The Code Giveth More to the Voluntary Carbon Market Than It Taketh Away
On Tuesday 7 June, the Voluntary Carbon Market Integrity Initiative (VCMI) launched the Provisional Claims Code of Practice to provide guidance on the credible voluntary use of carbon credits by companies and other nonstate actors.
The Claims Code builds on previous VCMI consultations and encompasses guidance from other initiatives such as the Science Based Target Initiative’s Net Zero Standard and GHG Protocol’s Corporate Value Chain (Scope 3) and Accounting and Reporting Standard. Google, Unilever and Hitachi are amongst those signed up to road-test the claims code.
The Provisional Code sets outs four steps to making a VCMI Claim:
- Meet the prerequisites
- Identify claim(s) to make
- Purchase high quality credits
- Report transparently on the use of carbon credits
1. Meet the prerequisites
The key principle behind the Code is that companies use carbon credits in addition to, not as a substitute for, reducing emissions. Specifically, companies must set clear, science-based interim targets as well as adopting long-term commitments to net zero by 2050. These must cover scopes 1, 2 and 3. The first a near-term target should be for 2025 or within two years of making a public long-term net zero commitment.
They must support these commitments by providing: a plan to achieve their targets, publicly available greenhouse gas emissions inventory and a declaration that activities are consistent with goals of Paris Agreement.
2. Identify claim(s) to make
Companies can make a claim in any given year, providing their emissions and decarbonization plans align with the claim. This must be verified by an independent third party. A company will then be awarded Gold, Silver or Bronze.
VCMI Gold: A company must be on course to achieve its next interim target for Scope 1, 2, and 3 through emissions reductions in its value chain and cover all (100 percent) of unabated emissions through the use of high-quality carbon credits.
VCMI Silver: A company must be on course to achieve its next interim target for Scope 1, 2, and 3 through emissions reductions in its value chain and cover 20% of unabated emissions through the use of high-quality carbon credits. The percentage of unabated emissions covered by carbon credits must increase over time.
VCMI Bronze: A company must be on course to achieve its next interim target for Scope 1 and 2 through emissions reductions in its value chain. It must also reduce Scope 3 emissions through both emissions reductions and the purchase and retirement of carbon credits (maximum 50% of Scope 3 footprint) to meet its interim target. In addition, it must cover 20% of unabated emissions through the use of high-quality carbon credits.
3. Purchase high quality credits
The Code requires that all credits used for credible claims must be high-quality and -integrity, referencing initiatives such as CORSIA and IC-VCM to identify what constitutes a high-quality carbon credit. The credits must be recognized by a credibly governed standard-setting body, be of high environmental quality and consider, where relevant, social safeguards and human rights.
4. Report transparently on the use of carbon credits
Transparent reporting is required to make a credible claim, information displaying achievement of the prerequisites and claim requirements must be made publicly available. They must also disclose how carbon credits will be used towards their corporate climate commitments.
Implications for the VCM
The VCMI’s long-awaited provisional code of practice has been in drafting for a year and half. This may seem like a long time to produce such a concise document, but reflects the difficulty in codifying the complex and controversial concepts. As Mark Twain said, “I didn’t have time to write you a short letter, so I wrote you a long one”. In this case the VCMI has written a short letter.
The Code may yet go through future edits, but in our view is unlikely to change substantially in overall approach. As such, as the current code could have important implications for the voluntary carbon market.
For firms that have struggled with understanding “what good looks like” in using carbon credits to demonstrate climate action, the Code will provide valuable re-assurance. One of the most common barriers to firms buying carbon credits is the risk of being accused of greenwashing – buying their way out of climate targets with sub-standard credits and without a concerted attempt to reduce emissions.
The VCMI Provisional Code gives these firms the guidance to know what to commit to and how to incorporate carbon credits in that process. They may not achieve the highest standard immediately (gold), but the Code provides alternative routes (silver and bronze) to higher ambition. The bronze claim proposes that firms can use carbon credits to meet 50% of the emission reduction target of scope 3 emissions. This will be welcomed for companies with extended scope 3 footprints that are difficult to abate.
However, for firms that have been comfortable in simply buying carbon credits and claiming to be carbon neutral without altering their existing business model, the Code will be more challenging. For some, the Code will be too much of a departure. They may decide not to engage with it and continue to claim their own version of carbon neutrality, or simply curtail their purchases of carbon credits.
The net effect of the draft Code is positive for the voluntary carbon market. On the basis the current draft, companies with ambitious climate commitments should be reassured by the clarity of the guidance. Firms with low climate ambition looking to access cheap credits, may exit the market, but this will be no bad thing. We could see a short-term dip in demand, with knock-on effects on prices, but the net effect will be to support stronger, long-term growth in demand.
Trove Research has always emphasized that corporate intentions on climate action are directed to the maximum effectiveness – for example in January 2021 we highlighted the risks to the credibility of the market of the build-up of older vintage credits. Yesterday’s launch of the VCMI Provisional Code marks an important milestone to achieving the objective of a high integrity carbon market that supports the net zero pathway of the corporate sector.
Calls for public comment on the VCMI’s Claims Code
The VCMI invites stakeholders to comment on the claims code through a public consultation, open until 12 August 2022. The Claims Code will be road tested by various companies in the second half of 2022, with the final Claims Code of Practice to issued in late 2022/early 2023.