One of the key planks in the global raft of policies and measures designed to slow climate change is the voluntary carbon market – a system that involves companies investing in greenhouse gas (GHG) emissions reduction projects in exchange for carbon credits.
The VCM is seen as a vital tool that can help address emissions that cannot easily be reduced or avoided, for example when no readily-available alternatives exist for certain uses of fossil fuels or carbon-intensive industrial processes.
However, the VCM is unregulated and has no basis in law – unlike the legally binding carbon cap-and-trade systems run by governments. So how do we know that carbon credits have come from a project that genuinely reduces, avoids or removes CO2 emissions? Is there any independent oversight to ensure environmental integrity?
The short answer is: no there isn’t. There is no top-down authority with the legal power to govern the market for carbon credits. However, there are many organisations and structures built into the VCM that help guard against bad practice, and there is ongoing work to do more on this front.
How we got here
To understand why there is no overarching oversight body, it’s helpful to consider a potted history of the United Nations carbon market.
The UN has for many years been working on the rules that would establish an international system of emissions trading to allow countries more flexibility in meeting their national emissions reduction goals. However, progress has been slow at the UN.
Meanwhile, many companies saw the urgency to act on climate and to be able to demonstrate their commitment to environmental sustainability, and therefore wanted to move ahead independently with their own market-based approaches.
The slow pace of progress at the UN level created a space in which environmentally progressive companies came together with non-governmental bodies and standards agencies to develop a set of transparent methodologies under the VCM. These enabled emissions reduction projects to earn carbon credits that companies can buy, sell and retire to demonstrate their environmental progress.
Thus a largely unregulated market for carbon credits emerged.
Independent checks
However, there are checks and balances in the VCM that help ensure environmental integrity of projects, which range from biogas plants to biofuels projects, clean transportation programs and forest restoration activities, to name just a few.
First of all, for an emissions reduction project to earn carbon credits, it must be checked, verified and approved by one of the independent standards bodies such as Verra (Verified Carbon Standard), the American Carbon Registry, Climate Action Reserve or Gold Standard. These standards-setters employ technical experts to assess projects and they make their detailed methodologies available for public scrutiny.
Secondly, all projects must be independently monitored, reported and verified (MRV) by trusted third-party auditing companies to ensure that the emissions reductions or removals are real.
In addition, other third-party companies have also begun to spring up in response to demand for independent assessment of emissions projects under the VCM. For example, there are several companies that offer specialist risk ratings of individual projects, which allow investors to gain insight into the level of risk involved in a specific project and how likely it is to have reduced emissions by the stated amount.
Market builds governance structures
However, despite all the work already done to address environmental integrity in the VCM, the market has at times suffered from bad publicity linked to certain projects or project types. As the VCM is widely understood to need to expand by a massive scale to become effective in the fight against climate change, market participants have highlighted a need for better oversight.
In light of that need, two important groups have emerged.
The first is the Integrity Council for the Voluntary Carbon Market – an independent governance group which aims to set and enforce a definitive global threshold for high quality carbon credits to help mobilise large-scale finance towards climate resilient development. As such, the ICVCM is largely focused on the supply side of the market.
The second group is the Voluntary Carbon Market Integrity Initiative. The VCMI is also an independent governance organisation and its focus is on the demand side of the market. The group has launched the VCMI Claims Code of Practice, which aims to build a broad sense of trust and confidence in how companies engage with carbon credits and what they can legitimately claim as a result of their use.
The future: UN Article 6 market
While all this activity has developed under the VCM, the UN has continued to work on Article 6 – the part of the Paris Agreement on climate change which allows governments to cooperate on meeting their national climate targets, including through the transfer of emissions reductions between countries.
This means that a set of processes, rules and procedures will be in place under the UN that will govern climate projects and the transfer of carbon credits between countries.
Countries finally agreed on the rules for Article 6 at the COP26 UN climate change conference in Glasgow in 2021, and the UN has established a Supervisory Body to oversee and implement work on Article 6.4, which establishes a market for UN-approved carbon credits.
This means that in theory, a two-tier market could emerge for carbon credits, with one tier representing the UN-approved projects and the other tier representing all other VCM projects. This could cause a divergence in prices for credits if the market perceives them as having different levels of quality, but could also mean that there is a ‘flight to quality’ if buyers mainly seek credits from UN-approved projects.
A lack of legal oversight of the VCM means that the onus is on the buyer to make sure they understand what they are buying. However, there is some degree of assurance built into the market through independent safeguards, as well as plenty of options to seek independent assessment if buyers want it.
