Lydia Sheldrake, Director of Policy and Partnerships at the Voluntary Carbon Markets Integrity Initiative, outlines how a new code of practice will address carbon credits’ credibility crunch.
Current climate pledges by governments are falling short, with the latest analysis by the UN Environment Programme (UNEP) putting the world on track for a temperature rise of between 2.4°C and 2.6°C by 2100. To address the emissions gap and keep the 1.5°C pathway alive, investors, companies and financial institutions must use every tool available to secure a liveable future, with voluntary carbon markets (VCMs) an important, albeit controversial one.
“Currently, the market is opaque, pretty fragmented, and often criticised,” says Lydia Sheldrake, Director of Policy and Partnerships at the Voluntary Carbon Markets Integrity Initiative (VCMI). “We need to build a foundation of transparency and trust to unlock a high-value, purposeful voluntary carbon market, which is fit for purpose to operate alongside and complement a suite of other financing instruments.”
The VCMI is a non-profit organisation, launched in the run up to COP26 with support from the UK government and the Children’s Investment Fund Foundation. Its mission is to enable and ensure VCMs make a meaningful contribution to the 1.5°C mitigation pathway.
“High-integrity VCMs deliver real and additional benefits to the atmosphere, as well as to people and nature, so there is a sustainable development and broader social purpose,” Sheldrake tells ESG Investor. “We take a cross-cutting view across VCMs to identify how, where and if they are delivering on that purpose.”
The credibility crunch surrounding the quality and integrity of the market has dampened demand and contributed to a significant drop in the price of carbon credits. VCMs have come under heavy scrutiny, with press investigations carried out by The Guardian, Die Zeit and SourceMaterial alleging that forest-based offset projects are often misleading in their carbon emissions reduction claims and at worse ineffective.
Clarity through code of practice
To bring clarity and integrity to corporate claims made about the voluntary use of carbon credits, VCMI is due to publish its Claims Code of Practice (CoP) which provides a guide to best practice for buyers of carbon credits.
“At the moment, you’ll see that companies are making all kinds of climate claims but there is no common basis for understanding how carbon credits factor into those claims,” says Sheldrake. “This creates confusion for investors about the role that carbon credits play in reducing emissions.”
Sheldrake says that companies need to take responsibility for how carbon credits factor into their transition plans to ensure that their use accelerates climate actions and does not delay or displace emissions reductions via the decarbonisation of the global economy. The VCMI’s CoP aims to offer companies a practical guide for how to do just that, allowing buyers of carbon credits to get recognised and rewarded for taking accountability for how they manage their emissions using carbon credits.
The CoP also aims to provide a basis for comparability and clarity for the broader corporate accountability ecosystem and those that are scrutinising corporate claims to better understand exactly how carbon credits are being used, says Sheldrake.
The VCMI released provisional draft of the CoP last summer, with a public consultation and ‘road-test’ with around 70 corporate participants held between June-August 2022. Feedback was broadly supportive and reiterated the importance of VCMI’s guidance to put guardrails around use and claims involving carbon credits.
Respondents noted that for the CoP to have maximum impact, the VCMI’s guidance must be both ambitious and accessible and highlighted challenges relating to implementation and operability.
The VCMI is working towards launching the final CoP later this year.
End-to-end rules for integrity
To further improve transparency and restore trust in VCMs, running alongside the VCMI’s guide for buyers, the Integrity Council for the Voluntary Carbon Market (ICVCM) has published its Core Carbon Core Carbon Principles (CCPs) this week for the supply side to ensure integrity of carbon offset projects.
The VCMI and ICVCM are independent initiatives but work together “closely and in complement” to build the necessary rules for end-to-end integrity on both the supply and demand sides of the market.
The CCPs are a global benchmark for identifying high-integrity carbon credits that create real, verifiable climate impact, based on the latest science and best practice, by setting rigorous thresholds on disclosure and sustainable development. It is comprised of 10 core principles that outline effective governance, transparency, validation and verification of carbon credits, as well as methods for quantifying their emissions reductions, sustainable development benefits and contribution to net zero.
“There are a lot of specific issues and expertise needed to clarify the rules for [supply and demand], which is why we have independent initiatives focused on developing guidance for each side of the market,” says Sheldrake. “We work closely with the ICVCM to ensure that our respective guidance joins up to provide a coherent basis for end-to-end rules for integrity.”
These core principles are operationalised through the ICVCM’s Assessment Framework, which provides rigorous criteria and decision tools for each of the 10 principles, with carbon credits only receiving the CCP label if both the carbon crediting programme that issued them and the credit category are assessed by the ICVCM.
Despite the work of the VCMI and ICVCM in restoring trust and transparency to VCMs, Sheldrake acknowledges that while “we’ve come a long way – we’ve got a long way to go”.
“From the VCMI perspective, we have the provisional code, we’ve done extensive stakeholder engagement and consultation on it and have garnered strong support across a range of sectors and geographies – real momentum is being built,” she says.
“Both initiatives now have a responsibility to come together to get this right and deliver the clarity, certainty and consistency needed to give a clear direction to the market and its participants on what good looks like.”
Final pieces of the puzzle
In a recent article by ESG Investor, Mark Kenber, Executive Director at the VCMI, said that 30 years of failed climate negotiations between governments makes VCMs necessary for the private sector to contribute to climate mitigation efforts.
Governments are still to decide how carbon credits may be used to meet Paris Agreement obligations and how voluntary and UN-authorised carbon markets will interact. The talks have been deferred to this year’s COP28.
When asked what is needed to be agreed at COP28 to ensure a robust future for VCMs, Sheldrake says that she hopes that the “pieces of the puzzle” will come together for high-integrity VCMs to support the work of the VCMI and ICVCM in clearly defining the role that they can play in the global net zero transition.
There are ongoing discussions and decisions to clarify under Article 6.4 of the Paris Agreement which aims to create an international carbon market overseen by the UN, with Sheldrake hoping for clarity on the market mechanism at COP28 and a demonstration of how VCMs can operate in complement to support the delivery of 1.5°C pathway.
Sheldrake adds that to establish a high integrity VCM the supply side of the market must align, support and enhance the implementation of national climate action plans to cut emissions and adapt to climate impacts – Nationally Determined Contributions (NDCs).
Since the VCMI was launched in 2021 and up until the end of last year, the organisation has run a pilot scheme offering demand led support to government entities in developing countries to support decision making on access strategies for VCMs, she says.
The aim of this pilot scheme was to help developing countries examine how they can leverage finance from VCMs to support their wider climate and economic prosperity.
“It’s important that developing countries have better, coordinated support to enable them to strategically engage with the growing VCM so that finance, which is being delivered, actually supports and feeds into climate and economy prosperity at a country level,” she adds.