US Seeks to Boost Carbon Market Credibility
Policies and principles aim to heighten VCM participation and support investment in developing markets’ clean energy transition.
New guidelines unveiled by the US government will improve trust in the voluntary carbon market (VCM) by reinforcing the need for high integrity carbon credits, according to market participants.
Three US government departments issued a Joint Statement of Policy and new Principles for Responsible Participation which outlined practices to support supply, demand and market integrity.
“The administration recognises that high integrity carbon markets can channel a significant amount of private capital to support the energy transition and combat climate change,” said Annette Nazareth, Chair of the Integrity Council for the Voluntary Carbon Market (ICVCM), speaking at a US Treasury event.
“In a climate emergency, we need every tool in the box to meet the 1.5°C target. It’s vital that there is a common global understanding of what high integrity looks like to build the trust. That will allow companies to buy credits with confidence, as well as common standards that will enable the market to scale and maximise its impact.”
VCMs are markets in which carbon credits – each representing one tonne of carbon reduced or removed from the atmosphere – are bought and sold by companies, NGOs, governments, and others on a voluntary basis. The market has suffered a number of setbacks in recent years, with press reports identifying projects and practices which have undermined the credibility of its carbon sequestration claims.
“This is the first time the Biden-Harris Administration has spoken so positively about the critical role of the VCMs,” said Dirk Forrister, CEO of the International Emissions Trading Association. “It’s positive, it’s a strong signal – and it comes at a critical moment when corporates are ready to scale up their climate action and market engagement.”
According to research from carbon ratings agency BeZero Carbon released in February, the VCM could reach US$3 billion this year, and is anticipated to reach US$50 billion by 2030.
Support for developing markets
The statement builds on the US government’s long-standing support for VCMs as a means of channelling capital to less developed markets in need of investment to support clean energy transition.
The US government’s joint policy statement pointed to “renewed wave” of civil society, corporate, and government resolve to address challenges facing VCMs. This includes multi-stakeholder initiatives setting out standards and principles for high-integrity credit development and responsible credit use.
The US Department of State launched the Energy Transition Accelerator (ETA) in 2022 at COP27 with support from the Bezos Earth Fund and The Rockefeller Foundation. The ETA is expected to utilise VCMs to finance the decommissioning of coal-fired power and the deployment of clean energy across emerging markets and developing economies through the sale of carbon credits. Last month, the three organisations set out next steps for the future governance and structure of the accelerator.
“[Carbon markets] need to deliver the finance that developing countries need to build their clean energy economies and protect their natural resources, [and] to create the confidence that investors need to participate,” said John Podesta, Senior Advisor to the President for Clean Energy Innovation and Implementation. “They need to spur activity both at home and abroad, especially helping our partners in developing countries grow entire sectors of their economy in a climate-friendly way.”
US support for VCMs recently caused controversy when Science Based Targets initiative (SBTi) staff called for its CEO to be sacked following the announcement of a policy change allowing companies to use carbon credits to offset Scope 3 emissions to meet net zero targets. It was previously reported that last year the US State Department asked SBTi to make the purchase of carbon credits compulsory for companies taking part in the initiative’s net zero verification process.
The organisation had previously said carbon credits should only play a minimal role in firms’ decarbonisation strategies, thus acting as a brake on demand.
Enhancing market confidence
The US statement recognised that VCMs hold the potential to channel a significant amount of private capital to support the energy transition and combat climate change, provided the right incentives and guardrails are in place.
In response to questions over the credibility of carbon credits, market participants have sought to establish practices and methodologies to improve transparency and to boost investor confidence. The ICVCM has developed guidance on the supply side of carbon credit generation, while the Voluntary Carbon Markets Integrity Initiative (VCMI) has introduced demand-side rules for entities using carbon credits.
The statement also underscored that actions suggested include promoting “robust” standards for the supply and demand of carbon credits and improving market functioning is required for the potential of VCMs to be fully realised.
Mark Kenber, Executive Director of the VCMI, noted the alignment of the US policy statement and principles with ongoing initiatives to reduce market fragmentation and increase consistency. “You’re seeing that being embodied here,” he said.
Janet Yellen, US Secretary of the Treasury, said the government had heard from participants that transactions in the VCM was difficult, due to it being a “fragmented market with high search costs and low transparency”. She also noted there were “genuinely hard questions” surrounding market design, including how VCMs can “ensure that emissions reducing activities are durable and truly additional”.
The announcement also included the release of a request for information by the Department of Agriculture, asking for public input relating to the protocols used in VCMs. “With your input, we can deliver on a programme that will provide real benefits to the VCM, said Tom Vilsack, US Secretary of Agriculture. “Establishing this programme will provide a foundation that agriculture and forestry credits can stand on.”
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