Release of Voluntary Carbon Markets Joint Policy Statement and Principles

At a Glance

• The release of the Policy is an important step in the development of voluntary carbon markets (VCMs). It includes seven Principles for Responsible Participation in VCMs, demonstrating growing alignment among governments, standards bodies / registries, and industry integrity efforts to ensure the creditability of decarbonization efforts.
• At the core of each of the Principles is the need to strengthen the transparency and credibility of VCMs, which includes ensuring the actuality of the emissions reduction/removal that makes up the carbon credit, and the buyer’s experience and confidence in the integrity of the carbon credit and the value of its use.
• Substantively, in addition to the several industry-led integrity efforts, the Policy generally aligns with California’s Assembly Bill 1305 (AB 1305), also known as the Voluntary Carbon Market Disclosure Business Regulation Act.
• Close review of the Policy is warranted for VCM participants and those interested in participating in VCMs to better understand how the Policy impacts their businesses in the near-, mid-, and long-term.

Voluntary carbon credit markets (VCMs) stand to play a growing role in global decarbonization efforts. Through its support of the generation, and subsequent purchase and sale, of carbon credits (or carbon offsets), VCMs can facilitate private capital and reliable funding for decarbonization projects, including nature-based solutions and climate technologies geared toward emissions reduction and removal, while also supporting localized economic development and aiding in conservation and biodiversity efforts. Recognizing this massive potential, the Biden-Harris administration recently released a joint policy statement titled Voluntary Carbon Markets Joint Policy Statement and Principles (the Policy), which, although lacking binding authority, provides guidance for private and public engagement in VCMs.

Summarized by the White House’s fact sheet, the Policy includes the following seven Principles for Responsible Participation in Voluntary Carbon Markets (the Principles):

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.
2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.
3. Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains.
4. Credit users should publicly disclose the nature of purchased and retired credits.
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.
6. Market participants should contribute to efforts that improve market integrity.
7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

Potential Impact of the Policy’s Principles

Although the Principles are not necessarily new in the VCM context, they do add the weight of the White House to the discussion of VCMs, which is important to demonstrate growing alignment among governments, standards bodies / registries, and industry integrity efforts to ensure the creditability of decarbonization efforts. Many businesses face significant challenges finding affordable technologies to decarbonize their operations directly, and while such technologies are developing rapidly (e.g., sustainable solutions for industrial-process heat and materials manufacturing), it is critically important to give organizations access to creditable emissions reductions/removals in VCMs that enable them to achieve a more sustainable atmospheric-level carbon footprint in a flexible and efficient manner.

At the core of each of the Principles is the need to strengthen the transparency and credibility of VCMs, which includes ensuring the actuality of the emissions reduction/removal that makes up the carbon credit, and the buyer’s experience and confidence in the integrity of the carbon credit and the value of its use. For example, the first principle for enhanced credibility calls for ensuring the elements considered in the adoption of VCM project standards, protocols and methodologies; and the approval, validation or registration of VCM projects; as well as the monitoring, reporting, and verification of VCM project activities and issuance of associated carbon credits all represent atmospheric-level integrity. This includes ensuring that (a) the carbon credit represents the carbon dioxide equivalent that has actually been reduced or removed from the atmosphere, and (b) the emissions reduction or removal activity is “additional,” generally meaning it is not standard business practice in the respective industry, was catalyzed with the help of the value created by the carbon-crediting mechanism, and is not required by law or regulation. A further example is the third Principle calling for strengthening demand transparency by encouraging carbon-credit users to use or retire, and report such use in a clear and measurable way. For instance, a carbon-credit user may use its carbon credit to offset emissions within its value-chain that are hard to directly reduce. Although the accounting and reporting of such carbon-credit use can be complex, and there is differing guidance from standards, protocols or VCM frameworks, the Principles’ calling for a measurable mechanism to show the use or retirement of carbon credits shows that VCMs are seen by the White House as an important component to combating climate change.

Overlap With California’s Voluntary Carbon Market Disclosure Business Regulation Act and the SEC’s Climate-Related Disclosures

Substantively, in addition to the several industry-led integrity efforts, the Policy generally aligns with California’s Assembly Bill 1305 (AB 1305), also known as the Voluntary Carbon Market Disclosure Business Regulation Act. For example, AB 1305 is designed to enhance transparency by requiring more robust disclosures around the use of carbon credits and associated “green” claims, to better understand the impact and accuracy of carbon-credit lifecycles (e.g., from protocol/project development to end-user consumption) by requiring disclosure of “all substantiating information,” and to create a mechanism to enforce noncompliance. Said differently, the “building blocks” comprising the Policy and AB 1305 are extremely similar. Further details about AB 1305 can be found here.

There are other similar regulatory initiatives aimed at increasing the transparency and integrity of VCMs, including certain required disclosures required of public companies making use of carbon credits/offsets or renewable energy certificates to achieve climate targets under the SEC’s recently adopted (but currently stayed pending litigation) climate-related disclosure rules. Further information about the climate-related disclosure rule is available here.

Key Takeaways

The release of the Policy is an important step in the development of VCMs and signals the following:

• VCMs are an important tool for global decarbonization efforts, hence the Principles’ focus on transparency and integrity.
• VCMs will continue to grow, which is sure to bring increased opportunities for stakeholders across industries to participate in them.
• However, that same growth underscores the importance of the Principles’ goals to increase credibility in the face of widescale commercial opportunities.
• While adherence to the Policy/Principles is voluntary, the substance aligns with existing regulation and general best practices.
• Close review of the Policy is warranted for VCM participants and those interested in participating in VCMs to better understand how the Policy impacts their businesses in the near-, mid- and long-term.