Overview

Beveridge & Diamond’s Carbon Markets Roundup covers domestic and international issues of note in mandatory and voluntary markets, as well as related regulatory programs aimed to reduce greenhouse gas (GHG) emissions or further GHG removals, sequestration, and storage.

The past year was significant for carbon markets, both in the United States and globally. We have seen increasing action on credit quality, including with respect to standards and disclosure. More countries are beginning to implement and expand national compliance markets, while new voluntary carbon market (VCM) standards are shifting with the aim of refinement. Discourse on the use and means of improvement of these many credit mechanisms is on the rise.

Given the voluntary nature of most carbon markets, companies in this field have been left to use varying standards without much clarity. A shift in governments' willingness to set standards for carbon credit markets—including via green marketing regulation and disclosure requirements—demonstrates a trend towards increased oversight, and an increased focus on standards.

Looming over these developments is the recent re-election of President Donald Trump. We expect the incoming Trump administration to unwind certain Biden administration climate initiatives but without material impact on U.S. carbon market regulation. Below we summarize key concepts regarding:

• U.S. Update: Election Impacts and State Action
• United States Voluntary Carbon Markets See More Regulation
• More Regulation of Claims Based on Carbon Offsets and Reductions
• Compliance Markets Evolving Worldwide
• Paris Agreement Developments

U.S. Update: Election Impacts and State Action

With the results of the November election now in hand, we can offer some basic observations about the future of VCMs in the U.S. At the federal level, upon assuming office, President-elect Donald Trump will withdraw the U.S. from the United Nations Framework Convention on Climate Change, including the Paris Agreement and other international climate change efforts. Additionally, the Trump Administration will seek to undo Biden Administration policies aimed at combating climate change, ranging from repealing or defunding the Inflation Reduction Act (or aspects of it) to reversing or revising U.S. Environmental Protection Agency (EPA) regulations aimed at reducing GHG emissions from power plants and other sources. It remains to be seen how successful these efforts will be, and it is uncertain how they will affect voluntary carbon markets, since those markets are driven by voluntary efforts to reduce emissions rather than federal regulatory policy.

Although federal climate policy will be in retrenchment for the next four years, the same is not true at the state level. In the State of Washington, Initiative 2117, aimed to repeal the state’s Climate Commitment Act, was soundly defeated, with more than 60% of voters rejecting the initiative. We expect that Washington’s carbon market will continue to develop, with linkage to the California and Quebec carbon markets as the next major step.

In California, voters approved Proposition 4, which carried nearly 60% of the vote. Proposition 4 authorizes $10 billion of bond funding for climate resiliency projects across the state. A similar, although much smaller, initiative passed in Hawaii. These initiatives could affect carbon markets to the extent that resiliency projects create tradable carbon credits. Despite the rightward shift in federal elections, these initiatives signal continuing momentum in many states to address climate change,

Compliance markets in the U.S., including California and the Regional Greenhouse Gas Initiative (RGGI), continue to operate and saw record-high allowance prices in 2024. At the same time, voluntary credit markets continue to experience uncertainty and a “flight to quality.” As buyers seek higher quality assets (including geological sequestration, biochar, measured soil carbon greenhouse gas (GHG) removals, and others), other assessed classes have dropped significantly in price. As quality continues to drive purchase decisions for companies, we expect innovation in voluntary markets to continue and increase, with a focus by registries on methodology and data integrity.

United States Voluntary Carbon Markets See More Regulation

Biden Administration Releases Guidelines for Voluntary Carbon Markets

In May 2024, the White House, along with the U.S. Departments of Energy, Treasury, and Agriculture, released a Joint Policy Statement on (VCMs). This Statement supports the use of VCMs to help reduce global GHG emissions, achieve net-zero emissions by 2050, and limit global warming to 1.5°C. It emphasizes that carbon credits and the activities generating them must meet stringent standards for atmospheric integrity, ensuring real decarbonization. The Statement outlines the importance of robust design, measurement, monitoring, reporting, and verification (MMRV) standards to maintain core integrity principles such as non-duplication, leakage protection, and validation. It also stresses the roles of credit certification bodies in maintaining transparency, accountability, and longevity of credits.

