What corporates need to know to engage effectively with the VCM post-COP 27
Key Takeaways
There is tremendous momentum behind the Voluntary Carbon Market (VCM), with multiple important new initiatives announced at COP27.
While negotiations yielded limited outcomes for immediate climate action, several new reports and guidelines were issued that provide helpful guidance for responsible corporations looking to take meaningful climate action
Flowcarbon recommends that corporates:
Be cognizant of potential challenges related to Article 6 implementation uncertainty when signing long term agreements with project developers
Be aware of evolving best practice guidance relating to corporate claims, including utilizing “carbon neutral” claims thoughtfully
Prioritize purchasing carbon credits that project natural carbon sinks, maximize co-benefits, and help scale up the carbon removals market.
COP27 was framed as the “Together for Implementation” COP. With important political decisions on the carbon market already made, this COP intended to iron out some of the many outstanding details regarding Article 6, in addition to making progress on thorny issues such as loss and damage, adaptation, and climate finance.
While the negotiations did not produce the clarity many in the market hoped for, there is remarkable momentum and enthusiasm regarding the VCM. It is clear that
An enormous gap exists between what is needed to finance climate mitigation activities and the public funding available and;
The VCM is very well positioned to help fill that gap. Multiple new meaningful initiatives were launched, including the U.S.’s unveiling of a system of carbon credits designed to finance the clean-energy transition in developing economies (the “Energy Transition Accelerator” and an African Carbon Markets Initiative which aims to annually produce 300 million carbon credits by 2030 and 1.5 billion credits by 2050.
In addition, several new reports were released that relate to an important topic for Flowcarbon clients: corporate claims. We’ll summarize the essentials here:
Corporate Claims
What was the state of play pre-COP27?
A wide range of existing frameworks, such as the Race to Zero, Climate Neutral Now, the CarbonNeutral Protocol, the Gold Standard, WWF’s Blueprint for Corporate Action on Climate and PAS2060 offered guidelines and standards for making environmental claims. In general, claiming “carbon neutrality” was acceptable, with varying levels of stringency regarding the requirement for organizations to follow the mitigation hierarchy (prioritize internal emission reductions) prior to making a carbon neutrality claim. WWF recommended putting an internal price on carbon and investing that sum in impactful projects rather than securing a high volume of lower quality credits (to meet a “carbon neutrality” claim), while Gold Standard indicated that “offsetting” claims should only be made with credits that are truly additional (ie/ they don’t simply displace a mitigation activity that a country would have taken anyway to meet their NDC).
New initiatives are trying to consolidate and simplify guidance that gain market acceptance. The Voluntary Carbon Market Integrity Initiative (VCMI) released draft guidance outlining how corporates should make claims at the organizational level (Gold/Silver/Bronze) and suggesting that an organization must meet key prerequisites, including being on an organization-wide, science-based net zero pathway to claim carbon neutrality for a specific product/brand/service. The Science-Based Targets Initiative (SBTI) requires that companies commit to internal science based decarbonization efforts. At the ultimate point of “net zero”, any residual emissions must be offset by high quality, permanent removal credits. They have also stated that companies “should” take action beyond their value chains, with a priority on securing and enhancing carbon sinks (both reduction and removal credits). Further guidance is anticipated from the SBTI in 2023.
What happened at COP27?
Multiple new reports were released. This includes, (1) VCMI provisional feedback on the claims guidance, (2) UN High Level Expert Group on Net Zero Emissions Commitments and (3) ISO’s Net Zero Guidelines.
New guidance confirms the importance of going “beyond net zero” and distinguishing long term “carbon neutrality” claims. Both the UN Expert Group and ISO Guidelines provided guidance aligned with the SBTI to prioritize urgent and deep internal reductions, and to only use high quality, permanent removal credits to offset residual emissions at the point of “net zero.” Both initiatives also encouraged organizations to “go beyond net zero,” including beyond value chain mitigation via carbon reduction credits. ISO shared that one yet to be released standard, ISO14068, will provide guidance for “carbon neutrality” claims, while the UN Expert Group endorsed the ongoing work of the VCMI.
There is tension between setting stringent criteria for the use of carbon credits to prevent “greenwashing” and creating more flexible guidelines that promote increased investment in the VCM from more participants. VCMI indicated they received over 130 submissions on their “Provisional Claims Code of Practice,” with 70 corporations “road-testing” the guidance to provide detailed feedback on implementability. Of particular note, only 53% of respondents believed the prerequisites to make corporate claims were achievable, and there was no consensus on the appropriateness of the “headline claims” of Gold/Silver/Bronze levels of achievement. There appears to be a desire for differentiated claims, but the devil will be in the details. The VCM intends to provide final guidance in the first half of 2023.
A new type of Article 6.4 unit was created: a “Mitigation Contribution Emission Reduction.” These units, fully controlled by the host country, will exist for the purpose of contributing to the emission reduction of the host party, and are eligible for use as part of the VCM when introduced (estimated to be in 2024 or 2025). Controversy and uncertainty remain regarding how this mechanism will eventually work, including how credible these units will be. The name of the unit itself has been generally interpreted as indicating a shift away from an “offsetting” or “climate neutrality” claims toward a “contribution” claim that makes clear the corporate is helping achieve climate goals by financing a country’s achievement of their nationality determined contribution.
What does this mean for my business?
There is unanimity that organizations should invest in beyond value chain mitigation and transparently report their efforts. There is market uncertainty with regards to: (1) long term interaction with Article 6.4, (2) corporate claims, and (3) what type of credits a business should purchase.
1. Long Term Interaction with Article 6
Given that the Article 6.4 market will not be operational until 2024 or 2025, this is not a near-term concern for most corporates. However, if project origination or long term offtakes are on your agenda, you should be cognizant of the power of host country governments to take unanticipated actions. Be sure to engage with local counsel.
2. Corporate Claims
The market appears to be moving away from organization-wide “carbon neutrality” claims. At a minimum, the expectation is that any environmental claim does not deter or delay the science based, credible internal carbon reductions necessary for the business to undertake. At its most ambitious, carbon neutral claims should only be considered by organizations that are 100% transparent with their carbon purchases, are fully Paris-aligned (including political lobbying efforts), and use credits that either have a Corresponding Adjustment (“CA”) or help a country achieve a “Conditional” NDC to ensure additionality. A compelling alternative to achieving “carbon neutrality” that is gaining traction in the market to set and levy and internal carbon tax on all remaining carbon emissions, then invest that sum in high impact projects that align with your business objectives.
3. What Credits Should I Purchase?
The Integrity Council on Voluntary Carbon Markets (“ICVCM”) is analyzing the 350 submissions they received, including several high profile criticisms, in an attempt to issue clear guidance for what a “high integrity” carbon credit is. It is widely anticipated that an Article 6 CA will not be required, at least in the near-mid term. Likely, the ICVCM will take a “wait and see” approach and collaborate with the VCMI to set best practices in this regard, which will evolve over time based on market demand and availability of CAs.
In the interim, we recommend focusing on three priorities:
Protecting natural carbon sinks → There is minimal chance of avoiding climate catastrophe if we don’t end deforestation this decade. Aim for jurisdictional-scale credits if available and ensure conservative baseline setting.
Maximizing co-benefits → Buy credits that benefit vulnerable people, local communities (especially Indigeneoius Communities) and biodiversity.
Scaling up removals → The removals market needs to grow by over 3,000x by 2050. Invest in high quality carbon removals such as Biochar and Direct Air Capture to bring down the price over time.
