Regulations in the Voluntary Carbon Market
The concept of carbon credits emerged in response to the urgent need to combat climate change. The voluntary carbon market has become a crucial mechanism for companies and individuals to offset their carbon emissions by purchasing carbon credits. However, to ensure the integrity and effectiveness of the voluntary carbon market, there should be regulations and mechanisms in place to ensure the credibility of carbon credits. In this article, we will explore the regulations and mechanisms of carbon credit issuance in the voluntary carbon market.
What are the regulations in the VCM space:
The short answer is… There are none.
The voluntary carbon market operates outside the framework of government-mandated carbon markets. Despite the lack of a centralised regulatory authority however, there are players in the market that heavily influence the space and the quality of carbon credits issued.
How is greenwashing prevented without regulations?
While there are bad actors operating in this space, there is an ecosystem whose purpose is to ensure the quality of carbon credits issued.
Carbon Credit Standard Setters
In the VCM (Voluntary Carbon Market) space, standard setters determines eligible projects in ensuring the issuance of high-quality carbon credits. Standard setters like Riverse develops Standard Rules and certification methodologies for specific project verticals. These standards are established to ensure that the carbon credits are developed in compliance with internationally recognised best practices guidelines prescribed by reputable international accreditation bodies. To maintain the independence and integrity of the process, standard setters engage with accredited verification and validation bodies (VVBs) to validate project descriptions of carbon credits issued.
Standards setters ensure that good quality carbon credits are issued by developing it accordance with internationally recognised best practices guidelines set forth by international accreditation bodies (refer below) and ensuring independence by engaging with verification and validation bodies to audit the carbon credits. These standard setters determine how carbon credits are issued.
International Accreditation Bodies
International accreditation bodies provide guidance and certification to ensure that carbon credits issued in the voluntary carbon market are credible, reliable, and meet internationally recognized best practices for reducing greenhouse gas emissions.
Notably according to a report released by BCG and Shell, they have identified top players within the field that hold significant influence on the carbon market - notably SBTi, VCMI and ICVCM.
In this article, we will be focusing on the top 3 influencers: Science Based Targets, Voluntary Carbon Markets Integrity Initiative and The Integrity Council for the Voluntary Carbon Market
Science Based Targets
The Science Based Targets (SBTi) is a partnership between CDP, the United Nations Global Compact (UNGC), World Resources Institute (WRI) and the World Wide Fund for Nature (WWF). They are the lead partner of the Business Ambition for 1.5°C campaign - mobilising companies to set net-zero science-based targets in line with a 1.5°C future.
More than 1,000 companies in 50 sectors are working with the SBTi to set science-based targets. Being a member of this organisation is a signal of the company’s commitment towards setting reliable net-zero target backed by science
In carbon credits, the SBTi made it clear that carbon credits (CCs) should not count as a reduction in carbon emissions against science-based carbon targets. CCs could only be used to:
- Neutralise the impact of residual emissions once those targets have been achieved, or
- Finance the reduction of greenhouse gas emissions outside of the organisation’s own value
Version 1 of of SBTi’s Net-Zero Standard is focused on incentivising emissions abatement within company value chains. The Standard also makes clear that neutralisation and removals and reduction outside of company value chains - are crucial for achieving net-zero. However, they must be prioritised after value chain emissions reductions.
Voluntary Carbon Markets Integrity Initiative (Buy-side)
The Voluntary Carbon Markets Integrity (VCMI) initiative is co-funded by the Children’s Investment Fund Foundation and the UK Government Department for Business, Energy, and Industrial Strategy.
The Voluntary Carbon Markets Integrity Initiative (VCMI) is developing guidance on what is an acceptable and meaningful approach to offsetting to help bring transparency to the demand side.
The Provisional Claims Code of Practice published by the organisation was launched on June 2022 . It aims to provide guidance to offset buyers on what constitutes reasonable marketing claims based on the use of voluntary carbon offsets. It also outlines a mechanism to rate corporate claims based on a framework to evaluate the integrity of those claims.
