Demand for voluntary carbon credits is outpacing the supply of high-quality carbon credits available.

Supply is hampered by concerns about quality of the carbon credits. Carbon offset claims by sellers can be challenging to verify.

A new standardized approach for comparing carbon credits is starting to take shape. Developers of renewable energy and carbon capture projects should be able to use the new core ratings principles as a guide for how to ensure their carbon offset credits are rated of high quality.

Voluntary Market

The carbon offset market is a potential additional revenue source for projects. (For more detail, see "Carbon Offsets as a Potential Source of Revenue" in the February 2022 NewsWire.)

A voluntary carbon credit — sometimes referred to as a carbon offset — represents one metric ton of carbon dioxide or equivalent greenhouse gases (GHG) that has been avoided or removed from the atmosphere.

Carbon credits are sold in voluntary markets.

When a buyer purchases carbon credits listed on a registry, it may enter into forward sales having terms of six months to a year, with terms of up to two or three years occurring less frequently. Much longer forward sales of 10 to 20 years are not uncommon when a buyer invests directly in the underlying project that will eventually produce the carbon credits.

Many buyers are companies that have set voluntary emissions targets and want to use carbon credits to offset their emissions.

Buyers do not want to purchase just any carbon credits. Like most people, they want to know what they are buying. Buyers focus on purchasing carbon credits that have been well-vetted and are created by projects that have been independently verified to reduce or remove the amount of GHG emissions that the project developers claim. Verification of the carbon credits and underlying projects gives buyers comfort that the carbon credits purchased are credible. Validation of the carbon credits also increases the price that buyers are willing to pay to developers for these credits.

However, there is no single uniform system used to validate carbon credits. Instead, there are various carbon-crediting programs, each with different standards, that developers can use to register carbon credits from developed projects.

A carbon-crediting program is a program that reviews projects and registers the related carbon credits. Also referred to as registries, carbon-crediting programs include The Gold Standard, Climate Action Reserve, American Carbon Registry and Verra.

Each carbon-crediting program has its own criteria for evaluating projects that wish to register carbon credits with the program, and each program has its own methodologies for testing the underlying projects against those criteria. While the registries look at similar factors, there is no easy way to compare on a "apples-to-apples" basis a carbon credit registered on one registry to a carbon credit registered on another registry.

The lack of a single uniform system to verify credits makes it more difficult for a buyer to identify high-quality carbon credits and properly value those credits across different types of projects.

An independent organization – the Integrity Council for the Voluntary Carbon Markets – is taking steps to fix this lack of uniformity in the carbon markets.

Core Principles

The Integrity Council published a final set of "core carbon principles" in late March.

These core carbon principles are intended to set a global threshold standard for determining the quality of carbon credits. Whether credits meet this threshold will be tested under an "assessment framework" that looks at both the carbon-crediting program and the categories of carbon credits.

The Integrity Council also released the first part of its assess-ment framework for evaluating the carbon-crediting programs. The framework identifies criteria that the Integrity Council recommends be used to determine whether the various carbon credit registries comply with the core carbon principles. Compliance by these registries would, according to the Integrity Council make it easier for buyers to evaluate the carbon credits being sold on that registry.

The 10 core carbon principles and the related criteria for carbon-crediting programs are as follows.

First, the carbon-crediting program must have effective governance in place to ensure transparency, accountability and overall quality of the carbon credits. Good governance helps ensure that the program's rules and processes are followed when registering the credits.

Second, the registry used by the carbon-crediting program must uniquely identify, record and track the credits. Ultimately, it should be easy for market participants to identify each individual carbon credit generated by any project. This is important for preventing fraud.

Third, the program must be transparent in sharing information on the mitigation activities that create the carbon credits. The mitigation activities are the projects that reduce or remove greenhouse gas emissions. For example, solar developers engage in mitigation activities by generating solar energy. A solar project displaces a more carbon-intensive power plant.

Fourth, the program must require independent third-party validation and verification of the carbon credits. In order for a third party to verify the credits, the program must set out clearly the rules that projects must follow in order to register carbon credits.

Fifth, the GHG emission reductions or removals from the project must be "additional," meaning the GHG reductions or removals would not have occurred but for the incentive created by the ability to sell carbon offset credits. Registering today a carbon credit for a solar or wind farm that was constructed many years ago does not fulfill this additionality requirement.

Sixth, the GHG reductions or removals must be permanent or, if there is risk for reversal, measures must be in place to limit the potential for reversal. For example, carbon credits can be issued for forestry projects that keep carbon in trees and soil, which reduces GHG emissions. However, if the forest is harvested by a lumber company or burns down, the trapped carbon may be released, reversing the earlier GHG reduction. A mitigation measure would be to bar tree harvesting and to take steps to reduce fire risks.

As another example, carbon capture projects looking to qualify for carbon credits under the core carbon principles must identify, and then take steps to mitigate, risks that arise in connection with sequestering carbon underground. Carbon-crediting programs should evaluate what steps a developer has taken to help ensure the carbon dioxide remains safely stored after injection.

Seventh, the GHG reductions or removals must be robustly quantified based on conservative approaches and scientific methods. A thorough, conservative approval process gives the market participants comfort that the GHG reductions or removals represented by the caron credits ultimately registered are legitimate. By registering carbon credits for a project, a carbon-crediting program is asserting that X metric tons of carbon dioxide or GHG gases have been avoided or removed from the atmosphere by a particular project. That assertion needs to be tested. The tools or methodologies used by the verification program to quantify the emission reductions or removals must be evaluated.

Eighth, the GHG reductions or removals must not be double counted. Two carbon credits cannot be issued for the same metric ton reduction or removal of GHG emissions. Once a carbon credit is used, it must be clearly retired.

Ninth, the carbon-crediting program must have clear guidance and compliance procedures to ensure that projects generating carbon credits comply with industry "best practices" for social and environmental safeguards.

Tenth, the projects creating carbon credits must truly reduce or remove GHG emissions. Projects that use technologies or carbon-intensive practices that are incompatible with achieving net zero global GHG emissions by 2050 will not qualify. Projects will be evaluated not only for consistency with zero or low GHG emissions but also for whether the technology is transformational or among the best currently available. Carbon-crediting programs must take this into account in evaluating projects.

Timetable

Carbon-crediting programs are expected to apply to the Integrity Council soon to be assessed against the criteria identified in the assessment framework.

Later this year, the Integrity Council will begin announcing those carbon-crediting programs that are in compliance.

The Integrity Council intends to publish a separate assessment framework for evaluating categories of carbon credits in the coming months.

If a registry satisfies the 10 core carbon principles for evaluat-ing registries and a project satisfies the forthcoming separate princi-ples for evaluating the credits themselves, then the carbon credits issued by the registry for that project will be "CCP-eligible."

The registries will be able to label both existing and new carbon credits as "CCP" approved. That tag will give buyers more comfort that what they are buying has been vetted and buyers may be willing to pay a premium for that tag.

Project developers should watch for the forthcoming credit-level assessment framework. That framework may give guidance on steps developers can take to ensure carbon credits from their projects are rated of high quality.