The Statement further highlights the need for credit-generating activities to avoid environmental and social harm, support co-benefits, and ensure transparent and inclusive benefits-sharing. Corporate buyers are encouraged to prioritize emissions reductions within their own value chains and consistently report their Scope 1, 2, and 3 emissions. Public disclosure of purchased and retired credits is promoted to ensure transparency and integrity. Additionally, the Statement advises that public claims about climate impact should accurately reflect the integrity of the credits used. It calls on market participants to enhance market integrity by promoting high-integrity credits, transparency, and fair treatment of suppliers, while policymakers and market participants are urged to facilitate efficient market participation and lower transaction costs.

Commodities Futures Trading Commission Evaluates Regulation of Certain VCM Trades

In June 2023, the Commodity Futures Trading Commission (CFTC) launched the “Environmental Fraud Task Force” to address carbon credit fraud and bolster market trust. This initiative, alongside a broad investigation by the Department of Justice and the CFTC into a major carbon credit broker, signals heightened scrutiny and enforcement in the carbon offset market. These actions indicate that the market could face increasing legal challenges.

Additionally, in September 2024, the CFTC approved final guidance for listing voluntary carbon credit derivative contracts, aiming to standardize these contracts to improve transparency, liquidity, pricing accuracy, and market integrity. The guidance specifies quality standards, delivery points, and inspection provisions to ensure the reliability of VCMs. This framework was developed with input from a diverse group of stakeholders, including agricultural and energy market participants, public interest groups, and academics, to enhance the effectiveness of the carbon credit market.

California Set to Implement AB 1305

On October 7, 2023, Governor Gavin Newsom signed AB 1305. This law created disclosure requirements for market participants using voluntary carbon offsets (VCOs) and other businesses in the state that make climate-related claims. The law aims to increase transparency and accountability in the carbon markets space.

The law includes disclosure requirements for (1) sellers and marketers of VCOs in the state of California, (2) buyers of VCOs that operate within California or make their claims in California, and (3) other businesses that operate in the state and make climate-related claims about themselves or a product they sell in the state of California.

"Climate-related claims" include claims of net-zero emissions, claims that a business is "carbon neutral,” or claims that a business or entity does not add to GHG emissions or has significantly reduced their GHG emissions.

AB 1305 requires that marketers and sellers of VCOs and purchasers of VCOs in the state disclose a suite of information about the VCOs on their websites annually to increase transparency. Businesses that make climate-related claims must update their website information that documents how the product or company is “carbon neutral” and whether that claim has been verified by an independent third party annually.

Those not complying with this law may be subject to civil penalties. These penalties can reach up to $2,500 per day per violation with a cap of $500,000.

As originally enacted, AB 1305 required Scope 1 and Scope 2 disclosures starting with VCOs sold or purchased in the state after January 1, 2024, with initial disclosures required starting in 2026, subject to extension by the California Air Resources Board (CARB). Although the sponsor of AB 1305 indicated that he intended the effective date to be January 1, 2025, not 2024, the 2024 California Legislature failed to pass a bill that would have extended the effective date. Instead, it passed SB 219, which extends the deadline for CARB to adopt regulations implementing AB 1305 to July 1, 2025, and also grants flexibility to CARB to extend the deadline for reporting Scope 3 emissions, a particularly difficult issue, past the deadline initially written into AB 1305, which would have required Scope 3 emissions reporting starting 180 days after Scope 1 and 2 emissions reports were required. Although it is yet to be seen whether CARB will extend reporting deadlines, regulated entities may still be required to report on their 2024 VCOs.

