Voluntary Carbon Markets

A carbon credit constitutes the reduction or removal of one metric ton of CO2 or GHG equivalent beyond business as usual that is used to compensate for emissions that occur elsewhere (VCMI 2021). While the terms carbon credits and carbon offsets are often used interchangeably, carbon credits can be used for purposes different from offsetting. The rationale for using a carbon credit as an offset is that it can enable “equivalent” mitigation outcomes while delivering finance where it is critically needed, as most of the carbon credit supply comes from developing countries (Streck 2021; VCMI 2021). If designed appropriately, carbon credits used for offsetting can also generate environmental and social co-benefits and contribute to sustainable development. Offsetting cannot replace emission reduction efforts that are urgently needed, and regulation to mandate emissions reductions should increase over time.

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Several independent standards have surfaced to provide credibility and foster trust in the VCM, serving a quality assurance function for the past 15 years (VCMI 2021). Independent standards are often private and non-governmental organizations that establish the sets of rules for the creation and issuance of carbon credits through various methodologies and procedures. By adhering to these practices, project developers and jurisdictions aim to certify emission reductions and removals achieved by their initiatives into tradable carbon credits.

While the UNFCCC does not have jurisdiction over VCM transactions governed by private standards (Streck 2021), the definition of the principles, rules, and procedures under Article 6 may help countries define an effective strategy to foster the complementarity of the various mechanisms that can contribute to the achievement of their NDCs. Article 6 of the Paris Agreement presents new opportunities for voluntary cooperation between Parties to foster higher climate ambition through the NDCs. To do that, it sets out three ways for Parties to cooperate toward climate mitigation goals, with the first two involving the use of international market-based mechanisms.61 Article 6 also aims to promote sustainable development and environmental integrity. To promote the environmental integrity of mitigation efforts under the Paris Agreement, it is critical to provide clarity on mitigation actions and ensure that progress is tracked by the different countries towards implementing and achieving their NDCs. To accomplish that, the Enhanced Transparency Framework (ETF) defines the modalities, procedures and guidelines to - among addressing other challenges - ensure that emission reductions and removals are only accounted for under one NDC (Box 3). Avoiding double counting102 is a key aspect of robust carbon accounting at the international level and is a critical feature of the ETF. When one country sells and transfers emission reductions or removals to another, both countries must agree on how to adjust their GHG emission figures through corresponding adjustments to the NDCs, in alignment with relevant guidance to be agreed by Parties under Article 6.2. National governments will need to have a process for authorizing the issuance of internationally transferred mitigation outcomes (ITMOs) under Article 6.2 or activities under the prospective Article 6.4 mechanism, as well as defining how these initiatives will be transparently accounted for and systematically reported under the ETF. While the use of corresponding adjustments in the context of Article 6.2 cooperative approaches is clear, the application of this approach to avoid double claiming in the context of VCMs is subject to debate. Proponents of corresponding adjustments in VCMs argue that this accounting measure can manage the risk of double claiming, increasing the credibility of VCM transactions. In contrast, others view this measure as potentially detrimental to private sector demand for carbon credits, given the associated institutional capacity required to understand the appropriate use of corresponding adjustments in different contexts and the implications for NDCs (Schneider and La Hoz Theuer 2019). Some have also expressed concerns about equity issues. The argument follows that these measures could potentially limit developing countries’ access to private sector finance for the implementation of conditional NDC targets as countries will take longer to set up the operational mechanisms needed to be able to make corresponding adjustments (Chodhury 2021). Article 6 negotiations under the UNFCCC are still ongoing, though when agreement is reached, this will represent the completion of the Paris Agreement rulebook. This part of the rulebook, along with the modalities, procedures, and guidelines of the ETF referenced above, could provide more information on how to operationalize different elements associated with the environmental integrity of market-based approaches, including the specific circumstances of when corresponding adjustments are required and how they are to be applied. However, issues of double claiming outside of NDCs are beyond what can be determined by the UNFCCC negotiations.

While there is no single definition of environmental integrity, it is commonly accepted that a carbon market mechanism has environmental integrity if the transfer of credits through that mechanism results in the same or lower aggregated global GHG emissions (Schneider and La Hoz Theuer 2019; Espejo et al. 2020). Environmental integrity is promoted through robust accounting. This means avoiding double counting and assuring the quality of emissions reductions and removals estimates, including that these are real and additional (i.e. resulting emission reductions and removals would not have happened without the mitigation measures implemented) and that issues of leakage and permanence have been sufficiently addressed.

