The recent one Joint Policy Statement and Principles (Principles) released by the Biden administration, and related comments from Treasury Secretary Janet L. Yellenmark an important milestone in the development of the Voluntary Carbon Market (VCM).
Our thoughts on this announcement and a brief summary of these Principles are set out below.
This is a very encouraging and intriguing announcement from the government regarding an unregulated, international market.
One of the critical aspects of this announcement is the U.S. government’s approach to balancing market promotion with non-regulation. The VCM is notably unregulated, and the intention is to remain so. As such, the announcement appears to aim to promote integrity and growth within the market while avoiding the imposition of rigid regulatory frameworks that could stifle growth. There is a clear nod from the government to the voluntary nature of the market, which provides flexibility and the opportunity for diverse, creative solutions, the VCM has faced challenges that are not unusual for an emerging, evolving market, and the government wants clearly stimulate the market by providing clear guidelines that increase trust and integrity. This delicate balance is essential to VCM’s long-term success and scalability.
These Principles therefore serve as voluntary (but government-endorsed) guidelines, moving towards establishing a structure that market participants can follow to ensure the credibility and reliability of carbon credits.
The Principles do not reform the current market. Instead, they are based in large part on existing best practices advocated by private and non-governmental organizations and initiatives. We thought about it extensively in an earlier version article these existing quasi-regulatory bodies and their functions – much of which can be found in the Principles.
The Principles seek to strengthen integrity in three main areas: on the supply side, the demand side and the actual market itself.
Supply side
- Principle 1 – “Integrity and Standards”: Carbon credits must meet strict integrity standards and be certified through robust, transparent verification processes to ensure additionality, quantifiability and sustainability.
- Principle 2 – “Avoid harm”: Credit generation should not cause environmental or social harm and promote co-benefits, including sustainable development and increased biodiversity, involving relevant stakeholders in the process.
Demand side
- Principle 3 – “Buyer Responsibility”: Companies that offset credits must establish a net-zero strategy, maintain an emissions inventory (detailing Scope 1, 2 and 3 emissions) and report regularly.
- Principle 4 – “Transparency”: Credit offset companies must disclose details of credits purchased and canceled annually so that the information is accessible and comparable.
- Principle 5 – “Accurate Claims”: Public offset claims should accurately reflect the climate impact of credits and use only those claims that meet high integrity standards, prioritizing internal emissions reductions.
Market side
- Principle 6 – “Market Integrity”: Stakeholders should seek to improve market functionality, transparency and equity to improve the overall health and high integrity of the market.
- Principle 7 – “Facilitate Participation”: Policymakers and market participants should reduce transaction costs and barriers for lenders, ensuring market security and bankability of VCM projects, especially from developing regions.
On the supply side (principles 1 and 2), inspiration has been drawn from the Core Carbon Principles and other standards of the Integrity Council for the Voluntary Carbon Market. On the demand side (principles 3, 4 and 5), inspiration has been drawn from the Claims Code of Practice and other standards of the Voluntary Carbon Market Initiative. On the market side (principles 6 and 7), the message is more general and aimed at promoting the integrity of the standards/registers and their participants and aimed at policy makers. The Principles conclude with a call for policymakers and buyers to consider ways to increase market certainty for lenders making long-term investments. The current financing landscape of the VCM is an area that we have also considered extensively in a previous study article.
The Ministry of Finance Principles and Commentaries recognize that the VCM, in its current state, faces some significant challenges that hinder growth at the scale necessary to achieve national and international climate goals. The seven Principles outlined above are the government’s first efforts to help overcome these challenges. They reflect the importance of a functioning carbon reduction infrastructure (both physical and financial) for the government, and a high level of understanding of the carbon reduction ecosystem. And perhaps most importantly, these statements recognize and encourage the commitment and initiative of all participating stakeholders to take demonstrative steps to achieve a market-based approach to carbon reduction. As Secretary Yellen’s statement says: “harnessing the power of markets and private capital is critical.”
While the announcement of the VCM Principles reflects an effort to increase confidence in voluntary carbon offsets, at the same time the U.S. Department of Agriculture (USDA) has indicated its interest in establishing public protocols specifically for verification by third parties of compensation arising from forestry and agriculture. This action reflects strong interest on both sides of the political aisle in Congress. Senator Debbie Stabenow (D-MI), chair of the Senate Agriculture Committee, noted that both the VCM Principles and the USDA announcement established that:Voluntary carbon credit markets generate new revenue streams for farmers, foresters and rural communities, and there is clear enthusiasm in the private and public sectors to tap into that potential.Senator Stabenow further notes that these actions “will strengthen the integrity of these markets and lay a foundation for the future.”
The VCM Principles and the USDA Statement can be seen as part of an effort to implement the Growing Climate Solutions Act, which was intended to break down barriers for farmers, ranchers, and foresters interested in participating in carbon markets and embracing of so-called climate-smart measures. agricultural practices. The law was passed by Congress on a bipartisan basis and signed into law by President Biden on December 29, 2022. With the House and Senate considering “farm bills” in the near future, we can expect more action on farm offsets.
These announcements clearly underline the government’s commitment to promoting the VCM without enforcing laws or regulations. It is a strong message of support for the VCM and the explicit recognition that the development of the VCM is crucial to unlocking carbon reduction projects worldwide. It clarifies that the current government recognizes the VCM as another part of the energy transition necessary to achieve national and international climate goals, as well as sustainable environmental practices. In particular, these seven Principles provide a framework that can guide the growth of the VCM. While the Principles reinforce (rather than reinvent) existing best practices, they achieve the delicate balancing act required of a government seeking to foster an unregulated market.