Quality Offsets for Emission Trading Systems: Anything to learn from ICVCM & other quality initiatives in the voluntary carbon markets?

A post by Jürg Füssler* (INFRAS), external collaborator of the project LIFE DICET

The direct linking of emission trading systems seems not to be gaining significant traction. In that situation, the use of offsets for compliance with emission caps in emission trading systems (ETS) may be seen as an easier way of more indirect linking with fewer institutional and regulatory challenges than direct linking (see LIFE DICET report 4). In theory, emission credits for offsetting emissions used for compliance in the ETS allows for reducing ETS compliance costs, using cheaper abatement from outside, in particular from developing countries. However, the use of credits from the Clean Development Mechanism (CDM) and Joint Implementation (JI) in the EU ETS brought in effect a weakening of the cap of the system and a net increase in global emissions. This is because the credits were cheaper but of low integrity, as they often were “non-additional” (i.e. most of the underlying projects would have been implemented anyway, even in the absence of incentives from the offset mechanism).

Although crediting standards matured over time and partially improved their rules, they appear still widely plagued by issues of low environmental integrity. With the petering out of the use of offsets for compliance in the context of the EU ETS after 2012, the attention moved to voluntary carbon markets (VCM). Here, standards are mostly derived from the CDM and inherited the same integrity issues. Importantly, many also allow for the issuance of (permanent) offsets from projects in forestry and land-use, which were absent in compliance markets.

Although major standards developed sound governance structures, including technical advisory boards, they struggle to define and enforce stringent rules. Their revenue model is often based on a fee per credit issued, implicitly creating an incentive to maximize issuance rather than insisting on conservative rule-setting. Even though the voluntary market is currently booming, with even more companies pledging “carbon neutrality” and therefore in need of offsets, the current state of regulatory stringency leads to a certain level of unease with some market participants, in particular buyers. The lack of robust quality standards is a key barrier to the development of a secondary voluntary market in VCM credits that are fungible and can be traded on an exchange.

Over the last months, several credit quality and integrity initiatives have been launched:

The initiatives develop and apply methods for the systematic and consistent assessment of the quality and integrity of standards and credits.

To make the best use of synergies, CCQI, ICVCM and Calyx share methodological approaches and experiences. At the same time, VCMI complements ICVCM in that it focuses on guidance on how to use credits rather than assessing their quality. Another initiative is the draft Nordic Code of Best Practice for Voluntary Compensation of GHG that has been featured in an earlier LIFE DICET blog post.

A good example is the ICVCM: Backed by several big carbon market players and financials, it developed “Core Carbon Principles” and a step-by-step assessment framework to determine the integrity of a carbon standard and project type/ methodologies. Key areas of assessment of the standard include the strength of governance systems, additionality determination, permanence, robust quantification of emission reductions and removals, avoidance of double counting, and sustainable development impacts. Critically, the framework currently assesses also how well the standards are aligned with the new rules of the Paris Agreement: it includes sections on crediting under the transition to net-zero emissions, the share of proceeds, overall mitigation in global emissions (OMGE) and, importantly, on the double claiming of mitigation outcomes with host country Nationally Determined Contributions (NDCs). However, these sections are currently only formulated as options (and hidden deep in section 13 of the draft Assessment Framework).

A preliminary assessment reveals that many current standards and project types/ methodologies might not pass the assessment on all issues. ICVCM hopes that standards will see this not as a criticism but as a motivation to improve their rules, following its ambitious motto: “Build integrity and scale will follow”.

In the voluntary markets, stakeholders have different views and different levels of appetite for high integrity. It is unclear at this point if and how the assessment framework of the ICVCM will change until its completion. Drafts of the ICVCM CCPs and Assessment Framework have just been released for public consultation.

Everybody interested in carbon markets is encouraged to participate in this ICVCM process and provide feedback until 27 September 2022 (public consultation on www.icvcm.org).

If the ICVCM and its parallel initiatives manage to set the bar for high integrity voluntary carbon markets, this may also serve as a model to determine high quality credits for compliance markets and the use of offsets in ETS or carbon tax schemes. It may help to sharpen key concepts such as additionality, robust quantification and permanence that may also form the basis for a potentially strengthened use of crediting for compliance purposes.

*Juerg Fuessler is managing partner at INFRAS, worked on the research for LIFE DICET and is currently contributing as an expert to the cited initiatives CCQI, ICVCM and Calyx.

The views and opinions expressed in this post are solely those of the author(s) and do not reflect those of the editors of the blog of the project LIFE DICET.