U.S. Government Issues Seven Principles for Building Voluntary Carbon Markets – the Principles Unpacked

Yesterday, a Joint Policy Statement and Principles for responsible participation in voluntary carbon markets (VCMs) was issued by Treasury Secretary Janet Yellen, Agriculture Secretary Tom Vilsack, Energy Secretary Jennifer Granholm, Senior Advisor for International Climate Policy John Podesta, National Economic Advisor Lael Brainard and National Climate Advisor Ali Zaidi. 

The principles are intended as a step toward building high-integrity voluntary carbon markets and reflect the Biden Administration’s view that high-integrity VCMs can and should play a meaningful role in reducing and removing global greenhouse gas emissions and support the objective of 2050 global net-zero emissions. 

Voluntary carbon offsets (VCOs) have been criticized for not producing claimed decarbonization outcomes, among other failures. The bill author of California’s recently adopted Voluntary Carbon Market Disclosures Act (AB 1305) characterized the current voluntary carbon offset industry as a “wild west.” 

As noted in the Joint Statement, high-functioning VCMs can connect buyers to cost-effective, high-quality emissions reduction and removal credits, creating meaningful economic opportunities for credit sellers. They also can help private sector buyers drive additional climate ambition through large-scale efforts such as nature-based decarbonization. In addition, demand signals in VCMs can help technologies for carbon removal and long-term storage become more cost-effective and support greater purchase volumes of associated carbon removal credits.

The Joint Statement contains seven non-exhaustive principles. The principles reflect Biden Administration policy and are being published to inform and support ongoing efforts to address the challenges and opportunities associated with VCMs. The principles do not reflect a change in law. In many respects, they are aligned with private initiatives and other market developments and practices. Therefore, the principles are evolutionary, rather than revolutionary.

At a high level, the principles recognize the need for credit integrity, including protections regarding climate and environmental justice, demand integrity and market-level integrity, as well as lowering transaction costs. More specifically:

1. Carbon credits and the credit-generating activities 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 measurement, monitoring, reporting and verification of emission reductions or removals that includes the following elements: 

• The activity is additional (i.e., it would not have occurred in the absence of the incentives of the crediting mechanism);
• The credit is unique (i.e., one credit corresponds to only one ton of carbon dioxide or its equivalent reduced or removed from the atmosphere and is not double-issued);
• Emissions reductions or removals are real and quantifiable;
• Activity design is validated and results are verified by a qualified, accredited and independent third party;
• The greenhouse gas benefits are permanent; and
• 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.

As indicated in this principle, credit certification standards bodies play an essential role in ensuring credit integrity.

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

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.

Developers should proactively monitor and mitigate any adverse impacts that remain. Where appropriate, developers also should seek to enhance positive impacts. Projects and programs should be designed and implemented in consultation with, and where applicable in partnership with, relevant stakeholders and respect Free, Prior and Informed Consent.

3. Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains.

Credit users should use VCMs to complement measurable within-value-chain emissions reductions as part of their net-zero strategies. These 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. 

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

Purchased, cancelled or retired credits should be disclosed at least annually and the disclosure should 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. 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.

Parties developing frameworks that define what constitutes an appropriate claim 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.  (This has been a controversial topic within the Science Based Targets initiative that last month erupted into a public feud, as discussed on the SBTi website and in this April 22 Reuters article). 

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. The claims should be in the context of a corporate climate strategy that prioritizes within-value-chain emissions reductions. 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 not pre-supposing any particular market structure, the Joint Statement indicates that 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. 

As noted in the Joint Statement, addressing these issues will require collaboration among 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.

The Joint Statement indicates that expanding market opportunities for credible credit providers is an important component of U.S. climate strategy. In addition, addressing barriers such as high transaction costs facing credit-generating suppliers – including farmers, ranchers, forest owners, small businesses and developing country jurisdictions – 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. 

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