Principles for Responsible Participation in Voluntary Carbon Markets - Smart Energy Decisions

GHG Emissions, Finance, Sourcing Renewables  -  May 29, 2024 - By Department of Energy

Principles for Responsible Participation in Voluntary Carbon Markets

While voluntary carbon markets (VCMs) remain relatively small today, they have the potential to grow in the coming years and channel a significant amount of private capital to support the energy transition and combat climate change, with the right incentives and guardrails in place. At the same time, fully achieving the potential of these markets requires further action to address challenges that have emerged, promote robust standards for carbon credit (“credit”) supply and demand, improve market functioning, ensure fair and equitable treatment of all participants, and instill needed market confidence.

The Department of Energy has published the Voluntary Carbon Markets Joint Policy Statement and Principles to provide guidance on how U.S. market participants should engage in these markets. While the focus of this statement is on VCMs, much of the content speaks to the development and operation of carbon credit markets generally, including corporate buyers.

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.

Activities that generate credits and the credits themselves should be certified to a robust standard for activity design and MMRV of emission reductions or removals, applying procedures that deliver on core integrity principles, including these elements:

• Additional. The activity would not have occurred in the absence of the incentives of the crediting mechanism and is not required by law or regulation.

• Unique. One credit corresponds to only one tonne of carbon dioxide (or its equivalent) reduced or removed from the atmosphere and is not double-issued.

• Real and Quantifiable. Claimed emissions reductions or removals represent genuine atmospheric impact that is determined in a transparent and replicable manner using robust, credible methodologies. Relevant activities are designed to prevent emissions from occurring, being shifted, or intensifying beyond their boundaries as a result of the activity (“leakage”).

• Validation and verification. Activity design is validated, and results are verified, by a qualified, accredited, independent third party.

• Permanence of greenhouse gas benefits. The emissions removed or reduced will be kept out of the atmosphere for a specified period of time during which any credited results that are released back into the atmosphere are fully remediated.

• Robust baselines. Baselines for emissions reduction and removal activities are based on rigorous methodologies that avoid over-crediting, prioritizing the use of performance benchmarks where applicable, and that evolve over time to reflect advancements in national climate policy, emissions pathways and decarbonization practices, and technology.

Some criteria, such as those for avoiding emissions leakage or for ensuring additionality of more capital-intensive infrastructure and policy alignment, can be more readily achieved through sector-wide or jurisdictional-scale approaches to crediting and nesting of project-level activities into jurisdictional-scale programs and accounting. Buyers and sellers should account for these differences in their market activities.

Credit certification standards bodies — which register activities and issue credits on the basis of verification against standards and approved methodologies — play an essential role in ensuring credit integrity. These bodies and their standards should:

• Effectively govern their standards to ensure transparency, accountability, responsiveness (e.g., to evolving best practice, science, and policy landscapes), and, when applicable, the longevity necessary to responsibly certify removal activities;

• Operate or make use of a registry to transparently track the attributes, issuance, ownership, and retirement and/or cancellation of credits, coordinating where appropriate to ensure that activities are not registered with more than one registry;

• Ensure robust MMRV of emissions reductions and removals;

• Have procedures in place to effectively address double-counting risks, including to prevent double-registration and -issuance, to prohibit double-selling and -use, and to transparently reinforce multi-stakeholder efforts to avoid double-claiming as applicable;

• Require publicly available and accessible, comprehensive, and transparent information on crediting activities;

• Ensure verification of reported emissions reductions and removals, and validation of the relevant project or program, is undertaken by independent, accredited third parties;

• Ensure their governance procedures address real or perceived conflicts of interest in relation to the standards body’s own governance, as well as in registry administration and in validation and verification activities; and

• Support a robust enabling environment for equitable participation, including by projects and programs in developing countries.

2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.

Climate and environmental justice impacts of credited activities are important to understand, and project and program developers should seek to avoid negative externalities for the communities in which they operate. Safeguards should be put in place to identify and avoid potential adverse impacts on people and the environment, including as they relate to local communities, land use and tenure rights, food security, nature, and biodiversity. They should proactively monitor and mitigate any adverse impacts that remain. Where appropriate, they should also seek to enhance positive impacts. To that end, the identification and delivery of verified “co-benefits” associated with credit-generating projects and programs, such as sustainable economic development and increased biodiversity, are encouraged. Projects and programs, including any benefits-sharing arrangements, should also be designed and implemented in consultation with — and, where applicable, in partnership with — relevant stakeholders and respect Free, Prior and Informed Consent where it applies.

3. Corporate buyers that use credits (“credit users”) should prioritize measurable emissions reductions within their own value chains.

