Quality is the name of the game: The quest for high-integrity carbon credits in a low-carbon world

April 20, 2023 | Selina Lee-Andersen

Carbon offsetting finds its origins in the late 1980s in an agroforestry project in Guatemala. In the world’s first documented carbon offset project, Applied Energy Services (AES) was looking to mitigate the emissions of a 183 megawatt coal-fired power plant that it was building in Connecticut. In 1989, AES entered into an agreement with CARE, a non-governmental organization, to plant 52 million trees in Guatemala. It was the first forestry project funded specifically to offset greenhouse gas (GHG) emissions. Since then, the markets for carbon offsets have grown steadily, spurred by three key policy developments: (1) Kyoto Protocol (1995); (2) EU Emissions Trading Scheme (EU ETS) (2005); and the (3) Paris Agreement (2015).

In order to achieve the Paris Agreement goal of keeping rising average temperatures to within 1.5°C above pre-industrial levels, the global community needs to reach net-zero emissions by no later than 2050. This will require an “all hands on deck” approach – stakeholders from across all sectors of the economy are stepping up to the challenge and have committed achieving net-zero or net negative goals. Under the auspices of the Race To Zero campaign, 1,136 cities, 52 sub-national regions, 8,296 businesses, 593 financial institutions, and 1,125 higher education institutions (as of October 2022) have come together to halve emissions by 2030, with the goal of achieving net-zero carbon emissions by 2050 at the latest. The Race To Zero mobilizes actors outside of national governments to join the Climate Ambition Alliance, which was launched at the UN Climate Action Summit 2019.

During the COVID-19 pandemic, the number of companies making climate-neutral or net-zero pledges increased significantly. As companies undertake efforts to abate their emissions, many will also need to offset emissions as they work towards their decarbonization goals. This is expected to create a surge in demand for carbon credits, which we are already witnessing in the market. Ecosystem Marketplace has reported that in 2021, the value of voluntary carbon market transactions hit a record US $2 billion (up from US $473 million in 2020) with 500 million credits traded. This growth was driven by an acceleration of trading volumes for nature-based solutions and higher prices for these projects, as well as higher prices for projects with non-carbon environmental and social benefits. Prices in 2021 increased by nearly 60%, reaching an annual global weighted average price per tonne of US $4.00 for reported transactions.

In order to meet the growing demand for carbon credits, voluntary carbon markets (VCMs) will need to scale-up. The Taskforce on Scaling Voluntary Carbon Markets estimates that voluntary carbon markets need to grow by more than 15-fold by 2030 in order to support the investment required to deliver the 1.5°C pathway. In order to address structural challenges in traditional VCMs, a paradigm shift is needed to ensure that buyers have access to high-quality carbon credits with transparent pricing. VCMs have also posed challenges for sellers, such as low prices, unpredictable demand, and limited access to financing. VCMs have not achieved the scale needed to meet growing demand for carbon credits, resulting in low liquidity and limited pricing information. To support the scale-up of VCMs and the development of a new integrity regime, there are several initiatives underway to establish a set of clear principles and attribute taxonomy for high-quality carbon credits. The growing demand for carbon credits with co-benefits (i.e. environmental and social benefits beyond carbon reductions) is also boosting calls for the establishment of standard criteria to support the creation of high-quality carbon credits. In addition, market participants are seeing increased efforts to develop guidance for companies making claims about the carbon credits being used to offset emissions – regulators across jurisdictions are now taking a closer look at so-called ‘greenwashing’ claims.

A short history of voluntary carbon credits and markets

Carbon markets consist of both mandatory schemes and voluntary programs. Mandatory carbon markets, also known as emissions trading systems, are established by national or regional governments and represent a market-based approach to reducing emissions. Voluntary carbon markets operate outside of mandatory schemes and enable a range of entities – from companies and individuals, to non-profit organizations and municipalities – to purchase carbon credits on a voluntary basis for a variety of corporate activities, such as net-zero initiatives. The majority of carbon credits in the voluntary market are purchased by private sector organizations, where demand is often driven by CSR or ESG goals.