More Regulation of Claims Based on Carbon Offsets and Reductions

US Green Guides Update Pending at FTC

The Federal Trade Commission (FTC) announced on December 22, 2022, that it was seeking public comments on potential updates and changes to the Green Guides for the Use of Environmental Marketing Claims. The Green Guides advise manufacturers on how to avoid making deceptive and unfair environmental marketing claims. FTC first issued the Green Guides in 1992, and subsequently updated them in 1996, 1998, and 2012. The request for public comment seeks feedback on the Green Guides generally, as well as specific issues in carbon offsets and climate change, compostable, degradable, ozone-friendly, recyclable, recycled content, energy use and energy efficiency, organic, and sustainable claims. Comments closed on April 24, 2023. It remains to be seen whether the FTC will issue updated Green Guides prior to the end of the Biden Administration. If not, we expect delays or non-issuance under the incoming Trump Administration.

EU Consumer Empowerment Directive

In January of this year, EU Parliament approved the Empowering Consumers for the Green Transition Directive (ECD). The ECD aims to provide consumers with clear and reliable information about environmental claims surrounding a product. It will accomplish this goal through various prohibitions and requirements on businesses that market their goods to consumers in the EU. The ECD regulates the use of “environmental claims.”

“Environmental claims” are defined as any non-mandatory statements or representations from an organization that explicitly states or implies that a given product, category of products, brand as a whole, or entire business (1) has a positive impact or no impact on the environment, (2) is less damaging to the environment than the peers in their specific field, or (3) has decreased their environmental footprint over time.

When utilizing green marketing such as labels or messages, companies are prohibited from (1) generic claims such as “biodegradable,” “eco-friendly,” “climate neutral,” “energy efficient,” or “eco,” unless there is evidence of recognized, outstanding environmental performance that justifies the claim; (2) claims that a product, good, or service has a neutral or reduced impact on GHG emissions if such claims are based on GHG offsetting; (3) display of sustainability labels not based on independent, third-party certification or established by public authorities; (3) claims that equate because one part of a product is sustainable, the entire product is sustainable; (4) other claims related to durability, replacement, and repairment.

Additional requirements include (1) substantiation of claims of future environmental performance, (2) disclosure of methods used, and (3) comparison of products when discussing how a product is distinguishable from another.

The directive entered into force on March 26, 2024, and Member States must transpose the same into their national laws by March 27, 2026. Applicability and enforcement will begin on September 27, 2026.

EU Green Claims Directive

The proposed Green Claims Directive (GCD) complements the ECD by specifying how environmental claims must be substantiated along with other requirements. The European Council recently adopted its negotiating position (the “general approach”) on June 17, 2024. The general approach includes specific requirements for substantiating, communicating, and verifying “explicit” and “comparative” environmental claims to consumers. Environmental claims are defined in accordance with the ECD. An “offset claim” is an explicit environmental claim related to climate, where the trader claims to have balanced out a share of its emissions by purchasing carbon credits. There are also requirements for environmental labels and labeling schemes.

Explicit and comparative claims must be assessed by trader and verified by a third-party ex ante to determine whether the claim is substantiated within the meaning of the GCD. Substantiated claims must be based on widely recognized scientific evidence, including primary, company-specific data for relevant aspects contributing significantly to the product’s environmental performance. Claimed environmental impacts, environmental aspects, or environmental performance must be significant from a lifecycle perspective (this does not require conducting a full lifecycle analysis for each type of claim). The general approach sets forth a simplified procedure to exempt certain types of explicit environmental claims from third-party verification: eligible companies should prove their compliance with the new rules by completing a technical document.

Consistent with the ECD, the GCD prohibits environmental claims on neutral, reduced, or positive environmental impact for a product based on the use of carbon credits. When considered together, the two directives distinguish between claims about a product (good or service) vs. claims about a trader (business). Climate-related claims about a product based on offsetting GHG emissions are generally prohibited, while similar claims regarding a trader are not prohibited and instead require substantiation. The GCD would also regulate other claims based on the use of carbon credits, e.g., in relation to residual emissions.

The procedures that Member States will use to verify substantiation and communication of explicit environmental claims and schemes will be determined by Member States as part of the process of transposing the GCD into national law.

