White House And Federal Agencies Issue Principles For Voluntary Carbon Credit Markets

On Tuesday, May 29, 2024, the White House, along with the Departments of Treasury, Agriculture, and Energy, released a Joint Policy Statement outlining principles for the future development of robust voluntary carbon-credit markets (VCMs). The Joint Policy Statement is an embrace of a still nascent carbon-credit industry, recognizing the substantial value VCMs can provide in achieving decarbonization and net zero goals of both private and governmental actors. Significantly, it recognizes that voluntary carbon credits can and should be used as tools to reduce companies' Scope 3 (indirect, non-electricity-related) greenhouse gas emissions, in tandem with companies' efforts to directly reduce emissions. While recognizing the evolving VCMs face certain challenges, the Joint Policy Statement holds out carbon-credits as a means to leverage private capital to achieve climate goals, while also providing "co-benefits" such as increasing biodiversity, economic development, and water and land conservation.

This Joint Policy Statement is the latest governmental action in a trend of increasing regulatory pressures on carbon credits and VCMs. For example, over a decade ago, the U.S. Federal Trade Commission (FTC) issued "Green Guides" dictating rules for how credit-purchasers should advertise their carbon offsets. More recently, in March 2024, the U.S. Securities and Exchange Commission (SEC) issued highly anticipated climate disclosure rules, which are currently stayed pending litigation, that require companies to disclose details about carbon-credits used to offset emissions. Additionally, the U.S. Commodity Futures Trading Commission is set to promulgate guidance on carbon-credit contract design, the listing of credits on VCM exchanges, and carbon-credit derivative products. Additional Biden administrative carbon credit initiatives include:

• The Department of Agriculture's issuance of a request for information regarding the participation in VCMs by farmers, ranchers, and private forest owners
• The Department of Energy's investment of US$35 million on carbon-credit purchases and US$100 million in carbon-removal technologies

The U.S. has also been active in international discussions regarding international carbon-credit standards and the development of VCMs in developing countries.

At the state level, legislators in California are advancing for the second time a bill that would penalize the issuance, sale, and use of carbon-credits that fail to meet certain standards, like those articulated in the Joint Policy Statement's principles. A materially identical bill passed the California legislature last session, but was vetoed by Governor Newsom for providing broad-based civil liability that potentially would stifle this evolving marketplace. California also enacted last session AB 1305, which requires companies selling, marketing, and using carbon credits to make certain disclosures on their websites.

Against this backdrop, the Joint Policy Statement recognizes that to achieve their full potential, carbon credits need to be reliable, transparent, based on robust measurements, generated, issued, and retired with integrity. To encourage the future development of "high-integrity" VCMs markets, the Joint Policy Statement sets out seven principles (listed below) to guide credit generators, issuers, purchasers, and policymakers. The majority of these principles are in line with existing best practices developed by leading carbon-credit governance bodies and are based on existing building blocks in the marketplace oriented towards generators, issuers, buyers, and sellers of credits.

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization. This first principle largely restates the "Core Carbon Principles" developed by Integrity Council for Voluntary Carbon Markets (ICVCM), a leading carbon-credit standards body. They require that carbon-credits meet the requirements of additionality, permeance, and robust quantification, and are not double counting reductions. It also says that credit-certification bodies should effectively govern their standards to ensure transparency, accountability, and responsiveness to scientific developments. Regarding permeance, while ICVCM has set a minimum permanence requirement of 40 years, the Joint Policy Statement suggests that credits need simply meet their own permanence claims.
2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing. This principle suggests that credit-generating activities should avoid negative externalities to surrounding communities, and that credit-generating activities should strive to deliver "co-benefits," such as sustainable economic development and increased biodiversity.
3. Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains. This principle makes clear that carbon credits are not a substitute for emissions reductions within a company's value chain. The principle urges credit-buyers to use carbon-credit purchases to complement within-value-chain emissions reductions, including insetting or purchasing supplier-generated credits.
4. Credit users should publicly disclose the nature of purchased and retired credits. Similar to the requirements California enacted in 2023, this principle explains that public disclosure is essential for public accountability regarding the quality of carbon-credits. Credit-users are encouraged to strive for uniformity of disclosures to allow for comparison, and to consider participating in services that aggregate and publish carbon credit information.
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. This principle echoes California law, the FTC Green Guides, and the SEC climate disclosure rule in underscoring the importance of tethering claims based on use of carbon credits to acquisition of high quality credits. The principle states that frameworks for proper carbon-credit claims should promote the continued development of VCMs while also incentivizing within-value-chain emissions reductions. As noted above, the principle suggests that carbon credits could be counted against Scope 3 emissions. This proposal is supported by the United Nations-backed Science Based Targets Initiative and the Voluntary Carbon Markets Integrity Initiative, a leading credit standard body, but has drawn criticism from commentators.
6. Market participants should contribute to efforts that improve market integrity. This principle encourages market participants to refine and improve VCMs without presupposing any particular market structure (both private trading and exchanges are viable).
7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs. This final principle envisions the expansion of carbon-credit opportunities to farmers, ranchers, forest owners, small businesses, developing country jurisdictions, and others. In order to expand market participation, however, transaction costs must be lowered and measurement models must be cost-effective and uniform.

In sum, the message sent by the Joint Policy Statement is clear: despite certain areas for improvement, the Biden administration believes that carbon credits, with the proper guardrails and accountability, can be an important part of its climate agenda. Multiple federal agencies, state, and international bodies are shaping the contours of participation in various aspects of the carbon credit market. For many participants in the VCM, these principles will not be new to them, but the level of governmental interest and potential oversight may require them to look at their existing policies, procedures, and programs to confirm that they are acting in line with best practices. Please reach out to the authors or anyone from your Arnold & Porter team to discuss these important issues further.

* Matt Salavitch, a summer associate in Arnold & Porter's New York office, contributed to this blog.

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