Carbon offsets and other voluntary carbon market (VCM) components are seen as an important part of the quest to reduce worldwide carbon emissions. They allow carbon emitters to purchase carbon credits generated by projects performed by others targeted at removing or reducing greenhouse gases (GHG) from the atmosphere. These mechanisms give carbon-heavy industries and other entities a relatively simple way to contribute to the reduction of emissions and participate in the “race to net zero,” and have created a substantial demand for these products.

The VCM is largely unregulated and quickly became pervaded by a “wild West” atmosphere reminiscent of the early 20th Century securities market. The lack of regulation has caused many VCM stakeholders to lose faith in the market when it became apparent that many of the carbon credits (often referred to as “offsets”) being offered lacked the integrity needed for buyers to legitimately claim credit for reducing emission. As a result, from 2021-2023, demand for offsets dropped precipitously and has yet to fully recover.

Self- Regulation or Government Regulation?

Since then, VCM participants have become aware that for offsets and other credits to survive as a meaningful emissions reduction tools without government intervention, the market needed to regulate itself. In July 2022, a set of principles was established by the Integrity Council for the Voluntary Carbon Market (ICVCM) for confirming the validity of offsets and credits. According to the ICVCM, high-integrity carbon reductions or removals should meet these key criteria:

• Additionality
• Mitigation activity information
• No double counting
• Permanence
• Program governance
• A registry
• Robust independent third-party validation and verification
• Robust quantification of emissions reductions and removals
• Sustainable development impact and safeguards
• Transition toward net-zero emissions

These core principles for carbon credits were adopted rapidly across carbon markets, and verification mechanisms emerged to confirm that these principles were being applied. Though these measures arguably fostered the production and marketing of higher-integrity offsets, the reputational effect of earlier problems with the market has lingered – and suffered a major setback in October 2023 when Kariba, a mega-project in Zimbabwe backed by South Pole, one of the top sellers of carbon offsets, collapsed.

Most recently, the credibility of the carbon offsets market was buffeted yet again when the United Nations-backed Science Based Targets initiative (SBTi), one of the largest and most respected promoters, announced on April 9 that it would support the use of environmental attribute certificates (EACs) used to validate carbon offsets “for abatement purposes on Scope 3 emissions as an additional tool to tackle climate change.” (SBTi had previously sought to limit the use of carbon credits to offset residual emissions.)

While it was anticipated that this easing of SBTi’s standards could fuel growth in the carbon offsets market, the unilateral action by SBTi’s board fostered fierce competition within and outside the organization. Just a few days later, SBTi’s board backed off when it added a clarification to its April 9 statement, noting that no change was made to its current standards and that any use of EACs for Scope 3 would be informed by evidence.

Biden Administration Moves to Restore Trust

Recognizing the importance of offsets for overall carbon emissions reduction, the Biden administration has acted to restore trust in the VCM and other markets for offsets and credits. Last December, the Commodities Futures Trading Commission (CFTC) issued a “whistleblower alert,” which notified the public to be on the lookout for misconduct related to the sale of carbon as offsets. The CFTC said it will pay cash rewards to people who provide original information to the agency about potential violations of the Commodity Exchange Act that result in sanctions of $1 million or more.

Then, on May 28 (on the heels of the SBTi dustup), the administration issued a Voluntary Carbon Markets Joint Policy Statement and Principles in a further attempt to restore faith in the VCM. According to the White House fact sheet, these non-binding guidelines “represent the U.S. government’s commitment to advancing the responsible development of VCMs, with clear incentives and guardrails in place to ensure that this market drives ambitious and credible climate action and generates economic opportunity.”

The Department of the Treasury, which had a lead role developing the principles, said in its own press release:

“The Statement and Principles affirm that high-integrity VCMs can and should play a meaningful role in reducing and removing global greenhouse gas emissions and support the objective of global net-zero emissions by 2050. By providing steady, reliable revenue streams, VCMs can deliver additional capital and market support for both existing, credible decarbonization practices, including nature-based solutions, and for innovative climate technologies, including those that scale up carbon removal activities.”

The principles state:

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

Notably the agencies jointly support “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” – an approach that raised a furor when proposed by SBTi.

These principles, clearly intended to convey strong government support for high-integrity VCMs, coupled with their endorsement by the ICVCM and leading environmental advocacy organizations like Ceres, should go a long way toward restoring the confidence in VCM market participants that the emissions offsets and credits they are buying and selling are real, and they can legitimately claim credit for reducing emissions. However, success will ultimately depend on commitments to abide by the principles and follow-through from VCM market participants; failure to do so may prompt formal regulation.