According to the VCMI’s code, credible claims on carbon market engagement need to follow a four-part approach
- Embedding offsetting into a broader carbon commitment (SBTi);
- Defining the scope of claims clearly;
- Purchasing high-quality offsets; and
- Transparent reporting on all actions taken and offsets purchased.
The Integrity Council for the Voluntary Carbon Market (Supply side)
The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body for the voluntary carbon market.
The ICVCM is developing a standard for high-quality carbon credits on the supply side, with draft guidelines released for public comment in July 2022. The standard aims to provide a unifying global standard that builds consensus.
The ICVCM's Core Carbon Principles and Assessment Framework will help to define some of the most commonly used concepts that contribute to offset quality such as
- High additionality
- Degree to which a specific carbon credit is directly financing carbon reductions
- Absence or presence of carbon leakage, with lower leakage reflecting higher quality; and the permanence of emissions reductions or avoidance.
The ICVCM is intending to release its 'high-integrity' label to the VCM in the third quarter of 2023. The ICVCM has concluded a 60-day public consultation (launched in July 2022) on its draft Core Carbon Principles (CCPs), Assessments and Assessment Procedure.
Other regulatory bodies and standards with significant influences over the space
Corporate Sustainability Reporting Directory
EU law requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues, and on the impacts of their activities on people and the environment.
The Corporate Sustainability Reporting Directory (CSRD) introduces more comprehensive reporting requirements on companies' impact on the environment, human rights, and social standards. This new framework focuses on double-materiality and aligns with the EU's climate goals, ensuring that businesses are held accountable for their impact on the world. The European Commission is committed to implementing the first set of standards by June 2023, with the aim to make it easier for companies to report on their sustainability efforts and enabling stakeholders to make informed decisions based on the information provided.
This initiative aims to expand to almost 50,000 firms from 2024. Companies will have to report in accordance with the CSRD if they fulfil 2 of 3 criteria:
- More than 250 employees
- Balance sheet of >20million
- Net revenue of >40million
Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The draft standards are developed by the EFRAG (previously known as the European Financial Reporting Advisory Group). Notably in the current draft, reporting standards would require companies to detail the reporting on the use and nature of offsets.
EU Carbon Removal Certification
The EU Carbon Removal Certificate proposal sets out a voluntary EU-wide framework to certify carbon removals generated in Europe. The certification aims to boost innovative carbon removal technologies and sustainable carbon farming solutions, while fighting greenwashing It sets out criteria to define high-quality carbon removals and the process to monitor, report and verify the authenticity of these removals.
To receive certification, the carbon removals will need to be correctly quantified, deliver additional climate benefits, strive to store carbon for a long time, prevent carbon leaks, and contribute to sustainability.
The Commission proposal will now be discussed by the European Parliament and the Council, in line with ordinary legislative procedure. Based on the set criteria, the Commission will develop tailored certification methodologies for the different types of carbon removal activities.
ISO14068: Greenhouse gas management and climate change management and related activities - carbon neutrality
The standard is aimed at all responsible organisations, companies, cities and municipalities. Framing the claim of carbon neutrality and pushing the separation of carbon offset vs carbon removal. In this way, the effect of the measures taken can be tracked and credibly demonstrated if climate neutrality is achieved.
While the voluntary carbon market has experienced significant growth in recent years, many standards and accreditations setters are still in the development process. These bodies and initiatives are crucial in preventing greenwashing, ensuring that carbon offsets are transparent, credible, and truly contribute to emissions reductions. The industry is working towards standardising protocols, methodologies, and accreditation processes to provide greater accountability and credibility.
As the demand for carbon offsets continues to grow, it is important that VCM players prioritises the development of strong regulations to maintain integrity and ensure that the voluntary carbon market plays a significant role in mitigating climate change.