The joint policy statement and principles provide integrity standards for carbon credits that both the US government and participants in the voluntary carbon market should aim to follow.

By Jean-Philippe Brisson, Michael Dreibelbis, Tal Carmeli, and Phil Goldberg

On May 28, 2024, the Biden Administration released the Voluntary Carbon Markets Joint Policy Statement and Principles for Responsible Participation in Voluntary Carbon Markets (the VCM Policy). The VCM Policy is co-signed by US Secretary of the Treasury Janet Yellen, US Secretary of Agriculture Tom Vilsack, US Secretary of Energy Jennifer Granholm, International Climate Policy Senior Advisor John Podesta, National Economic Advisor Lael Brainard, and National Climate Advisor Ali Zaidi.

The VCM Policy represents the executive branch of the US government’s position with respect to the role of the voluntary carbon market (VCM) in supporting decarbonization efforts in the United States and globally. This announcement is significant and timely because it was released at a time when some have questioned whether voluntary carbon credits are an appropriate tool for reducing greenhouse gas (GHG) emissions.

Joint Policy Statement

The VCM Policy supports the role that the VCM can play in facilitating global GHG emissions reductions and removals to help limit global warming. The VCM Policy arrives at a time when various observers have identified the failure of certain crediting methodologies and activities that rely on such methodologies to produce claimed decarbonization outcomes. For the VCM to reach its potential, the VCM Policy notes that stakeholders must be certain that one credit truly represents 1 tonne of additional emissions reduction or removal.

The VCM Policy recognizes a renewed wave of civil society, corporate, and government interest in addressing these challenges. Notably, multi-stakeholder initiatives have recently emerged to produce standards and principles for high-integrity credit development and responsible credit use. For example, the Integrity Council for the Voluntary Carbon Market is a nonprofit, independent governance body that aims to set and maintain a global standard in the VCM. International actors have also developed rules, guidance, and procedures that shape certified credits, such as the International Civil Aviation Organization’s (ICAO’s) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The VCM Policy also recognizes that recent advances in market infrastructure have improved transparency, liquidity, and integrity in the VCM.

The VCM Policy reaffirms federal efforts and commitment to contribute to the integrity and function of the VCM and encourages the private sector and other stakeholders to responsibly participate in the VCM, consistent with the principles it sets forth, as detailed below. A high-functioning VCM creates an efficient and attractive market for credit sellers and connects buyers to cost-effective, high-quality emissions reduction and removal credits. The VCM can also facilitate buyers’ additional climate ambitions through large-scale efforts, such as nature-based carbon projects.

We anticipate that the release of the VCM Policy will attract additional participants to the VCM and provide them with useful tools to identify high-quality projects and carbon crediting programs. As the use of carbon credits will continue to be scrutinized, there is a need to codify and unify the standards in this space to allow the VCM to reach its potential. We hope to see additional guidance published in the near future.

Principles for Responsible Participation

The VCM Policy outlines seven voluntary principles to promote robust standards for carbon credit supply and demand, improve market functioning, and ensure fair and equitable treatment of all participants. Each of these principles is summarized below.

Principle 1: Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.

Carbon credits should be certified under a robust standard that adheres to core integrity principles and ensures that the carbon credits are additional, unique, real, and quantifiable; the activity is validated and verified; the emissions removed or reduced are kept out of the atmosphere for a specified period of time (permanence); and credits are measured based on robust baselines. The carbon-crediting programs responsible for listing activities and issuing carbon credits are also essential to ensuring credit integrity, and the VCM Policy lists best practices for these bodies as well. 

Principle 2: Credit-generating activities should avoid environmental and social harm and should, when applicable, support co-benefits and transparent and inclusive benefits-sharing.

Project developers should seek to avoid negative externalities for the communities where they operate by establishing safeguards for the protection of local communities’ land use and tenure rights, food security, nature, and biodiversity. 

Principle 3: Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains.

The VCM Policy encourages businesses to use the VCM as part of their net-zero strategies. Businesses should conduct thorough emissions inventories that cover Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (all other indirect emissions in the value chain). They should also publicly report these emissions, set short-term reduction targets, establish long-term net-zero goals, and implement plans to transition towards these targets.

The VCM Policy advises companies to engage with their suppliers to collaboratively pursue decarbonization. This might involve directly funding decarbonization efforts within their value chains, such as through insetting (investing in emissions reductions within their own supply chains) or by purchasing credits generated by their suppliers. The US Treasury’s Principles for Net-Zero Financing and Investment can be consulted for further guidance on credible approaches to reduce value chain emissions.

Principle 4: Credit users should publicly disclose the nature of purchased and retired credits.

The VCM Policy encourages credit users to annually disclose information on purchased, cancelled, or retired carbon credits for external observers and stakeholders to evaluate if the credits used are of high integrity and do not have negative environmental or social impacts.

Principle 5: Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high-integrity standards.

Based on the VCM Policy, evolving frameworks for demand-side credit standards and codes of conduct should incentivize ongoing purchases of high-integrity carbon credits while encouraging companies to reduce emissions within their value chains. These frameworks may allow companies to count credits towards a portion of their Scope 3 emissions when full abatement is unreasonable within a given timeframe. Public claims made by companies should be based on carbon credits that meet high-integrity standards and avoid adverse impacts, within a corporate climate strategy that prioritizes internal emissions reductions. Carbon credits that are reversed, inflated, or fail safeguards should only support claims if remediated, for instance, through buffer pool replacements.

Principle 6: Market participants should contribute to efforts that improve market integrity.

The VCM Policy recommends stakeholders improve market functionality by creating incentives to develop and purchase high-integrity credits; improving transparency and the publicly available data of carbon projects; promoting fair and equitable treatment of suppliers involved in credit generation; mitigating potential conflicts of interest among VCM participants; preventing fraud and manipulation by bad-faith actors; providing for the appropriate accounting and legal treatment of carbon credits; enabling global interoperability of relevant standards, market infrastructure, and reporting; and supporting robust and equitable participation in the VCM. The VCM Policy recognizes addressing these issues will require collaboration between the private sector, civil society, and the public sector.

Principle 7: Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

The VCM Policy recommends that policymakers and carbon credit buyers consider methods for enhancing market certainty for credit providers undertaking long-term investments in decarbonization. For example, the use of scientifically robust models can help reduce measurement, monitoring, reporting, and verification costs and improve credit integrity when paired with appropriate safeguards.

Latham & Watkins will continue to monitor the implementation of the VCM Policy and other initiatives and developments in this space.