Unpacking the New “Blueprint” for Bigger (and Better?) Voluntary Carbon Markets

Steve Zwick

With more and more companies scrambling to achieve zero net greenhouse-gas emissions, the demand for voluntary carbon credits is skyrocketing. The Taskforce on Scaling Voluntary Carbon Markets today published a detailed 138-page blueprint for ratcheting up the size of voluntary carbon markets without sacrificing quality. Here is a brief dive into the highlights.

27 January 2021 | After four months of exhaustive consultation among nearly 200 environmental and financial entities, including Ecosystem Marketplace, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) today released its “blueprint” for expanding voluntary carbon markets to support the global transition to net-zero greenhouse-gas emissions by 2050.

Launched in September by former Bank of England Governor Mark Carney (pictured) and the Institute of International Finance (IIF), the Taskforce estimates that carbon markets must grow at least 15-fold by 2030 to cut net man-made greenhouse-gas emissions in half by the end of the decade – a goal that the Intergovernmental Panel on Climate Change (IPCC) says is necessary to prevent average global temperatures from rising to more than 1.5 degrees Celsius (2.7°F) above preindustrial levels.

Such market growth will mean nothing if the underlying credits don’t work or if companies use them to continue emitting, and the Taskforce aims to forge agreement on practices that can help voluntary carbon markets scale up in ways that deliver verified ecological outcomes. The blueprint offers 20 specific actions divided among six topics, ranging from the creation of “Core Carbon Principles” (CCPs) and exchange-traded reference contracts to the establishment of a global regulator to coordinate existing standard-setting bodies. Once CCPs are established, the Taskforce envisions exchange-traded futures contracts that will provide a global reference price for a verified emission reduction as well as ways of valuing “additional attributes” such as habitat conservation and gender equality.

The blueprint identifies several impediments to growth, including the historical lack of climate awareness and the fragmented nature of existing voluntary markets and standards. It recommends ways of moving forward and establishes working groups to further develop recommendations in Phase 2 of the process.

Core Carbon and a Base Reference Price

As Ecosystem Marketplace’s annual State of Voluntary Carbon Markets (SOVCM) reports make clear, the voluntary carbon market is primarily an over-the-counter market, with credits from individual projects being sold bilaterally to intermediaries before finding their way to the public. The Taskforce recognizes that this practice may continue, but it envisions a global reference price similar to those used in other financial markets, especially those related to commodities.

In these markets, exchange-traded instruments – such as futures contracts built around specific baskets of interest rate products or bushels of corn meeting agreed-on grades and delivery points – are traded on a government-regulated exchange to generate a reference price, which in turn is used to set or negotiate prices in other grades or locations. These other grades and locations can result in either a premium or discount to the reference price.

To create the CCPs and market infrastructure, the Taskforce spawned working groups to also develop an umbrella organization that will coordinate existing regulators and standard-setting bodies.

Natural Climate Solutions

Drawing on research from McKinsey & Company and others, the Taskforce identified between eight and 12 billion metric tons of carbon dioxide credits that could be brought to market annually by 2030, with 65 to 85 percent of them coming from Natural Climate Solutions (NCS) – primarily conservation of endangered forests and peatlands, which accounted for 3.6 billion metric tons per year.

The blueprint, therefore, includes provisions for project-based REDD+ (Reducing Emissions from Deforestation and Degradation, plus the enhancement of carbon stocks), but it emphasizes the need to nest such projects in jurisdictional efforts where possible and improve existing safeguards. It also recommends the creation of a supplier/financer matching platform that would make it easier to assess the creditworthiness of small suppliers.

Reduce, Report, Offset

The blueprint encourages consensus on when a company can utilize offsets to meet a net-zero commitment and encourages an approach similar to that championed by the Science-Based Targets Initiative (SBTi), which the Taskforce summarizes as “Reduce, Report, Offset,” meaning a company should first come clean on its emissions in a verifiable way and create a plan for eliminating them through fuel-switching or other direct measures, then it should submit to audits on its progress, and finally it should use carbon credits to offset those emissions it can’t eliminate internally.

It recommends the creation of a “High Ambition Demand Accelerator for the  Voluntary Carbon Market” (HADA-VCM) that will coordinate with existing efforts such as SBTi, Climate Action 100+,  and the Net-Zero Asset Owner Alliance (NZAOA) to develop principles for utilizing credits and for marketing offsets at point-of-sale, which critics argue leads to “guilt-free” buying of fossil fuels and other products that generate emissions.

“This is complementary [to direct reductions],” Carney said during a panel discussion World Economic Forum. “it’s one piece of the puzzle, but we need this market.”

Reductions vs Removals

Several issues proved contentious during the consultation process, and the issue of reductions vs removals is one of these. It is likely to remain so in Phase 2.

In early drafts of the blueprint, the Taskforce proposed the creation of two grades of credit based on whether they reduced emissions – by, say, funding low-carbon technologies or conserving forests – or removed greenhouse gasses from the atmosphere – by, say, deploying carbon capture technologies or planting trees.

In early drafts, credits that generated removals were seen as a premium grade over those that generated reductions, largely due to market demand from new buyers. Opponents of the proposal, however, argued that it made little sense to emphasize removals over reductions at this stage, when markets should be utilized to accelerate reductions across the board. Many argued that even differentiation is problematic when natural climate solutions are involved because conservation both reduces emissions and enhances sinks.

In the end, a consensus emerged that reductions and removals should be emphasized now, with a gradual shift to emphasizing removals as trees grow and new technologies mature. The blueprint does, however, group credits into two categories – avoidance/reduction credits and removal/sequestration credits – while not making a quality distinction.

What About Old Credits?

Another contentious issue was what to do with older credits, which are often cheaper than newer ones and represent reductions achieved in the past. The Taskforce initially leaned towards eliminating older credits, as the International Civil Aviation Organization (ICAO) had done with its Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

Many consultation group participants argued that eliminating older offsets would punish organizations that took early action and that older offsets were a legitimate tool for offsetting historical emissions, as many companies are doing.

In the end, the Taskforce chose not to exclude projects based on vintage or start date but to review methodologies against the Core Carbon Principles (CCPs). The exact procedure for reviewing existing methodologies was left for Phase 2.

The Consultation Process: What Next?

The Taskforce published its first public Consultation Document on November 10, with 17 recommendations spread among six topics, and the IIF encouraged all market participants to submit feedback by December 10.

“Exactly how the infrastructure for the voluntary carbon market as outlined in this blueprint will be operationalized is still to be determined,” the blueprint states. “While there are important decisions yet to be made, we want to make sure that the final governance structure adds value and helps to drive further finance towards climate mitigation.”

Steve Zwick is a freelance writer and produces the Bionic Planet podcast. Previously, he was Managing Editor of Ecosystem Marketplace, and prior to that he covered European business for Time Magazine and Fortune Magazine and produced the award-winning program Money Talks on Deutsche Welle Radio in Bonn, Germany.

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