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To address these issues, VCM standards have created methodologies, procedures, and validations/verification requirements that take into account the specific considerations of forest projects and programmes, with the objective of attesting to the credibility of forest sector carbon credits. These requirements provide technical solutions to address additionality, permanence, leakage, and the quantification and monitoring of GHG emissions and removals and, in some cases, also assess the sustainable development co-benefits, such as biodiversity or sustainable livelihoods (Chagas et al. 2020; VCMI 2021). However, VCM standards vary in their approaches to promoting environmental integrity. As a result, governments and/or project/programme developers face different financing options that may be more or less appropriate, depending on the national or local context (Granziera et al. 2021). Moreover, the diverse set of rules and measurement methodologies for the VCM, in addition to the lack of a formal oversight mechanism and a standardized framework to assess the effectiveness of these standards, have led to different types of emissions reductions and removals with diverging underlying assumptions and credits of varying quality (Streck 2020; Chagas et al. 2020; Schmidt and Gerber 2016). Currently there is a diversity of REDD+ standards for results-based or market-based approaches with different accounting rules, safeguards requirements and scales (Table 2). Another important challenge that tropical forest countries have is addressing the potential inconsistencies between the national REDD+ framework with domestic carbon systems and project-based activities from independent VCM standards seeking to transact forest carbon credits (Streck 2020). Many governments have found existing REDD+ projects in overlapping geographical areas when implementing jurisdictional REDD+ approaches (Granziera et al. 2021). While REDD+ results-based finance and carbon market initiatives may come from different financing sources and are independent from each other, they generate emission reductions and removals that may contribute to the NDCs of countries where activities take place (Streck 2020). Countries need to define clear rules and systems to optimize the potential contribution of the various initiatives at different levels and to ensure the fair and equitative distribution of the potential revenues received.

The quality of carbon credits is affected by factors beyond carbon accounting and highintegrity VCMs need to consider the robustness of social and environmental measures in place to safeguard against potential risks and promote co-benefits associated with the implementation of activities that lead to mitigation outcomes. The inclusion of safeguards as a prerequisite for countries to receive REDD+ finance regardless of the funding source, is a notable achievement by actors concerned that a purely carbon-centric approach to REDD+ would not give due regard to the social and environmental dimensions and potential adverse impacts (Maniatis et al. 2019). There is growing recognition that the quality of a carbon unit (and its associated price) also needs to be defined by the extent to which the actions leading to results effectively embed core international standards related to human rights in particular those of Indigenous Peoples and local communities, equity, participation, and governance, among others. For over 10 years, tropical forest countries and the diverse set of actors supporting them have worked hard to interpret and clarify the UNFCCC safeguards requirements and test their application, while also applying and creating their own institutional safeguards and associated guidance and tools—with mixed results (Maniatis et al. 2019). Notable progress has been made in gaining clarity on the level of quality and types of safeguards information and systems expected to meet safeguards requirements across a range of funding sources for resultsbased finance (GCF, multi-lateral programmes, bi-lateral agreements, FCPF). This progress has, in turn, led to concrete and valuable lessons that can inform countries’ approaches and strategies for meeting VCM requirements, as well as be incorporated into key considerations on high integrity in VCMs. ART/TREES and Verra JNR, for example, include safeguards provisions aligned to the Cancun Safeguards that are validated and verified by independent third parties annually.

The ability to demonstrate adherence to and promotion of these critical components through robust monitoring and reporting mechanisms will be an important factor contributing to high integrity in VCMs. How well these mechanisms are embedded in and linked to national REDD+ frameworks will also be important. Keen to avoid adverse impacts, exacerbated conflicts, or violation of rights associated with their investments, there is an increase in demand from private sector actors for quality units with clearly defined and demonstrated sustainable development impacts (including livelihoods, benefit-sharing, promotion of rights, social inclusion, gender equity). In addition, some initiatives promoting high-integrity VCMs have included safeguards-related principles as part of the criteria to foster the quality of credits. The Voluntary Carbon Markets Initiative (VCMI) proposes as part of the principles for high integrity and ambition that business activities ensure social safeguards and support inclusive and resilient livelihoods (VCMI 2021). The Integrity Council for Voluntary Carbon Markets (ICVCM, formally the TSVCM or Task Force on Scaling Voluntary Carbon Markets) includes the principle that VCMs must have high environmental integrity and minimize any risks of adverse impacts, recognizing the need for carbon markets to promote emissions-reduction projects that benefit local communities, preserve ecosystems, and do no harm (TSVCM 2021). In addition to safeguards requirements, other relevant aspects of high-integrity VCMs include programme governance, the credibility of corporate commitments, and the use of carbon credits. Robust programme governance is important for the quality of VCM credits and includes the establishment of transparent provisions and procedures to regulate the programme's activities to effectively support its mission, promote accountability, and avoid fraudulent conduct, as well as robust third-party auditing and verification processes (Carbon Credit Quality Initiative 2021). It is essential for carbon market standards to provide for transparency of transactions happening in countries, so that national and subnational governments can consider this information in their strategies to implement their NDCs. Credible private sector commitments refer to science-based targets built on accurate and complete corporate GHG inventories. The clarity and legitimacy of use of carbon credits refers to principles that seek to ensure that corporations prioritize reducing emissions stemming from their own operational and value chain processes, using VCM credits to supplement these efforts (Schneider et al. 2020; WB 2021a; VCMI 2021). Given the scale of mitigation efforts that are needed to ensure long-term decarbonization, several initiatives are considering such principles, including the Voluntary Carbon Markets Initiative (VCMI). These were put into practice by the recent call for proposals from the LEAF Coalition. While these elements are not directly related to the supply side, it is important to note that the high integrity of VCMs hinges on actions undertaken by both the supply and demand sides. Tropical forest countries can also consider these elements when assessing potential sources of carbon finance and engagement in VCMs.