need to understand whether credits are being bought and used in ways that align with decarbonization impact — that when companies make net zero claims, they’re backed by robust, high-integrity credits, and by science. So we need to know what credits are being bought, how those credits are being used, and how they fit into the net zero or other climate claims that companies are making. 

One of our strongly held views is that transparency is essential to the success of this market. This step brings more transparency. Credit buyers and users making these robust, detailed disclosures can enable other market participants and stakeholders to understand whether they really are living up to the claims that they’ve made, and to the science that climate change demands of us. 

CTVC: What reaction are you hoping to get from this announcement? And in particular what can our readers do? 

Zoffer: I think the most important two things would be for suppliers to redouble their efforts to ensure that they are delivering on the decarbonization they claim. That applies to the activities and projects issuing credits. It applies to registries and rating agencies continuing to ensure that this market is delivering on quality — to help identify the credits that are, to point to the credits that are not, and to scale down the share of those credits in this market. Because we think that type of behavior, with credits just simply not living up to the promises they’ve made, isn’t workable. This market is going to succeed both as a tool for economic opportunity and as a tool for climate impact only if we rectify that.

And then on the buyer demand side, we want to see buyers really drive their capital toward that quality — for them to say, we’re going to do this, but we’re going to do it right. We not only want to see removals become a larger share of this market, but also to see the overall level of quality in this market increase. This means more data, more transparency, a more robust and high integrity set supply of carbon credits, and a more robust and high integrity market overall. It creates a virtuous cycle that improves and builds integrity and credibility over time. 

Special thanks to Josh Zoffer, Maria Michalos, and Kobi Weinberg for helping bring clarity to this new frontier of the voluntary carbon market.