Action

On May 28, 2024, the U.S. Departments of Treasury, Agriculture, Energy, and White House representatives published a joint Policy Statement on voluntary carbon markets (VCMs). The Policy Statement sets out seven principles to guide engagement with VCMs, and the principles are designed to ensure that VCMs are effective, fair, and equitable, and instill market confidence.

Takeaways

• Expect continued regulatory action relating to disclosure of offset credits secured through VCMs (e.g., California AB 1305).
• Companies currently participating or considering participation in VCMs should use the Policy Statement and principles as a roadmap for engagement but track developments in particular markets where they will be used. 
• Companies that engage in the VCM should consider modifying representations in carbon offset purchase agreements (particularly long-term offtake agreements) to ensure their carbon credits comply with the policy and to avoid greenwashing claims.
• Diligence surrounding the purchase of offsets should consider the ability to claim an actual reduction or removal of carbon emissions.

Details

On May 28, 2024, the U.S. Departments of Treasury, Agriculture, Energy, and White House representatives published a joint Policy Statement on VCMs. The Policy Statement highlights that VCMs can and should play a meaningful role in facilitating GHG emissions reductions to reach global net-zero emissions by 2050 and limit warming to 1.5 °C.

Notably, the Policy Statement recognizes that confidence in the integrity of credited emissions reductions is critical for VCMs to reach their potential. Legitimate use of credits (e.g., additional and permanent carbon emission removal) must therefore be prioritized for VCMs to drive decarbonization. Technical assurances are also important to ensure that activities and their credited results are compatible with emissions pathways, national climate change policies, and sustainable development goals.

To that end, the Policy Statement sets out seven principles (listed and summarized below) for U.S. market participants to consider for responsible participation. The principles are intended to guide engagement with VCMs and carbon markets generally and are designed to ensure that VCMs are effective, fair, and equitable, and instill market confidence.

The Policy Statement and principles are non-binding but perhaps foreshadow a growing interest in government regulation of voluntary action moving forward. For example, the White House published a Fact Sheet related to the Policy Statement identifying various initiatives that U.S. agencies have taken to advance market integrity of VCMs. Additionally, California’s Assembly Bill 1305 (AB 1305), which took effect in January 2024, regulates disclosures related to the marketing, sale, and use of voluntary carbon offsets. AB 1305 requires voluntary carbon offset marketers/sellers, purchasers/users, and other parties making claims about net zero emissions or carbon neutrality to make specific disclosures to ensure the integrity of the underlying offsets. While AB 1305’s scope is narrower than the Policy Statement principles, it demonstrates the regulatory priority on the use of quality carbon offsets as part of ensuring robust VCMs.

In sum, participants should use the Policy Statement as a roadmap to engage in VCMs responsibly and effectively, which will help to minimize criticism (including “greenwashing” claims) from third parties.  Companies that engage in VCMs should also consider modifying representations in carbon offset purchase agreements (particularly long-term offtake agreements) to ensure their carbon credits comply with the policy, and diligence surrounding the purchase of offsets should reflect an actual reduction or removal of carbon emissions.

The Seven VCM Principles

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization. Activities that generate credits and the credits themselves should be certified to a robust standard for activity design and Measurement, Monitoring, Reporting and Verification (MMRV) of emission reductions or removals, applying procedures that deliver on core integrity principles.
2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing. Project and program developers should seek to avoid negative externalities for the communities in which they operate, seek to enhance positive impacts, and place safeguards to identify adverse impacts on people and the environment, including as they relate to local communities, land use and tenure rights, food security, nature, and biodiversity.
3. Corporate buyers that use credits (credit users) should prioritize measurable emissions reductions within their own value chains. Achieving long-term climate goals requires transforming business models across economies. Accordingly, credit users should use VCMs to complement measurable within-value-chain emissions reductions as part of their net-zero strategies.
4. Credit users should publicly disclose the nature of purchased and retired credits. Disclosure of purchased, cancelled, or retired credits should be made on at least an annual basis and include details that enable outside observers and relevant stakeholders to assess whether purchased and retired credits are of high integrity and avoid negative environmental and social impacts.
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. Claims should rely only on the impact of credits that meet current high integrity standards at the time the claim is made and that avoid adverse impacts (see Principles 1 and 2).
6. Market participants should contribute to efforts that improve market integrity. Stakeholders should seek to improve market functionality for a variety of market participants, including by:
   • creating incentives to develop and purchase high-integrity credits;
   • improving transparency and the publicly available data of credit-generating projects and programs;
   • promoting fair and equitable treatment of suppliers involved in credit generation;
   • controlling for potential conflicts of interest among VCM service providers;
   • preventing fraud and manipulation by bad-faith actors undermining credit integrity;
   • providing for the appropriate accounting and legal treatment of credits and resolving any related ambiguities;
   • enabling global interoperability of relevant standards, market infrastructure, and reporting; supporting robust and equitable participation in these markets; and
   • taking other measures separate from credit and demand integrity to improve the functioning and health of these markets.
7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs. Policymakers and buyers should consider ways to enhance market certainty for credit providers undertaking long-term and often significant investments in decarbonization that plan to rely on VCM revenues to finance their actions.