Voluntary carbon market players hope new quality guidance will boost liquidity

A much-awaited framework that helps define high-quality carbon offsets was unveiled July 27, with labeled credits available to buyers by end-2023.

The Integrity Council for the Voluntary Carbon Market said that it has finalized its Assessment Framework, which will be used to evaluate whether carbon credits meet its high-integrity Core Carbon Principles (CCPs).

Many in the industry are hopeful this release will bring more certainty to the market and lead to more carbon reduction and removal projects.

Annette Nazareth, chair of the ICVCM, said the voluntary carbon markets now have a global threshold for quality, which could solve some of the confidence and credibility issues that this market is facing.

"We know there is strong demand for high-integrity credits and the CCP label will give more companies confidence to invest. We expect high-integrity credits to trade at a premium, which will incentivize the market to adopt CCP criteria," she added.

This guidance comes at a crucial juncture for the $2 billion voluntary carbon market. Growing scrutiny over the efficacy of some carbon offsets and projects has led to a sharp fall in both liquidity and prices.

S&P Global Commodity Insights' Platts CNC assessment -- which reflects the most competitive nature-based carbon credit prices -- reached $2.45/mtCO2e on July 26, up from a record low of $1/mtCO2e on May 29. Platts CNC averaged $9.55/mtC02e in 2022, S&P Global data showed.

High bar

The assessment framework sets out criteria that carbon-crediting programs and categories of carbon credits will have to follow to meet the CCP label.

To qualify for this label, credits must fund projects that are compatible with a transition to net zero, permanent, additional and robustly quantified, according to the framework.

Kelley Kizzier from ICVCM's Governing Board said a key objective of the framework was to ensure that the highest quality carbon credits rise to the top, and trade at high prices.

"I think what we've really tried to do is set a high bar, but not a bar so high that it would be impossible to achieve," Kizzier said in an interview with S&P Global. "I think we hope to see a cycle of continuous improvement in the voluntary carbon market and for more consistency across the major carbon crediting programs in terms of their rules."

Many crediting program and standards are already reviewing and updating their methodologies.

Verra, the world's leading carbon registry, is in the process of finalized its methodology for REDD+ projects by the fourth quarter of 2023, as it looks to improve the quality of its forest carbon offsets.

The registry is also looking to strengthen and update the program rules of its Verified Carbon Standard, which is the world's most widely used greenhouse gas (GHG) crediting program.

In late-March, the ICVCM released its Core Carbon Principles, laying out the attributes of a high integrity carbon credit.

The CCPs include 10 codes that are broadly based under three groups: governance; emissions impact and sustainable development.

Quality concerns

Dana Agrotti, a Carbon Markets Analyst at S&P Global, said the ICVCM has now provided some clarity to the market but an upswing in prices and liquidity is unlikely till the first half of next year.

"Expectations that clear definitions would be provided as to what credit categories will and won't be CCP-eligible have been somewhat met, with indications that enhanced oil recovery projects, among others, won't comply with the principles," she added.

"However, the market continues to wait for clear signals from the ICVCM as to which credit categories and methodologies will receive the CCP label. Until then, we continue to expect limited upsides for the market, amid wider liquidity issues."

Some market participants forewarned that quality concerns of projects are likely to persist.

These initiatives are not a silver bullet that can solve the challenge of carbon credit quality, according to Sebastien Cross, chief innovation officer at carbon ratings agency BeZero Carbon

"Criticism about the VCM has largely, and rightly, focused on notable failures to deliver at a project level," he said.

"Although assessment frameworks may increase overall quality, ultimately some projects will still be more effective than others -- a spectrum of quality will always exist. Assessing credit quality does not stop at the CCPs, but requires the project level approach that ratings provide as a tool," he added.

Strengthen over time

The ICVCM said it will start establishing several multi-stakeholder working groups to assess different categories of carbon credits and associated crediting methodologies against the CCP criteria and recommend those that meet the threshold.

The governance body also has plans to update and strengthen the CCPs and framework over time, "learning lessons from experience, reflecting scientific and technical advances, and taking market developments into account."

"We are already planning for the next version by setting up work programs to ensure that important and technically complex areas receive dedicated and focused attention from experts," said William McDonnell, ICVCM's chief operating officer.

This comes a month after the Voluntary Carbon Markets Integrity Initiative launched its Claims Code of Practice, which outlines guidelines for companies to credibly make voluntary use of carbon credits.

The Claims Code of Practice, which aims to bring integrity to the demand side of voluntary carbon markets, consists of three tiers of claims that companies can make – Platinum, Gold and Silver.

The VCMI, which is involved in setting rules on the demand side of the VCM, is also working with the ICVCM to develop an integrated market integrity framework to improve the quality of carbon offsets.