I write about innovation, finance, energy, climate and sustainability.
While its widely accepted that carbon offsets are going to play a vital role in meeting corporate net zero targets, the voluntary carbon markets have been dogged by scandal and confusion. With the Integrity Council for the Voluntary Carbon Markets (IC-VCM) launching its Core Carbon Principles however, could there be agreement on the basics of what every credit needs to be credible?
The voluntary carbon markets are central to many corporate emissions reduction plans, as well as a critical instrument for funnelling finance towards projects and countries that might otherwise fail to raise funding.
Given the increasing importance of action on climate change however, companies need to do more than say they're taking action, they need to prove it. Many corporate offset programmes have historically used cheap carbon credits, where the credits in question either have little carbon impact, are impermanent or are based on projects which have ignored the rights of indigenous peoples on their own land.
In order to prove the integrity of their approach, increasing numbers of multinationals are signing up for Science-based Targets, aligned to the goals of the Paris Agreement. Such targets mean that they are committing to the use of offsets equivalent to only 5-10% of their overall emissions. If that's their commitment, they need to be sure that their credits are credible, both in the eyes of the public and of all stakeholders. Even those companies with transition plans not yet aligned with the Paris goals must be seen to be taking credible action.
This is a critical stage for both the carbon markets themselves, and the corporates who are using the markets as a means of achieving their net zero ambitions. The issue with carbon credits is that they should be additional to business as usual. Research published in early 2023 reported that up to 90% of avoided deforestation credits issued by certifier Verra had no appreciable impact, and were even termed 'phantom' credits. While Verra has contested the findings, the confusion does the carbon markets - and its buyers - no favours.
The issue for the Verra REDD+ is one of methodology, and how avoided deforestation for the relevant credits was calculated - but the problem remains that there is little clarity by many purchasers about what they're buying, the implication of their selection and how those credits fit into the wider market or their own strategic plans. Many believe that the problem is a lack of governance to ensure that the market delivers on its goals.
The Integrity Council the voluntary carbon markets (IC-VCM) has now published its long awaited Core Carbon Principles, providing a baseline, framework and benchmark for what every carbon credit should have in order to be used as an offset. The Council says it will be taking a 'regulation-like' approach to the markets. It will audit programs, make spot checks and respond to complaints and, most importantly, if it finds failings it will be able to suspend or terminate the eligibility of the program or category.
The voluntary carbon markets are an important tool for but, as Annette Nazareth, ICVCM Chair, points out: "Well-functioning markets and integrity are inextricably linked. Building a widely shared understanding of what high integrity means for carbon crediting programs and categories of carbon credits is a pre-condition for the development and growth of a viable and vibrant VCM."
The core principles are grouped into governance, emissions impact and sustainable development and are intended to provide threshold standards for carbon credits, bringing some consistency and transparency to the voluntary carbon markets.
Yet even the Integrity Council must respond to its members. The Association of Small Island States (AOSIS) requested a 5% levy on carbon market finance to help towards adaptation finance. While its been reported the expert panel was in favour of the levy, with members reported to be opposed, a political decision was made to leave that as a voluntary option.
What is becoming clear that whatever your take on the politicisation of ESG, measuring carbon footprints and setting targets for reduction is simply good business. Cutting emissions goes hand in hand with cutting costs, something of which no stakeholder can disapprove. For those companies attempting to become leaders in climate action however, its increasingly important to go beyond a credit integrity floor.
What we know is that that transparency, additionality, permanence and the importance of doing no harm, are important baselines to set for the sector. What we don't yet know is how the ICVCM is going to achieve this. As Owen Hewlett, chief technical officer at Gold Standard points out, the underlying principles of the ICVCM are in place across the market, albeit in different places and given different levels of prominence. He said: "there's a lot of good practices that we've developed over the years in the carbon markets and to some extent, one way to read the CCP's is that it's a consolidation of the good things that we're already happening."
One thing that needs to be accepted and understood is that the carbon markets are operating in a rapidly evolving environment. There are going to be changes in the methodologies and processes around carbon credits as our understanding of climate science, the changing nature of business as usual and additionality, are all subject to change.
There are ongoing debates in the market about what level of permanence is acceptable - is it 100 years or 500 years. Is technological direct air capture 'better' than nature based solutions? These are questions that require nuance, subtlety and a market working together to develop overall solutions to address the challenge. There will be different approaches that perhaps are more closely aligned with particular industries or business models, and the important thing to recognise that this is a journey that needs to be accelerated, not a fight to undercut and attack different options.
There are issues beyond permanence that are increasingly important. Gold Standard demands that credits it certifies address at least 3 of the SDGs. It's known that land under the care of indigenous peoples fares better - but are markets the best way to finance land and biodiversity protection. How do you balance the trade offs between a credit being economically effective, beneficial to the environment and addressing inequality for example?
Reputational concern about greenwash is a major problem for many corporates. Research has shown that companies with higher emissions are more likely to publish reports about their climate actions. This is leading to a lack of trust in corporate statements, as well as an increase in regulation around greenwash, from growing stringency in advertising to regulation of financial market.
At COP 27, the High-Level Expert Group on Net-Zero Commitments published a report, Integrity Matters, to define what corporates need to do to credibly call themselves net-zero aligned. They must have short, medium and long term targets, they must report publicly on their progression and they need to have a transition plan. But the confusion around carbon credits, what they represent and how they're used is only adding to the problem of what things look like from the outside.
Concerns about accusations of greenwash are sufficiently strong that companies are beginning to avoid discussing their carbon reduction plans. This is known as 'greenhushing', and means that companies are setting targets and then keeping quiet - "going green, then going dark" - in order to avoid potential conflict.
If the voluntary carbon markets are going to achieve their goals there needs to be greater clarity, not simply about what constitutes a credible credit, but also about what companies are trying to achieve. Are they simply looking to cut their carbon footprint, or use that as a tool to do beyond net zero and think about strategic development in a sustainable way? There is no question that investing in an environment that lacks certainty is risky. But with the IPCC arguing that we only have a short window to act effectively on climate change, that investment needs to happen. And that's going to mean a great deal of learning about what credits are, and their impact, across the board.
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