Voluntary Carbon Market

Biden administration issues new policy on voluntary carbon markets

On May 28, 2024, the Biden administration introduced new guidelines on voluntary carbon markets ("VCMs") intended to strengthen the integrity of the markets and make them a reliable, effective tool to reduce carbon emissions.¹ While some nonprofit organizations, such as The Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative, have already developed guidance and standards to improve the quality and reliability of VCMs, this new policy is the first guidance on VCMs issued by the federal government.

Identified concerns regarding VCMs

Widespread concerns over the reliability of carbon credits and the accuracy of credit users' claims currently hinder the growth of VCMs. These concerns generally revolve around the lack of oversight and transparency of the nature of the credits issued through VCMs. Concerns about VCMs expressed in the new policy document, and by the greater public, include:

• the inability of credit users to examine or control the emission reduction of the carbon credits they buy,
• the lack of a guarantee that one credit actually represents the amount of emission reduction it is sold for,
• the difficulty to fact-check companies' broad claims about the impact of their carbon credits, and
• the negative environmental and social impacts that credit generating activities can have.

Companies invested in VCMs have faced legal trouble over these concerns. In 2023, Delta Air Lines had a class-action lawsuit filed against them for publicly claiming to be the world's first carbon-neutral airline and relying on allegedly invalid and ineffective carbon credits. This legal risk deters companies from investing in VCMs and highlights the need to improve the integrity of the markets so credit users can rely on their investments.

Overview of the policy and principles

The guidance document, titled "Voluntary Carbon Markets Joint Policy Statement and Principles," outlines the following seven principles to guide responsible participation in VCMs.²

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.
   • This principle addresses a few of the previously identified concerns. It requires carbon credits to correspond to a unique emission reduction to avoid double counting, for the impact of each credit to be real and quantifiable, and for implementation of a validation and verification process for credit generating activities. This principle emphasizes the importance of third-party credit certification to apply approved methodologies to ensure transparency and accountability within VCMs.
2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.
   • As noted above, credited activities can negatively impact the communities in which the activities take place. The guidance urges organizations that develop credit generating activities to create safeguards and be proactive by mitigating potential impacts.
3. Corporate buyers that use credits ("credit users") should prioritize measurable emissions reductions within their own value chains.
   • Under this principle, companies making public claims about using carbon credits to achieve decarbonization goals should also work to reduce carbon emissions within their supply chains. This requires companies to collaborate with their suppliers and distributors to alter their processes to promote decarbonization.
4. Credit users should publicly disclose the nature of purchased and retired credits.
   • Transparency of the status and integrity of carbon credits must improve for VCMs to grow. This principle recognizes this need and encourages credit users to make regular disclosures to allow outsiders to assess credit integrity.
5. Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards.
   • As discussed above, companies may face legal action by making public claims about carbon credits that are difficult to verify. To reduce this risk, this principle recommends credit users rely only on credits that meet high integrity standards.
6. Market participants should contribute to efforts that improve market integrity.
   • VCM integrity will not improve if all stakeholders do not contribute to the efforts to do so. Therefore, all stakeholders should adhere to policies that improve the integrity of VCMs.
7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.
   • For VCMs to play a significant role in decarbonization efforts, credible credit providers must have access to the market. This principle identifies policymakers and market participants as two key groups that can help those providers gain access to the market.

Key takeaways

These principles, and the policy in general, are significant for two primary reasons. First, the issuance of the policy indicates that the federal government views high-integrity VCMs as an important tool for future decarbonization efforts and will continue to dedicate resources to improve the market.³ While the federal government has started to regulate carbon credits, primarily through securities regulations ⁴, this guidance constitutes the first comprehensive codification of the administration's approach to improving VCMs.⁵

Second, the principles this guidance endorses generally align with those set forward by other entities in the VCM ecosystem, including the Integrity Council for Voluntary Carbon Markets. The policy itself acknowledges that both the public and private sector have important roles to play in the development of VCMs. While the principles articulated in this guidance are only instructive and not binding on VCMs or market participants, they indicate the administration's commitment to encourage the futuregrowth of high-integrity VCMs.

Footnotes

1 Statements and Releases, The White House, FACT SHEET: Biden-⁠Harris Administration Announces New Principles for High-Integrity Voluntary Carbon Markets (May 28, 2024), https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/28/fact-sheet-biden-harris-administration-announces-new-principles-for-high-integrity-voluntary-carbon-markets/.

2 The White House, Voluntary Carbon Markets Joint Policy Statement and Principles (May 2024), https://www.whitehouse.gov/wp-content/uploads/2024/05/VCM-Joint-Policy-Statement-and-Principles.pdf.

3 See supra note 1.

4 See The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21668 (Mar. 28, 2024) (to be codified at 17 C.F.R parts 210, 229, 230, 232, 239, and 249).

5 See supra note 2

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