Carbon offsets refer generally to a reduction in GHG emissions or an increase in carbon storage (measured in tonnes of carbon dioxide equivalent or CO2e) that is used to compensate for emissions occurring elsewhere. The use of the term ‘offset’ within the context of emissions began in the late 1970s under the US Clean Air Act, which allowed new emissions in high-pollution areas only where other reductions occurred to offset such new emissions. The term ‘carbon offset’ entered the daily lexicon in the early 2000s, as carbon markets emerged under the Kyoto Protocol. The term ‘carbon offset’ can be distinguished from a ‘carbon credit’, which refers to the transferable financial instrument that is certified by governments or independent certification bodies to represent an emission reduction of one tonne of CO2e. Carbon credits are also referred to as ‘verified emission reductions’ or ‘certified emission reductions’ in the carbon market.

While the first recorded voluntary offset transaction took place in 1989, it was not until 1997 that the world’s first VCM carbon credits were created with the Scolel’te tree-planting project in Mexico. In 2003, the first electronic spot and futures market for voluntary offsets was established. The Chicago Climate Exchange (CCX) established a market price for voluntary emission reductions and their related credits, referred to as ‘carbon financial instruments’. CCX ceased trading carbon credits at the end of 2010 due to inactivity in the US carbon markets, but a number of platforms for trading voluntary carbon credits have been established since then, including the AirCarbon Exchange (ACX), Carbon Trade eXchange (CTX), and Xpansiv.

Voluntary carbon credits are generated by projects that avoid, reduce or remove GHG emissions from the atmosphere, and are validated and verified according to a chosen program standard. A number of programs, protocols and standards operate in the voluntary carbon market space. Some of the leading carbon offset programs include Verra’s Verified Carbon Standard (VCS), the Gold Standard, and Plan Vivo. While the programs may share common components for project approvals, each program uses different approaches for project validation and verification. For an offset project to generate carbon credits, it needs to be demonstrated that the emission reductions from the project meet certain quality criteria, including that the emission reductions are real, measurable, permanent, additional and unique. Carbon credits in the VCM can be purchased directly from project developers, through a broker and/or exchange, or from retailers who are re-selling credits. While there are some exchanges that facilitate carbon credit transactions, most voluntary carbon credits are traded over-the-counter, which has resulted in limited liquidity and price transparency in the market. Some exchanges will match buyers and sellers through peer-to-peer platforms.

Based on surveys conducted by Ecosystem Marketplace, the vast majority of respondents prefer bilateral transactions between project developers and end buyers. Respondents also indicated that retail marketplaces provide opportunities for parties with greater knowledge of projects to participate in the market. As noted above, different platforms and futures exchanges have emerged to facilitate voluntary carbon credit transactions. Carbon credits can also be traded as tokens on a digital exchange, similar to trading on traditional platforms. Although cryptocurrencies were identified in the Ecosystem Marketplace report as the least preferred method of transacting voluntary carbon credits, blockchain is seen as a new area of demand in the VCM, where carbon credits are turned into crypto tokens and tied to blockchains. In order to ensure that such tokens are in compliance with issuing standards, several organizations (including Verra, Gold Standard and the International Emissions Trading Association) have launched either consultations or initiatives on how to deal with potential quality issues arising from blockchain use in carbon markets.

The price of carbon credits varies significantly and will depend on the type of offset project, the voluntary standard under which it was certified, the geographical location of the project, and any co-benefits associated with the project. The wide variation in price reflects the diversity of buyer preferences and willingness to pay for voluntary carbon credits. Ecosystem Marketplace reported that the average price for forestry and land use offsets was US $5.80/MtCO2e in 2021, while offsets from renewable energy projects transacted for US $2.26/MtCO2e on average; by comparison, the average price of offsets from energy efficiency and fuel switching projects was US $1.99/MtCO2e and offsets from waste disposal projects transacted for US $3.62/MtCO2e.

There are certain risks associated with transacting voluntary carbon credits, which will depend on the type of project that generate them. Certain project types, such as agricultural or land use management projects, may face a higher risk of reversal if the expected level of permanent reductions is not achieved. Where such reversals occur, voluntary standards will retire carbon credits from their buffer accounts to account for the reversals.

