Voluntary Carbon Market (VCM)

Risk adjustment and legacy credits in the VCM

Last week, the Integrity Council for the Voluntary Carbon Market (ICVCM) released its updated Assessment Framework, benchmarking high-quality credits for the global Voluntary Carbon Market (VCM). The market has been eagerly anticipating this release, as ICVCM is one of the standard-bearers for quality on the supply side in the VCM. Enforceable and transparent standards will help build badly-needed confidence in carbon credits and their integrity, which – along with the participation of buyers in response to appropriate incentives – will help the VCM to scale its impact. At Rubicon Carbon, we welcome this development.

Programs and credits eventually approved by ICVCM will be labeled “CCP Eligible” or “CCP Approved” because their methodologies, along with the programs or registries that issue their credits, will have met the requirements laid out by ICVCM in its new Core Carbon Principles (CCPs). The hope is that, once these labels are finalized and in use, most VCM buyers will invest in CCP-compliant credits and that this shift in demand will help reform the entire market and drive out low quality carbon credits. 

While few technical details are contained in this new assessment framework, the ICVCM has laid out a path for finalizing the CCP approval and labeling process. This deliberate approach is also quite welcome, because it acknowledges that we’re all learning and improving as we work to scale the VCM, and it allows for a gradual ratcheting-up of impact.

There is a problem though. The ICVCM is looking forward, with hope and optimism about the future of the VCM. But that future market – where new and improved methodologies will be used to create new projects that issue credits going forward – does not yet exist. The market we have today is one where certifying bodies – using methodologies that were deemed appropriate when they were written – are issuing credits every year for very good, though sometimes flawed, projects whose crediting periods extend for decades, but may have had slippage from their intended outcomes. The credits from these projects are not yet CCP-eligible. In some cases, we don’t know whether they will ever be CCP-eligible, because ICVCM has not yet defined which credit categories will be able to receive the CCP approved label. In the name of restoring integrity to the VCM market, ICVCM may decline to approve a substantial share of credits in today’s carbon market.

Are all of these legacy projects and credits worthless? Absolutely not! We know that some of them – perhaps many of them -- may have overestimated their expected impact and this has resulted in overcrediting (the issuance of more carbon credits than can be justified based on science). That problem is real and needs to be remedied. But even so, most of these projects are making a positive impact. REDD+ projects, for example, are protecting carbon-rich forests, funneling finance for nature and biodiversity to regions and communities where funds would not otherwise be available. Were some of these early carbon projects developed using legacy methodologies that in hindsight are not as rigorous as needed? Yes! Many of these developers were early actors in the VCM and we’ve all learned a lot since the first projects were developed. But does that mean credits from these projects should be erased and that the price of their carbon credits should go to zero? Absolutely not, and here’s why.

For projects where overcrediting and/ or the accuracy of carbon accounting is a risk, there are good ways to correct the prior vintages today. At Rubicon Carbon, we have developed the Rubicon Carbon Tonne (RCTSM), which is a credit backed by a diversified portfolio of projects. Each RCT portfolio is actively managed by our Science Team, which creates an empirical estimate (using dynamic baseline techniques) of what the appropriate baseline is for each of our projects. We compare that with the project baseline to understand the extent of overcrediting risk. By aggregating those project-level risk values, we estimate the portfolio-level over crediting risk based on the projects in that portfolio. 

Then, when a customer chooses to retire RCTs, we over-retire additional credits – above and beyond the credits purchased by the customer – in numbers consistent with the overcrediting risk. By retiring those extra credits on behalf of nobody, we seek to add value back to the credits we do sell, thereby ensuring that each RCT we deliver to a customer is, in our view, as close as we can get to having one tCO2e impact per credit.

There’s another reason we shouldn’t just throw out the old credits when a new standard comes along, and that relates to the predictable evolution of standards in any industry. This “new” standard – even the ones laid out last week by ICVCM – will undoubtedly need to be updated in the future, because projects may not achieve all they set out to accomplish. Technologies may advance, or we may develop better methods to assess SDGs, or expectations may change. So do we just throw out the old credits again next time, when a new version comes along? There is a practical risk here: if developers and corporates believe that a prior purchase could suddenly become worthless, then of course they will wait until the very last minute to invest. This minimizes the risk for companies, but it also delays critical climate action. And the world can’t wait.

We applaud the work by ICVCM and others to continue to advance and improve standards for a market that is so critical to global climate goals. The ICVCM has laid out a “path to compliance” for developers and programs that do not yet meet the ICVCM’s benchmarks. This is critical, because it means that there will be a grace period for developers and programs to work to meet the demanding standards laid out by the group. As VCM participants, we’re all trying to figure out the best way to build an effective and efficient market while still moving with the urgency the climate crisis requires. 

Approaches like the one taken by Rubicon Carbon demonstrate that there are ways to restore integrity to today’s carbon market even as we build a better one for the future. With the support of our CEO Tom Montag, a pioneer and veteran of innovative financial markets over his 30 year career, Rubicon Carbon was created to bring innovative products and approaches to drive greater confidence and access to the carbon markets. We will be sharing more on our portfolio risk adjustment process in the coming days, explaining how the problem of overcrediting can be solved via discounting and active management. Please stay tuned for more from us on this topic and other important VCM issues, and reach out to science@rubiconcarbon.com with comments and questions.





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