Market Integrity Takes a Village

By Team Oka

Aug 15, 2023

Could quality control finally be within reach for carbon credits traded on the voluntary carbon market (VCM)?

Four months after unveiling its 10 Core Carbon Principles (CCPs) and accompanying program-level assessment framework, the Integrity Council for the Voluntary Carbon Market (ICVCM) recently released the accompanying credit category-level assessment guidelines. The complete Assessment Framework sets out the process for CCP-alignment. To qualify for the green-standard label, a credit must pass two checks:

The program (i.e. the body registering the project and issuing the credit) must adhere to the CCP criteria published in March. Those include design features such as additionality and permanence; program standards such as governance and transparency; and positive outcomes such as sustainable co-benefits.
If deemed “CCP-Eligible,” a program can market credits as “CCP-Approved,” provided they meet certain category and associated methodology requirements. The specifics are under review, but the ICVCM has already vetoed Carbon Capture and Storage (CCS) credits and credits issued ex-ante.

Following a lengthy consultation process and difficult chapter for the VCM, the ICVCM is picking up the pace by inviting program applications and establishing two working groups to kickstart the approval process by year end: one to recommend which credit categories should be fast-tracked, which reviewed, and which denied; another to conduct deeper assessment on categories flagged as “raising more complex issues.”

Though the program-level parameters tally with market consensus of what constitutes “quality,” the second hurdle is bound to be more divisive. Given the outsized impact of every additional degree (and every negative headline), the ICVCM cannot afford to stall while prioritizing perfection ahead of progress. The question is, where do its new definitions leave a) high-quality credits deriving from the “wrong” categories, and b) those deriving from the “right” categories that are nonetheless exposed to idiosyncratic project-level risks?

The ICVCM Is Setting the Standard

Complicated at the best of times, measuring carbon removal or reduction is made more complex by the vast range of evolving risks to which projects are exposed over their long lifespans. The methodologies employed by carbon registries — which tend to be based on historical data — may underestimate unexpected and unfolding risks such as climate change, which leads to a gap between the number of credits issued (particularly the early days of a project) and their actual carbon benefit (particularly with the benefit of hindsight). The disparity creates buyer confusion and hinders necessary market activity. In its efforts to bridge the gap between reported and actual value, the ICVCM is honing in on inconsistent program and registry methodologies, specifically. Its objective is to raise the bar for process and design, rather than address live risks on a project-by-project basis. That is to be expected: Industry initiatives such as the ICVCM lack the resources (it cannot judge every non-fungible project on its individual merits), incentive (it needs to balance environmental integrity with market liquidity), and authority (it is voluntary) to set the absolute terms for quality. The hope here is that a global benchmark for high-integrity carbon credits — where “integrity” is a measure of credit category and associated methodology, as determined by the ICVCM — will redirect corporate buyers towards CCP-compliant credit categories and methodologies, in turn incentivizing programs to develop projects that adhere to those categories and methodologies while shaking out low-quality credits.

Carbon Credit Insurance Is Raising the Bar

The risk, particularly in the near term, is twofold:

Where does it leave high-quality credits that derive from projects that are not yet and will potentially never be CCP-eligible? Corporate buyers may be in possession of credits backed by a methodology that was deemed appropriate at the time of issuance, but which now falls outside the scope of CCP approval. The credit is not necessarily flawed, even if the project is or has been subject to slippage.
Where does it leave individual CCP-eligible projects with exposure to idiosyncratic risks unrelated to governance or methodology? Important though they are, raising the bar on methodology will not safeguard buyers against the full gamut of human and natural risks facing credit quality. The CCPs alone are not a complete quality assurance and so cannot be exclusively relied upon to end the VCM crisis of confidence.

The ICVCM is a risk-mitigation body with a crucial role to play in bringing integrity to and scaling the VCM, but it is not a risk-management body. Taken in silo, CCP-approval is an incomplete measure of quality. Corporate buyers seeking to minimize their financial and reputational risk, while also maximizing their positive impact, need more nuanced quality assurances and more holistic risk protections. That is where carbon credit insurance comes into play.

“If complemented with third-party risk assessments and protections (such as project ratings and carbon credit insurance, respectively), the CCP Assessment Framework should catalyze a boom in high-quality and high-impact credits.”

– Chris Slater, Founder & CEO, Oka, The Carbon Insurance Company™

By conducting sophisticated due diligence at an individual project level, project ratings and carbon credit insurance complement the sweeping but binary — albeit necessary, on a market-wide scale — program governance and project design standards established by the ICVCM. Risk can never be eliminated entirely. By activating (top-down) risk mitigation and (bottom-up) risk management at every point in the VCM value chain, however, we can collectively raise the bar for buyers and sellers of carbon credits — and the odds of beating the climate crisis.