“Use of credits” pertains to the purchase and cancellation or retirement of credits, and any subsequent public-facing “claim” based on the climate impact of those credits (see Principle 5). Achieving long-term climate goals requires transforming business models across economies. Accordingly, credit users should use VCMs to complement measurable within-value-chain emissions reductions as part of their net-zero strategies. Such efforts should include taking inventory of Scope 1, 2, and 3 emissions and regularly reporting them, setting near-term emissions reduction targets and longer-term net-zero targets, and adopting and executing transition plans. Where feasible, companies should work collaboratively with their suppliers on efforts to undertake decarbonization activities, including in ways that are mutually beneficial. This could include directly funding within-value-chain decarbonization activities (e.g., by insetting or purchasing supplier-generated credits). Credit users seeking further guidance on credible approaches to climate strategies that reduce value chain emissions should refer to Treasury’s Principles for Net-Zero Financing and Investment or similarly robust guidance.

4. Credit users should publicly disclose the nature of purchased and retired credits.

Disclosure of purchased, cancelled, or retired credits should be made on at least an annual basis and include details that enable outside observers and relevant stakeholders to assess whether purchased and retired credits are of high integrity and avoid negative environmental and social impacts (i.e., relating to the parameters discussed in Principles 1 and 2). In some cases, adherence to this principle may involve voluntary public disclosures exceeding those required by applicable law.

Credit users should determine the optimal format in which to publish information about purchased and retired credits in light of evolving practices while seeking to disclose information in a standardized manner that enables comparability across credit users. Regardless of format, such information should be made easily accessible to stakeholders, such as in a regular publication. Credit users should consider reporting to resources that aggregate and publicly disseminate this information.

5. Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards.

Demand-side credit standards, codes of conduct, and other frameworks that define what constitutes an appropriate claim are evolving. As these frameworks continue to develop, they should increase incentives to purchase high-integrity credits on an ongoing, regular basis without reducing incentives for companies to expeditiously pursue within-value-chain emissions reductions. For example, those developing such frameworks should consider incorporating approaches that allow companies to count credits toward a portion of their Scope 3 emissions associated with science-aligned emission pathways in cases where it would be unreasonable to expect a company to be able to fully abate those emissions within a given timeframe.

Claims should rely only on the impact of credits that meet current high integrity standards at the time the claim is made and that avoid adverse impacts (see Principles 1 and 2). These claims should be in the context of a corporate climate strategy that prioritizes within-value-chain emissions reductions (see Principle 3). Credited emissions reductions or removals that have been reversed, revealed as inflated, or exposed as failing environmental or social safeguards should not be used as the basis for any claims unless remediation, such as replacement by buffer pool credits, has taken place.

6. Market participants should contribute to efforts that improve market integrity.

While issues of market integrity are distinct from those of credit and demand integrity (i.e., those referenced in Principles 1–5), improvements to the latter can positively impact the former. The market structures underpinning VCMs are quickly evolving. Today, credits are traded both through private contracts (over-the-counter) and on exchanges. While not pre-supposing any particular market structure, stakeholders should seek to improve market functionality for a variety of market participants. This includes: creating incentives to develop and purchase high-integrity credits; improving transparency and the publicly available data of credit-generating projects and programs, including transaction volumes and prices; promoting fair and equitable treatment of suppliers involved in credit generation, including fair distribution of revenue; controlling for potential conflicts of interest among VCM service providers; preventing fraud and manipulation by bad-faith actors undermining credit integrity; providing for the appropriate accounting and legal treatment of credits and resolving any related ambiguities; enabling global interoperability of relevant standards, market infrastructure, and reporting; supporting robust and equitable participation in these markets, including by projects and programs in developing countries; and taking other measures separate from credit and demand integrity to improve the functioning and health of these markets. Addressing these issues will require collaboration between the private sector, civil society, and the public sector.

7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

Expanding market opportunities for credible credit providers is an important component of the United States’ climate strategy. Addressing the barriers (e.g., high transaction costs) facing credit-generating suppliers — including farmers, ranchers, forest owners, small businesses, developing country jurisdictions, and others — can improve the overall ability of VCMs to produce high-integrity credits that advance decarbonization and generate economic opportunity. Policymakers and buyers should consider ways to enhance market certainty for credit providers undertaking long-term and often significant investments in decarbonization that plan to rely on VCM revenues to finance their actions. Where appropriate, including for land-based credits, the use of scientifically robust models — including those supported by government investment — can help reduce MMRV costs and improve credit integrity when paired with appropriate safeguards.

This content originally appeared in the White House's Voluntary Carbon Markets Joint Policy Statement and Principles.

The Biden-Harris Administration is committed to taking ambitious action to drive the investments needed to achieve our nation’s historic climate goals – cutting greenhouse gas emissions in half by 2030 and reaching net zero by 2050. President Biden firmly believes that these investments must create economic opportunities across America’s diverse businesses – ranging from farms in rural communities, to innovative technology companies, to historically-underserved entrepreneurs.

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