Science Based Targets Initiative (SBTi) Issues Guidance on Scope 3 Offset Use

On April 9, the SBTi CEO and Board of Trustees announced a plan to allow companies to use carbon offset credits to offset Scope 3 GHG emissions in certain situations. Previously, SBTi had maintained that it did not support using carbon offsets to achieve emissions reduction targets. The SBTi offset plan was met with resistance by some SBTi staff, who noted the normal consultation process did not occur prior to the change. SBTi is proceeding with its plan to revise its Corporate Net-Zero Standard, which will include additional guidance on Scope 3 emissions abatement. SBTi also announced plans to issue further guidance in 2025 on whether and how companies can use carbon offsetting to meet their climate targets.

Compliance Markets Evolving Worldwide

Compliance programs and markets remain robust and are growing worldwide. This year has seen an expansion of the scope of mandatory carbon markets in different countries around the globe. Mandatory carbon markets have been established in approximately 30+ jurisdictions so far. Countries that have established national mandatory carbon markets include: Switzerland, New Zealand, Australia, Kazakhstan, South Korea, Canada, Mexico, the United Kingdom, Germany, China, Montenegro, Austria, Indonesia, and Australia.

Additionally, Brazil, Canada, Colombia, India, Japan, Turkey, Ukraine, and Vietnam are among the countries currently working to develop national mandatory carbon markets. Other jurisdictions have partial markets, including the U.S., with several states (e.g., California, Washington) currently implementing carbon market compliance schemes and others (including New York) continuing to develop.

EU ETS

In January 2024, the European Union Emissions Trading System ( EU ETS) expanded to cover maritime transport emissions (CO₂, and methane and nitrous oxide from 2026) from all large ships (of 5,000 gross tonnage and above) entering EU ports, including non-European flagged ships. The expansion of the ETS to maritime transport forms part of the EU ETS reforms announced in 2023. During the phase-in period (2024-2027), shipping companies will only be required to surrender EU ETS emissions allowances for a portion of their reported emissions, with full obligations from 2027 onwards.

EU CBAM Implementation Proves Rocky

The implementation of the transitional phase of the Carbon Border Adjustment Mechanism (CBAM), a measure designed to support the functioning of the ETS, started on October 1, 2023, imposing new requirements on importers or indirect customs representatives to report direct and indirect emissions embedded in select imports and precursors within the scope of the CBAM (cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen). After a delay due to technical issues with the filing process, entities began filing quarterly reports in early 2024. The transitional period will finish at the end of 2025, following which EU importers of goods covered by the CBAM will need to register with national authorities and purchase CBAM certificates corresponding to the emissions embedded in their imports, minus a carbon price paid during the production of the imported goods.

Although formal plans to expand the scope of the CBAM have not been announced, EU Climate Commissioner Wopke Hoekstra recently stated that the EU should consider expanding the CBAM to cover additional products. The inclusion of organic chemicals, plastics, and ammonia was considered during the legislative process.

In response to CBAM, at least in part, the prospect of U.S. cross-border tariffs or adjustment mechanisms is back on the table in Congress, while U.S. agencies consider related actions to dampen the impacts of CBAM, such as increased product-level GHG accounting efforts to better reflect the relatively lower GHG intensity of certain products or materials produced in the U.S. Some of these efforts may find an ally in the incoming Trump Administration, which has announced a focus on tariffs.

UK ETS

The UK Government is moving ahead with plans to expand the sectors covered by the U.K. Emissions Trading Scheme (UK ETS). The UK ETS has been in place since 2021 and currently covers power generation, energy-intensive industries, and aviation In July 2023. The UK ETS Authority announced a package of reforms that included expanding the emissions cap to cover domestic maritime transport vessels (5000 gross tonnage and above) from 2026, and energy from waste and waste incineration from 2028, preceded by a two-year transitional period during which emissions would be monitored, reported and verified. The Government opened a public consultation on waste expansion in May 2024. The consultation period closes on July 18, 2024.

