Over 1,000 firms have made either indicative or concrete pledges to align their greenhouse gas emissions with the Paris Agreement—which means reducing emissions to zero by 2050.1 As noted by UCL/Trove Research, for many firms, achieving this aim will require the use of carbon offsets at some point, but the carbon offsetting concept "depends on the environmental rigor of the credits—specifically whether money paid for the offsets is used to reduce emissions (or capture emissions from the atmosphere) beyond levels that would have otherwise occurred … Methodologies and standards for defining carbon offsets, and the rigor with which the standards are enforced, have evolved and improved over time."
On January 27, 2021, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) published its blueprint on creating a large-scale, transparent carbon credit trading market. A related summary and FAQs were also published.
"Voluntary" carbon markets can be distinguished from mandatory or formal carbon markets with legally binding compliance mechanisms, such as the Regional Greenhouse Gas Initiative and the Low Carbon Fuel Standard in the US and the Clean Development Mechanism (CDM) under the Kyoto Protocol. For many years, the carbon markets were dominated by the CDM, whose credits (CERs) were able to be used for compliance not only by states with binding emissions reduction targets under the Kyoto Protocol but also by companies for compliance under the EU Emissions Trading Scheme, for example. That is no longer the case. Furthermore, it has been difficult to agree on the rulebook for establishing new carbon markets under Article 6 of the Paris Agreement. Voluntary carbon markets (VCM), on the other hand, are now booming; however, concerns of some stakeholders regarding offset integrity persist.
However, as the TSVCM notes, in order to limit atmospheric warming to 1.5°C, the world must halve existing greenhouse gas emissions by 2030 and achieve net-zero emissions by 2050 and the VCM may need to grow 15x its current size. The blueprint is intended to support that growth by:
- Connecting carbon credits supply to demand in a seamless, cost-effective and transparent way.
- Instilling confidence and ensuring credibility in carbon credits being exchanged/transacted.
- Being scalable to meet the expected increase in demand as more companies pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, as set out by the Paris Agreement.
As Bill Gates states in his foreword to the blueprint:
A robust voluntary carbon market is one important tool the private sector can use to address climate change and reach net-zero emissions by 2050. While this market is important for a number of reasons, I am most excited because I believe it has the potential to drive early investment in green technologies, especially those that are difficult to commercialize. To take just one example, the third largest contributor to global emissions is manufacturing, so the world needs to find ways to produce carbon-free materials like steel and cement. To do so, we need new technologies such as carbon capture, the electrification of manufacturing processes, and green hydrogen. If carbon credits help make these emerging climate technologies more affordable now, they can eventually be used more widely and cost-effectively to reduce direct emissions. By orders of magnitude, this will enhance the positive impact of the carbon credits themselves.
A broad array of VCM standards already exists, such as the Verified Carbon Standard and the Gold Standard. However, in order to support the scale-up of voluntary carbon markets, TSVCM identifies six key topics for high-level action, spanning the entire value chain, namely:
1. Core Carbon Principles and Attribute Taxonomy
2. Core Carbon Reference Contracts
3. Infrastructure: Trade, Post-Trade, Financing and Data
4. Consensus on Legitimacy of Offsetting
5. Market Integrity Assurance
6. Demand Signals
In order to deliver on that vision, the blueprint also includes a set of 20 underlying recommended actions (see Exhibits 2 and 32 in the blueprint).
However, TSVCM also notes that the blueprint “is the beginning of a longer process” and that TSVCM will “move with deliberation, at pace, and with inclusivity to drive real change in the market.”
While noting that the majority of the required work will be driven by individual market participants, TSVCM promises its support for four topics: 1) stakeholder engagement, 2) governance, 3) legal principles and contracts and 4) credit-level market integrity. This approach mirrors to some extent the approach adopted by the Task Force on Climate-related Financial Disclosures (TCFD), which aimed to improve the way a disparate array of carbon disclosure methodologies were used.
TSVCM states that it believes “this is truly a historic opportunity to contribute to getting the world to net-zero, and we encourage continued participation from across the economic value chain to ensure that the blueprint and future initiatives set out a pathway toward real growth of these markets.” While we expect that VCM generally will welcome more standardization and measures to assure offset integrity, the question remains as to how long the TSVCM “longer process” will actually take.