The race for net-zero is on. Many companies are making public commitments to achieve net-zero greenhouse gas (GHG) emissions by a certain date. Often this involves a combination of reducing energy usage and using carbon credits to offset the emissions that cannot be eliminated. A new Code of Practice provides guidance for companies on how and when to use carbon credits as part of their net-zero commitments and aims to bring more credibility to this practice. It aims to direct private sector investment to the most effective emissions abatement projects and provide stakeholders with confidence that credits are high quality and have avoided emissions.
Background on carbon markets
The Paris Agreement sets a target to keep the increase in global temperatures well below 2°C compared with pre-industrial levels. In order to meet this goal, companies and national governments are taking steps to reduce their GHG emissions but will also in many cases use carbon credits to "offset" those emissions they cannot eliminate. Two markets have emerged for these carbon credits: (1) the regulated carbon markets (such as the EU's emissions trading system) and (2) the voluntary market, where trading is not regulated by any national or international law. As more companies make net zero commitments, the volume of credits traded on the latter has soared. However, there are concerns around the quality of some voluntary carbon credits and the projects that generate them. These concerns can undermine corporate sustainability or net-zero claims and ultimately undermine progress towards the Paris targets.
The Claims Code of Practice
As part of an attempt to address these credibility concerns, in June 2022, the Voluntary Carbon Markets Initiative (VCMI) released its provisional "Claims Code of Practice" (the Code). Through the Code, VCMI (which has the backing of the UK government) is trying to direct private sector investment to the most effective emissions abatement projects and provide stakeholders with confidence that credits are high quality and have avoided emissions. VCMI's rationale in introducing the Code is to ensure credits can only be used by companies towards a net-zero claim where that company has a detailed plan in place to mitigate its emissions over the medium to long term.
The Code sets out four steps that a company must adhere to in order to make a credible claim around its emissions reduction targets. To comply with the Code, companies must:
- meet certain prerequisites, including making public commitments to achieve science-aligned, long-term, net-zero emissions no later than 2050 across Scopes 1, 2 and 3, alongside interim targets on how it will cut emissions;
- identify whether it is making an enterprise-wide claim, or a claim relating to a specific brand or product;
- only purchase "high-quality" carbon credits that meet basic criteria (see below); and
- report transparently on how it uses carbon credits.
Gold, Silver and Bronze Claims
Under the Code, VCMI divides claims into Gold, Silver and Bronze. In short, these claims relate to how much progress a company has made towards its interim targets and whether it has covered a proportion of its remaining emissions via the purchase and retirement of high-quality offsets. For example, a Gold Claim is where a company has offset 100% of remaining emissions beyond an interim target with high-quality carbon credits and a Silver Claim is where 20% of such emissions have been offset. Generally, we expect a Gold or Silver claim will involve a company making a significant cost outlay to purchase the high-quality credits.
What is a high-quality credit?
The Code lacks specific guidance on what constitutes a high-quality credit. The guidance currently refers to other initiatives, such as IC-VCM and CORSIA, with some basic supporting criteria, such as association with a recognised standard setting body like VERRA and compatibility with human rights. This does not really address the issue of competing standards bodies and accreditations create a confusing environment for businesses looking to purchase credits.
Status of the Code
The Code is voluntary and in no way binding on any companies seeking to purchase carbon credits on the voluntary market. However, as corporates look to assure investors and other stakeholders that their emissions reductions targets are robust, we expect that demand for high-quality credits like those described in the Code will rise.
From the point of view of a consumer or an investor, the Code seems like a useful tool to provide some credibility around the climate commitments made by companies. From a corporate's standpoint, it provides structure for how to go about setting and working towards a net-zero target, whilst avoiding accusations of greenwashing. If the Code is adopted by governments and regulators (as the VCMI hopes), it could strengthen confidence in use of voluntary carbon credits.
At present, the Code is in provisional form and stakeholders can provide their input on the draft via the VCMI website until 12 August 2022. In parallel, VCMI is running deep dives with non-state actors and a road test with corporate participants to simulate the implementation of the current draft of the Code.
VCMI's intention is to issue a final Claims Code in late 2022 or early 2023, followed by a full review in 2025 to ensure changes in climate policy, carbon markets and disclosure regulations are included. This is a sensible approach, given the ongoing developments to issues such as the development of an Article 6 linked carbon market and the nexus between voluntary credits and countries' Nationally Determined Contributions under the Paris Agreement.