According to Ecosystem Marketplace’s August 2022 report, State of the Voluntary Carbon Markets 2022 Q3, the highest volume of project category transacted in 2021 was forestry and land use at 227.7 MtCO2e (46% of total traded volume in 2021), followed by renewable energy at 211.4 MtCO2e (43% of total traded volume in 2021). As renewable energy projects become more affordable (meaning that carbon finance is only needed to implement certain renewable energy projects in some countries), carbon standards are starting phasing out their recognition of emission reductions generated by renewable energy. Certain program standards dominate VCMs. Ecosystem Marketplace reported that in 2019, the VCS program dominated the voluntary markets, with VCS and VCS+CCB (Climate, Community and Biodiversity standard) offsets accounting for 66.2% of transacted volumes. To date, European corporate buyers have dominated the demand side of the VCM – in 2019, they accounted for 63% of voluntary carbon credits purchased (23.5 million carbon credits purchased). North American buyers followed with 12.2 million carbon credits purchased, which represents almost 33% of the market.

The role of carbon credits in corporate climate commitments

As noted above, the number of companies making climate-neutral or net-zero pledges during the COVID-19 pandemic increased significantly. According to Net Zero Tracker, more than one-third (702) of the world’s largest publicly traded companies now have net zero targets, up from one-fifth (417) in December 2020. In one of the first quantitative analyses undertaken of net zero commitments, a 2021 report called ‘Taking Stock: A global assessment of net zero targets’ noted that these companies together represent sales of nearly US $14 trillion.

As companies navigate the path the net-zero, traditional offsetting – i.e. simply counterbalancing emissions – has revealed its limitations. In particular, traditional offsetting may end up creating a disincentive for companies to make actual emission reductions. As a result, there has been a shift in thinking where a new role for offsetting is being envisioned in respect of corporate climate commitments. Under this new approach, the use of carbon credits is additional to abatement and used in such a way that does not avoid action to reduce emissions. In addition, carbon markets are seen as a tool to raise ambition and mobilize investment in the conservation and restoration of ecosystems.

This new approach is reflected in initiatives such as the Science-based Target Initiative (SBTi), which provides companies that adopt SBTi-approved targets with a path to reduce emissions in line with the temperature goals of the Paris Agreement. SBTi’s Net-Zero Standard provides guidance on the role of decarbonization in corporate net-zero strategies. Under the Net-Zero Standard, science-based corporate net-zero targets require:

  • emissions reductions in line with a global temperature increase of 1.5°C before 2050;
  • near-term targets and rapid action to reduce emissions over 5-10 years in line with 1.5°C;
  • long-term deep decarbonization of 90-95% across all scopes before 2050;
  • a limited dependence on high-quality carbon removals to neutralize emissions that cannot yet be eliminated (5-10%); and
  • external verification of corporate net-zero targets and annual progress reporting.

As a part of the Net-Zero Standard, SBTi encourages companies to make additional investments in mitigation activities above and beyond their value chain to stay on the path of 1.5°C. However, SBTi notes that these investments are not a substitute for a company’s own emission reductions and cannot count towards the 90%+ deep decarbonization efforts.

A new paradigm emerges

Today, VCMs are fragmented – an array of competing offset project standards have emerged with differing attributes (e.g. project type, geography) and buyers have different project preferences. As a result, buyers and sellers are faced with what can often be a time-consuming and inefficient process to transact carbon credits over-the-counter. The lack of liquidity in the voluntary market is also a barrier to enabling a reliable price signal and financing. VCMs have also been subject to scrutiny over the years – common criticisms relate to poor environmental integrity of offsets, greenwashing, or misleading claims. Other criticisms include concerns about overestimating emission reductions for certain project types. With the push towards net-zero, there are concerns that carbon credits could incentivize companies to offset, rather than reduce their emissions, thus undermining overall efforts to reach net-zero. As a result, integrity is seen as a fundamental characteristic of VCMs going forward in order to build trust and confidence in the market.

In response to these quality concerns, several public and multi-stakeholder initiatives have emerged to assess the integrity of carbon credits and to provide guidance on the use of carbon credits in corporate climate claims. Two notable initiatives include the Integrity Council for the Voluntary Carbon Market and the VCM Integrity Initiative, which are discussed in further detail below. Governments have also become increasingly concerned about the use of carbon credits in corporate climate strategies. Both the U.S. Securities and Exchange Commission and the European Union are in the process of drafting climate-related and sustainability disclosure regulation that seeks to address climate-related risks, including information on the use of carbon credits. Further, carbon credit rating initiatives (such as SylveraCalyx and BeZero) and tools such as the Carbon Credit Quality Initiative are looking to assess the quality of carbon credits for the purposes of enhancing transparency and ensuring the supply of high-quality carbon credits.

