New carbon credits Code of Practice suggests more robust standards for voluntary markets

Increasingly, corporations are under pressure to set public targets for the net reduction of carbon produced by their operations. Meeting these voluntary targets broadly involves a combination of two strategies: the actual reduction of carbon produced as a result of a corporation’s operations, and the ‘offset’ of unabated emissions through the purchase and surrender of carbon credits.  

As emissions reduction deadlines grow closer, the practice of offsetting emissions — and, consequently, trading in currently unregulated voluntary carbon markets — is increasing.   At the same time, investors, the public and regulators are becoming increasingly apprehensive of the potential for corporate ‘greenwashing’.

This article discusses a new credibility standard offered by the recent publication of the Voluntary Carbon Markets Integrity Initiative (VCMI)’s new provisional Claims Code of Practice (Claims Code), which VCMI expects will become a new global benchmark for assessing the robustness of the corporate use of carbon credits and associated claims.

Current standards and the new Claims Code

The ad hoc emergence of voluntary carbon markets has created an environment that lacks consistency in the terminology and standards used by bodies that issue carbon credits and recognise their surrender.  

VCMI — a global initiative launched last year and supported by the UK Government and United Nations Development Programme — has started consultation and ‘road-testing’ on its provisional Claims Code, which is aimed at providing consistent international guidance for corporations using carbon credits.

VCMI aims to ensure carbon claims made by the private sector are underpinned by credibly-sourced carbon credits, used in a way that is transparent and aligned with the overarching goals of the Paris Agreement to limit overall global warming to 1.5 degrees Celsius compared to pre-industrial temperatures.

The Claims Code will rank corporate claims using a three-tier rating system to help investors and stakeholders judge the veracity of a claim.  The ranking — VCMI Gold, VCMI Silver or VCMI Bronze — will be based on a company’s progress towards meeting interim emissions reduction targets in relation to its own value chain activities, as well as the extent to which its remaining emissions are offset by ‘high quality’ carbon credits.

‘Beyond value chain mitigation’

The Claims Code addresses mounting criticism that carbon credits are being used to offset emissions that could be addressed by internal mitigation activities — i.e., critics of carbon credits have suggested that corporations are simply buying offsets instead of trying to meaningfully reduce their own contribution to global emissions in the first instance.

To this end, the Claims Code provides that companies should set goals to decarbonise their own value chains as a priority before setting broader carbon offsetting targets. For the purpose of the ranking, whether a company has met these internal decarbonisation goals is assessed separately from whether it has used high quality carbon credits to offset any remaining hard-to-abate emissions.

Accordingly, for the purpose of achieving VCMI Gold, VCMI Silver or VCMI Bronze, carbon credits will only be recognised where they are used towards goals set in addition to — and not in substitution of — actual reductions in the emissions produced by a company’s activities.  VCMI refers to this as ‘beyond value chain mitigation’.  

‘High quality carbon credits’

The Claims Code also offers broad guidance as to what constitutes a ‘high quality’ carbon credit, including whether it is:

• verified by a recognised and credible body;
  
  
• the subject of detailed and transparent reporting by the company;
  
  
• in respect of emissions abatements that would not occur anyway — i.e., in the absence of demand for carbon credits;
  
  
• in respect of activities with measures in place to address the risk of reversal or carbon ‘leakage’; and
  
  
• noting abatement projects may occur in low socioeconomic areas or on indigenous land, in respect of activities that are compatible with human rights and have a positive overall socioeconomic impact.

It is unclear whether further criteria or guidance will be introduced in relation to the body that issues or verifies the carbon credits.  

Presently, the internal standards developed and used by select bodies such as VERRA and Gold Standard are considered sufficiently robust for voluntary purposes in Australia, such as Climate Active certification

Looking ahead

VCMI is accepting public feedback on the Claims Code until 31 August 2022.

The final version of the Claims Code is expected to be published next year, and may form the basis for consistent standards, guidance and regulation in relation to the use of carbon credits around the world.  

Although the Claims Code is not yet finalised, nor are there current plans to adopt it as mandatory in Australia, it may be indicative of a global trend towards more robust and sophisticated standards for the use of carbon credits. Corporate actors wishing to stay in-step with best practice may wish to reflect on their carbon credit usage against the provisional Claims Code in anticipation of heightened investor expectations.