Toward a Culture of Formalism? Virtues of the ICVCM’s Core Carbon Market Principles

Of the 1.5 billion carbon credits now issued from more than 5,000 projects, critics claim many do not deliver the promised climate benefits. To help build integrity in the carbon offset credit market, and generate more funding for existing high-integrity projects, the Integrity Council for the Voluntary Carbon Market (“ICVCM”)—an independent governance body composed of climate and industry experts—published a set of draft carbon credit standards on 27 July 2022. These standards aim to formalise elements common to high-integrity carbon credits (known as the ICVCM’s “Core Carbon Principles”). 

The voluntary carbon market is rapidly expanding in scale and diversity. According to the World Bank, the voluntary carbon market’s value grew 48% in 2021, to a record high of over US$1.4 billion worldwide. Nature-based credit transactions, alone, doubled between 2020 and 2021. This growth has primarily been fuelled by increasing corporate net zero commitments. The market is also fragmented. Purchasers assign different values to carbon credits, depending on the underlying characteristics of individual projects differentiated by sector, location, and co-benefits. Demand for carbon removal technologies, in particular, has caused credit prices to increase, compared to credits from more conventional nature-based, renewable energy, or avoidance activities. 

The ICVCM’s draft proposes 10 Core Carbon Principles with which carbon credit projects and registries must conform to be labelled as “ICVCM-compliant”. Its standardised benchmarks and assessment criteria aim to help buyers better identify, compare, and classify high-quality carbon credits. The Principles could reduce uncertainty and facilitate investment decisions by signalling buyers’ expectations to suppliers. More homogenous price signals may ensue, helping to mobilise private capital for climate mitigation.

More specifically, the draft Core Carbon Principles are as follows:

1. Governance: Carbon crediting projects must be subject to effective governance.
2. Robust validation and verification: An accredited, independent third-party institution must audit each project.
   
3. No double-counting: Emissions reductions or removals should not be double-counted. This phenomenon ensues when an identical carbon credit is retired by two companies (“double-use”), credited under two separate programs (“double-issuance”), or if two companies or two countries claim the same credit toward their climate targets (“double-claiming”). Nonetheless, an active debate remains on whether double-claiming—by a company and host country against their climate targets, simultaneously—raises integrity concerns or, alternatively, whether such practices are normal aspects of nested accounting systems. 
4. Registry: Well-maintained registries record mitigation activities and real-time transactions, in addition to implementing carbon accounting rules. They must also be capable of recording information about individual carbon credits, their associated activities, and their attributes. Identifying attributes could highlight other beneficial characteristics relating to the mitigation activity. Under the draft Principles, each compliant carbon credit would reference—at a minimum—the type of activity (that is to say, emissions reduction or removal) in its registry. Registries may also identify whether credits contribute to other SDGs, whether underlying activities are authorised by their host countries for the purpose of Article 6 of the Paris Agreement, or the extent to which the activities have adaptation co-benefits.
5. Mitigation activity information: The decisions and analyses underpinning any given credit must be transparent and publicly available. These include additionality assessments, actual quantities of emissions reductions or removals, as well as any social and environmental impacts.
6. Sustainable development impacts and safeguards: Each project must be subject to guidance and compliance procedures identifying whether they conform with, or go beyond, industry best practices on social and environmental safeguards, as well as on efforts to deliver net positive sustainable development impacts.
7. Additionality: Credits must only be issued for reductions or removals that would not have occurred, except for the financial or non-financial incentives associated with the voluntary carbon market.
8. Permanence: Projects must take account of any reversal (or non-permanence) event. Different activities will bring different levels of reversal risk. Measures to address such risks must depend on their probability and impact. Common types of non-reversal approaches include: temporary crediting, buffer pools, and discounting.
9. Robust quantification of emissions reductions and removals: These must be conservatively calculated, taking into account uncertainties in data, to limit overestimation risks. In particular, emissions baseline projections must rely on sound scientific methods, and regularly reviewed.
10. Transition towards net-zero emissions: Any activities that lock in long-term emissions increases must be discouraged, even if those activities may lead to short-term emissions reductions.

Publication of these draft Principles began a public consultation period, which closes on 27 September 2022. Once finalised later in the year, the Principles may guide the development of new financial regulations, futures contracts, and help define the scope of what constitutes “greenwashing” with regard to the voluntary carbon market. However, in striving for concrete guidelines, while concurrently preserving flexibility for the market to evolve, perhaps some integrity concerns will inevitably remain.

Regardless, prospective carbon credit project developers, purchasers, and financiers may wish to examine how their organisations’ objectives, purposes, and decarbonisation plans align with these Principles. These actors might also consider how the Principles align with coexisting standards, such as those set out by the Science-Based Targets Initiative and Voluntary Carbon Market Initiative ("VCMI"). The VCMI, in particular, is also developing standards to enhance the demand-side integrity of carbon credits used toward achieving corporate decarbonisation targets. 

Ultimately, the ICVCM’s colossal endeavours to enumerate standardised criteria for carbon credit quality deserve acclaim. If building trust and integrity between businesses, markets, and societies indispensably buttress global climate action, then the ICVCM has undoubtedly helped us all take necessary steps toward this objective.