ICVCM’s core carbon principles

The Integrity Council for the Voluntary Carbon Market (ICVCM) was established in 2021 by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) as an independent governance body for the purpose of developing a set of global standards to ensure the integrity of VCMs.

In July 2022, ICVCM launched a public consultation on its draft Core Carbon Principles (CCPs), which aim to set the global standard for high-quality carbon credits. The CCPs were accompanied by a draft Assessment Framework and Assessment Procedure, which seeks to provide guidance on how to apply the CCPs and define which carbon credit programs and methodology types are compatible with CCP criteria. On March 29, 2023, ICVCM released the final Core Carbon Principles, which set out the fundamental principles for high-quality credits that create real and verifiable climate impact, based on the latest science and best practice. ICVCM also published the first part of its Program-Level Assessment Framework, which provides detailed criteria for assessing whether carbon-crediting programs are eligible to satisfy the CCPs.

The CCPs are designed to build trust, unlock investment and scale-up VCMs by providing a readily identifiable benchmark for high-integrity carbon credits, no matter which carbon-crediting program issued them, what kind of credits they are, or where they are generated. ICVCM’s intent is to overcome market fragmentation, and provide confidence to stakeholders that the projects being funded are having a genuine impact on emissions.

The CCPs set out 10 high-level principles for assuring consistency in the high integrity of carbon credits that create real, additional and verifiable climate impacts. These principles are organized under three pillars and include:


  1. Effective governance: The carbon-crediting program shall have effective program governance to ensure transparency, accountability, continuous improvement and the overall quality of carbon credits.
  2. Tracking: The carbon-crediting program shall operate or make use of a registry to uniquely identify, record and track mitigation activities and carbon credits issued to ensure credits can be identified securely and unambiguously.
  3. Transparency: The carbon-crediting program shall provide comprehensive and transparent information on all credited mitigation activities. The information shall be publicly available in electronic format and shall be accessible to non-specialized audiences, to enable scrutiny of mitigation activities.
  4. Robust independent third-party validation and verification: The carbon-crediting program shall have program-level requirements for robust independent third-party validation and verification of mitigation activities.

Emissions Impact

  1. Additionality: The GHG emission reductions or removals from the mitigation activity shall be additional, i.e., they would not have occurred in the absence of the incentive created by carbon credit revenues.
  2. Permanence: The GHG emission reductions or removals from the mitigation activity shall be permanent or, where there is a risk of reversal, there shall be measures in place to address those risks and compensate reversals.
  3. Robust quantification of emission reductions and removals: The GHG emission reductions or removals from the mitigation activity shall be robustly quantified, based on conservative approaches, completeness and sound scientific methods.
  4. No double counting: The GHG emission reductions or removals from the mitigation activity shall not be double counted, i.e., they shall only be counted once towards achieving mitigation targets or goals. Double counting covers double issuance, double claiming, and double use.

Sustainable Development

  1. Sustainable development benefits and safeguards: The carbon-crediting program shall have clear guidance, tools and compliance procedures to ensure mitigation activities conform with or go beyond widely established industry best practices on social and environmental safeguards while delivering positive sustainable development impacts.
  2. Contribution to net-zero transition: The mitigation activity shall avoid locking-in levels of GHG emissions, technologies or carbon-intensive practices that are incompatible with the objective of achieving net zero GHG emissions by mid-century.

The CCPs are realized through the Assessment Framework, which sets out the criteria and decision tools for each principle. Carbon credits will receive the CCP label only if both the carbon-crediting program that issued them and the credit category are assessed by the ICVCM and meet its criteria for high-integrity (i.e. climate, environmental and social) as articulated in the CCPs. There are two components to the Assessment Framework: (i) the Program-Level Assessment Framework, which assesses whether carbon-crediting programs meet the criteria outlined in the CCPs; and (ii) the Category-Level Assessment Framework, which will be released in mid-2023 and will set out the criteria that the credit categories must meet.

In respect of program-level processes under the Governance pillar, ICVCM notes that many of them are addressed in the requirements of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which have been developed and adopted by the International Civil Aviation Organisation (ICAO). In order to minimize the burden on carbon-crediting programs, ICVCM has determined that programs already eligible under CORSIA will also be eligible under the Assessment Framework, provided that they meet the requirements in Section 3 of the Assessment Framework.

