If every market is the product of supply and demand, integrity is the product of good market governance — a concept that has eluded the voluntary carbon market (VCM) for much of its young life. In the absence of oversight, supply of and demand for carbon credits have been besieged by controversies relating to quality (of supplier projects) and credibility (of buyer claims), respectively.
In recent months, two industry bodies have sought to catalyze change with the first integrated market integrity framework. In March, the Integrity Council for the Voluntary Carbon Markets (ICVCM) took on quality with the publication of its Core Carbon Principles (CCPs); and in June, the Voluntary Carbon Market Integrity Initiative (VCMI) followed suit with its campaign for credibility.
Described as a “rulebook for companies on credible use of high-quality carbon credits,” the Claims Code of Practice sets a new bar for corporate offset claims. Gone could be the days of sweeping (and unsubstantiated) carbon neutral assertions; in their place, the VCMI is seeking to introduce “clarity, transparency and consistency.”
Provided their net-zero targets and disclosures meet a number of foundational criteria, companies can select one of three claims to communicate what percentage of outstanding Scope 1, 2, and 3 emissions have been offset by retired credits: Platinum indicates at least 100%, Gold, 60% to 100%, and Silver, 20% to 60% have been accounted for.
Oka, The Carbon Insurance Company™ is predicated on two beliefs: first, that the VCM will meet its $1 trillion potential only when integrity is achieved; and second, that integrity is contingent on having in place risk-mitigation guardrails that have been proven in more sophisticated capital markets.
That, to us, means carbon credit insurance — in conjunction with regulation, ratings, data, and accounting standardization. To that end, three things excite us most about the VCMI Code:
1. CORPORATE ACCOUNTABILITYTo make a claim, a company must a) meet a number of stringent foundational criteria, including Science Based Targets initiative (SBTi) alignment and progress documentation, Scope 3 reporting, and public policy advocacy, b) buy credits “that meet stringent quality thresholds in line with the [CCPs],” and c) “disclose information to support its claim and conduct independent validation and assurance in line with the VCMI MRV and Assurance Framework (to be published in November 2023).” In other words, quality control.
2. REPORTING CONSISTENCY
Standardization is the enemy of disclosure arbitrage, whereby companies take advantage of fragmented expectations to spin their claims in the best possible light. Regulation notwithstanding, the existence of a centralized gold standard puts pressure on companies to either adhere or justify their non-adherence to shareholders. By eliminating confusion and mistrust among asset managers, the Code could catalyze wider acceptance of carbon credits as a net-zero lever.
3. MARKET EFFICIENCY
Good accounting practices are a critical feature of a well-functioning market. Just as they have for broader environmental, social, and governance (ESG) reporting, reporting standards could pave the way for much-needed regulation in the VCM — not to mention higher buyer demand for high-quality credits and more capital for transformative carbon reduction projects on the way. One by-product would be more efficient price discovery, which would compound progress towards market maturity.
Industry infrastructure is coming together. Exciting though that is for the VCM as a whole, the buy-side rules introduced by the VCMI could prove daunting for individual companies still scrambling to adjust to new compliance expectations. The teenage years for any market — during which standards and frameworks are coalescing, but regulation (which would grant them authority) is still pending — yields unique risks. In the world of ESG reporting, for instance, one unintended consequence of increasingly rigorous transparency and accountability was widespread greenhushing as companies shied away from the financial and reputational pitfalls associated with greenwashing.
But history need not repeat itself in the VCM. Carbon Credit Insurance provides companies with the protection they need to continue staking their carbon credit claims, even as the rules governing those claims begin to evolve.