India’s Carbon Credit and Trading Scheme

Motivated in part by the exposure of some of its major exports to the EU CBAM, India is pressing ahead with the development of its own emissions trading scheme. India’s Carbon Credit and Trading Scheme (CCTS) was established in December 2022, via the amendment of India’s Energy Conservation Act, 2001. The CCTS framework includes a compliance mechanism setting caps for GHG emission intensities and covering certain hard-to-abate industrial sectors, expected to begin in 2026. Following a subsequent amendment to the framework at the end of last year, the CCTS will also impose emissions reduction targets and include an offset mechanism. The offset mechanism is an important addition as it will allow non-obligated entities to voluntarily register projects for GHG reduction, removal, or avoidance and the issuance of tradeable carbon credit certificates (CCCs). Details on the operation of the offset mechanism are to be determined, including the sectoral scope and the methodologies to be used.

Brazil Emissions Trading System

The Brazilian National Congress is reviewing legislation to create a mandatory Emissions Trading System (SBCE). The SBCE would follow a cap-and-trade approach and allow regulated companies to purchase a certain amount of tradeable registered Certified Emission Reduction or Removal Verification Certificates (CRVE) to stay within their allocated emission limits. Regulated sectors exclude livestock and unprocessed agricultural goods, an approach that has been criticized. If enacted, compliance obligations would be preceded by a two-year transition period limited to reporting obligations.

Belize Introduces Carbon Markets Bill

On October 13, 2023, the Belizean legislature introduced the “Climate Change and Carbon Market Initiatives Bill.” This bill not only works towards establishing the requirements for carbon trading in Belize, but also seeks to establish national bodies to regulate, monitor, and track GHG mitigation projects. The bill would apply to carbon credits from any activity within Belize’s borders and track GHG emissions and carbon sequestration on a national scale. If enacted, existing climate change projects would have to register with the newly created Climate Change Department within six months of the bill’s passage.

Paris Agreement Developments

As noted above, the most significant development with respect to the Paris Agreement is the outcome of the 2024 U.S. Elections, which will almost certainly result in the withdrawal of the U.S. from the Paris Agreement shortly after President-elect Trump is sworn into office. The withdrawal of one of the world’s largest carbon emitters will be a major setback for international efforts to address climate change. However, states and localities will likely continue to participate in international climate negotiations as “subnational” delegates.

Article 6 of the Paris Agreement allows countries to voluntarily cooperate to reach their nationally determined contributions. Under Article 6, there are three provisions to exchange carbon credits: Article 6.2, Article 6.4, and Article 6.8.

Article 6.2 establishes a system to exchange Internationally Transferred Mitigation Outcomes (ITMOs) from reduced GHG emissions through a bilateral agreement by two countries. In 2022, at COP27, Switzerland and Ghana, and Vanuatu approved the first Article 6.2 emissions trading agreement.

Article 6.4 creates a centralized, multilateral mechanism of trading carbon credits called Article 6.4 Emission Reductions (A6.4ERs) between many countries. While Article 6.2 only pertains to governments, Article 6.4 covers public and private sector actors. The Supervisory Body sent regulatory guidance for methodology and GHG removal of the Article 6.4 mechanism for approval by the Conference of the Parties of the Paris Agreement. It was rejected at COP28 and will be reconsidered at COP29 in November 2024. The recent election casts a long shadow over COP29.

Article 6.8 establishes non-market approaches to sustainable development, such as finance and capacity building.

Continued discussion of these Article 6 mechanisms is slated for COP 29.

Conclusions

The past 12 months were eventful ones for carbon markets. Voluntary markets face increased oversight, particularly in the EU, while experiencing a move towards more rigorous standards. Going forward, many U.S. states and national governments will continue to advance carbon market programs, including those under the Paris Agreement, even in the absence of support or involvement from the U.S. federal government under an incoming Trump Administration.

Kirstin Gruver, Lauren M. Lankenau, and Audra P. Gale also contributed to this piece.

Special thanks to Dorje Wu (2024 Summer Associate) for his work on this piece.