Voluntary Carbon Market (VCM)

The US Government Voices its Support for VCM 2.0

By Drs. Jen Jenkins and Brian Clough

Late last month, a coalition of Federal agencies in the United States issued a Joint Policy Statement outlining principles for voluntary carbon markets. This is a big win for the VCM. The United States Government (USG) has not only endorsed the importance of a high functioning market, but laid out a set of guidelines that will propel us to Voluntary Carbon Market 2.0. Given the momentum building in the VCM, this announcement couldn’t have come at a better time. Let’s look at a few major takeaways from the statement.

The principles are fairly broad and generally align with existing guidance for groups such as the Integrity Council on the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Initiative (VCMI). But, digging below the headlines, the US is making some important statements about the critical role of the VCM in climate action:

The United States wants the Voluntary Carbon Market to work

Engagement at this level indicates that the Biden administration believes the VCM is an indispensable tool in the fight against climate change. With this statement, the USG emphasizes that — in this decisive decade for climate action — we must pull out all the stops to channel the trillions of dollars needed to help developing countries decarbonize and help the US achieve its commitments under the Paris Agreement. 

Ultimately, it will take every policy lever available to meet our climate goals (i.e., regulatory markets, direct funding to developing nations, etc.). Still, in today’s political reality, given the urgency of the climate crisis, we must deploy all the tools we have. The USG’s statement signals that boosting private sector climate action through the VCM is necessary to achieve the greatest, immediate impact.

Public/private partnerships will lead the way on quality

The first principle includes specific parameters for defining high-integrity carbon credits. These reference the work of the ICVCM and VCMI and other international efforts to set quality standards for carbon credits, including CORSIA and the ongoing work of the UN Article 6 Supervisory Body. Importantly, they include specific quality criteria for both how projects are developed and for how they are governed by certification bodies and registries. 

It’s great news that the US is endorsing the need for quality, but even better, it’s encouraging that the Administration is planning to build on existing initiatives rather than reinventing the wheel. The ICVCM and VCMI are working to establish best practices for ensuring high-integrity carbon credits in VCM 2.0, and the United States Joint Principles are very much aligned. This bodes well for the ongoing efforts to create the supply and demand integrity required for the market to succeed and scale.

Co-benefits get top-billing

The second Principle released in the announcement highlights that projects should, at a minimum, not harm human rights and ecosystem services beyond carbon. This includes land use and tenure rights of local communities, potential health impacts, impacts on food security, and risks for nature and biodiversity. The principles go a step beyond mitigating risk in saying that, where appropriate, projects should present verified “co-benefits” relating to these issues. 

We already see a significant shift in buyer preferences towards carbon projects involving direct community engagement. In addition, demand for nature-based projects is coalescing around removal projects that restore native ecosystems and large-scale forest conservation programs such as jurisdictional REDD+, capable of protecting large swathes of biodiverse tropical forests. The new US principles signal to the market that all buyers should prioritize these attributes.

Emphasizing a flexible approach to decarbonization

The Joint Principles emphasize the scientific consensus that decarbonization within companies’ value chains should precede investment in carbon credits, but that buyers also need practical flexibility. For instance, a passage under Principle 5 says of demand-side credit standards: “...those developing such frameworks should consider incorporating approaches that allow companies to count credits toward a portion of their Scope 3 emissions associated with science-aligned emission pathways in cases where it would be unreasonable to expect a company to be able to fully abate those emissions within a given timeframe.”

This section is directed squarely at the Science Based Targets Initiative, who are currently reviewing whether to allow companies to address a portion of their Scope 3 emissions using carbon credits when they revise their Net Zero Standard. The USG is saying that, while the mitigation hierarchy beginning  with emissions reduction should be the main first approach, standards that are too rigid will lower private sector ambition.

The White House is ready to walk the walk 

Alongside the release of the Joint Principles, the Biden administration released a fact sheet detailing a number of steps they are already taking specifically to bolster the VCM and accelerate climate action. These include:

  • The Inflation Reduction Act, the administration’s sweeping and forward-thinking effort to fund adoption of green technologies, including carbon removal, in the US.

  • The United States’ first-ever carbon dioxide removal purchases via the Department of Energy’s Purchase Pilot Prize. The 22 semifinalists for the $35 million dedicated to purchasing carbon credits were also announced last month. 

  • Leadership on market-based initiatives that will direct conservation finance to developing countries, such as the LEAF Coalition and the Energy Transition Accelerator.

  • Directing the USDA to establish clear guidance and technical assistance that will help farmers, foresters, ranchers, and other landowners engage in the development of high-integrity voluntary carbon credits.

While the extent to which the US will become an active buyer of credits remains unknown, what’s clear is that the Biden administration will use its influence and regulatory authority to support an active VCM. This was also made clear in the Joint Principles document, which describes how various agencies will promote the use of high-integrity credits through disclosure rules (e.g. SEC), regulation of derivatives and other financial products (e.g. CFTC), and provisioning of data and technologies that can support credit development (e.g. USDA, DOE, and others).

What was missing: how we can create a high-integrity market 

One thing missing was a discussion on how we can create a high-integrity market to help scale trade of high quality carbon credits. The VCM is a financial market after all, and financial services can play an important role in ensuring companies can make impactful investments for the climate, such as by allowing better management and mitigation of risks associated with carbon credits. Yet the Joint Principles do not tackle the broader question of market integrity.

Looking ahead

The US Joint Principles are a powerful vote of confidence for the VCM, adding to the momentum and optimism we are seeing in the market in the first half of 2024. As various agencies work to implement different parts of this agenda, expect to see an increasingly positive environment for VCM participation in the United States. 

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