From mid-2023, carbon-crediting programs may start their application to the ICVCM via its Application Platform. Applications will be assessed against the program-level criteria in the Assessment Framework for CCP eligibility and in accordance with the process set out in the Assessment Procedure. Carbon-crediting programs are expected to be able to label the first credits as CCP-approved later in 2023.

VCMI Principles

The Voluntary Carbon Markets Integrity Initiative (VCMI) is a multi-stakeholder initiative which aims to provide guidance on the high integrity voluntary use of carbon credits by companies. In June 2022, VCMI published the provisional VCMI Claims Code of Practice (Code of Practice) for public consultation and corporate road testing; a final version of the Code is expected to be released later in 2023. VCMI has proposed Ten Principles for Voluntary Corporate Climate Action, which relate to both the supply-side access and demand-side of the VCM and are intended to guide corporate climate action:

  1. Science-based action;
  2. Comprehensive action;
  3. Equity-oriented action;
  4. Nature positive action;
  5. Rapid action;
  6. Scaled-up action;
  7. Transparent action;
  8. Actions enabling Nationally Determined Contributions (NDCs);
  9. Consistent action; and
  10. Collective and predictable action.

The main objectives of the Code of Practice are to: (i) provide clear guidance to companies and other non-state actors on when they can credibly make voluntary use of carbon credits as part of their net zero commitments; and (ii) ensure the credibility of claims made by companies and other private non-state actors regarding this use of carbon credits.

The content of the Claims Code is driven by VCMI’s Principles for High-Ambition and High-Integrity Voluntary Climate Action by Companies (set out in Annex A of the Claims Code) as well as by more specific Design Criteria for Guidance on Claims (see Annex B of the Claims Code).

The Code of Practice comprises four steps that companies must adhere to in order to make credible claims about their voluntary use of carbon credits: (i) meet the prerequisites to ensure that companies only use carbon credits in addition to, and not as a substitute for, science-aligned decarbonization across their value chains; (ii) identify which claim(s) are being made (i.e. Enterprise-Wide Claims or Brand-, Product-, and Service-Level Claims); (3) purchase high quality offsets that are associated with a recognized and credibly governed standard-setting body; and (4) report transparently on the use of carbon credits in publicly available annual corporate sustainability or similar reports to demonstrate that prerequisites and claim requirements have been met.

VCMI’s Steering Committee and Expert Advisory Group are now considering stakeholder feedback, with a view to finalizing the Claims Code later in 2023. VCMI has indicated that further refinements are needed in the following areas:

  • financial and emissions analysis to better understand the likely potential uptake of the Claims Code across various sectors and geographies over time;
  • analysis of the potential impacts and implications of including carbon credits associated with corresponding adjustments within voluntary carbon market transactions on the availability of credits, credit prices, purchasing decisions, and achievement and enhancement of countries’ NDCs;
  • development of methodologies and frameworks for assessing companies’ progress toward meeting their interim emission reduction targets; and
  • development of clearer guidance on quantifying, accounting, and target setting for Scope 3 emissions.

Looking ahead

VCMs are increasingly seen as an effective way for corporations to mitigate emissions and acknowledge that climate change can, and should, be addressed beyond the scope of existing regulations. While offsetting is an important tool in the pursuit of net-zero commitments, it should not be considered a substitute for direct emission abatement by companies. Rather, offsetting should be seen as a complement to emission reduction activities of as an option for financing additional emission reductions beyond their net-zero targets. VCMs hold great potential for Canadian businesses, particularly given the dearth of schemes that are designed for industries outside of regulated emitters. However, in order to meet the full potential of VCMs, market participants will need greater certainty around market infrastructure and confidence in the quality of carbon credits. A globally-accepted standard to ensure the integrity of emission reduction projects and the carbon credits generated by such projects can help to boost confidence in VCMs. The question of whether the various high-quality carbon credit initiatives now underway will provide the needed push to scale-up and bring confidence to VCMs is one that is being closely watched by stakeholders across all sectors.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s ESG and Carbon Finance group.

Mark your calendars for Wednesday, May 10, 2023, our ESG and Carbon Finance group will be hosting a panelist discussion on Sustainable Finance. The event will be held in-person at our Montreal office and will be broadcasted virtually for those who wish to dial-in. To learn more about the event, please click here.

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