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Federal Agencies Join White House in Outlining Principles for Voluntary Carbon Markets

On May 28, multiple federal agencies in conjunction with the White House published a Joint Policy Statement that laid out the principles for the further development of future, high-integrity voluntary carbon-credit markets.

The 12-page Joint Statement of Policy and New Principles for Responsible Participation in Voluntary Carbon Markets was co-signed by Treasury Secretary Janet Yellen, Agricultural Secretary Thomas 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 Joint Statement is just the latest effort to bolster the carbon-credit industry, which is still very much in its infancy, by fostering the potential value voluntary carbon-credit markets have in pushing companies and government entities into switching to more carbon-free energy sources and achieving the net zero goals set by the Paris Agreement. Overall, the Joint Policy Statement highlights how voluntary carbon credits can be implemented to assist in lowering participants’ Scope 3 greenhouse emissions (i.e., indirect, non-electricity-related) in conjunction with their efforts to reduce their direct emissions. The goal is that voluntary carbon-credit markets, which all co-signers agree will take years to develop, will channel a significant amount of private capital to support the energy transition and combat climate change, provided that the right guardrails and guiding principles can be put in place. The problem this plan has run into in the early going is that available carbon credits have been found to have inconsistent quality standards, which has not exactly encouraged private companies to jump right into the voluntary carbon markets.

“Voluntary carbon markets can help unlock the power of private markets to reduce emissions, but that can only happen if we address significant existing challenges,” said U.S. Secretary of the Treasury Janet L. Yellen. “The principles released today are an important step toward building high-integrity voluntary carbon markets. This is part of the Biden administration’s ambitious efforts to tackle the climate crisis and accelerate a clean energy transition that benefits all Americans.”

So, what is the voluntary carbon market? Put simply, it helps big companies reach their carbon-neutrality goals by giving them a marketplace to buy and sell carbon-offset credits. A carbon offset is an instrument that represents the reduction of one metric ton of carbon dioxide of greenhouse gas emissions. Companies that struggle to reach their greenhouse gas emission targets thereby have a place to purchase carbon-offset credits by putting some of their private capital into environmental projects that help lower carbon emissions either through emission reduction or through the more costly projects aimed at emission removal.

To help these markets grow, the Joint Policy Statement sets forth seven principles to guide credit generators, sellers, buyers, and the policy makers shaping these markets.

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.

The Joint Policy Statement’s first principle suggests that carbon credits ought to deliver on core integrity principles including additionality, uniqueness, permeance, validated and verified by an independent third party, and being subject to robust guidelines.

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

The second of the Joint Policy Statement’s principles suggests that safeguards need to be established to identify and avoid potential negative impacts on both the environment and its surrounding communities, and that credit-generating activities must attempt to create “co-benefits,” including a sustainable economic development and increased biodiversity.

3. Corporate buyers that use credits (“credit users”) should prioritize measurable-emissions reductions within their own value chains.

The third principle stresses that carbon credits, while encouraged, ought not to take the place of direct efforts to reduce greenhouse emissions within a company’s or agency’s value chain. Credit buyers are encouraged to use carbon credits to act in conjunction with (rather than in place of) within-value-chain emissions reductions.

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

The fourth principle suggests that public disclosure is essential to allow the public to hold companies accountable for their decarbonization and net zero efforts regarding the quality of carbon credits. The SEC’s climate disclosure rules already make enhanced public disclosures of carbon credits a requirement.

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.

The Joint Policy Statement makes it clear that carbon claims should only rely on the impact of credits that meet current high integrity standards at the time the claim is made, which falls in line with current California law and SEC climate disclosure rules. Frameworks for proper carbon-credit claims should promote the continued building up of voluntary carbon-credit markets.

6. Market participants should contribute to efforts that improve market integrity.

The sixth principle pushes participants in the voluntary carbon-credit markets to refine and improve the markets with a number of suggested initiatives to strengthen the integrity of the markets. Some of the initiatives suggested include providing incentives to develop and buy high-integrity credits, improving transparency and the type of data made available to the public regarding credit-generating projects, and pushing for fair and equitable treatment of suppliers involved in carbon-credit generation.

7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

The last principle outlined in the policy statement encourages policymakers and buyers in the carbon-credit markets to making the markets more available to more potential participants, including farmers, ranchers, forest owners, small businesses, developing country jurisdictions, and others. To do this, however, the drafters of the joint statement realize that transaction costs must first be lowered, and measurement models must be both uniformly implemented and cost-effective.

While the Joint Policy Statement does not, in and of itself, call for the implementation of any new legislation, what is clear from it is that while voluntary carbon-credit markets need improvement, the White House and those who co-signed the statement believe that carbon credits can play a significant role in reaching key climate change. It is significant to note that support for these carbon markets appears to be getting almost universal backing and approval within the U.S. government with an eye towards improving its integrity. This support is likely to carry over into the upcoming negotiations over Article 6 of the Paris Agreement, which will take place at COP 29 later this year in Baku, Azerbaijan.