Scaling VCM Integrity Pt 1: Quality of supply 🌱

At IETA’s European Climate Summit, integrity was repeatedly identified that the largest barrier to scaling voluntary carbon markets (VCMs) in line with growing demand.

This post is the first in a three part series in which we will explore current market trends and emerging initiatives seeking to drive future integrity:

• Pt. 1: Quality of supply 🌱
• Pt 2: Quality of demand 🛒
• Pt 3: Quality of market operation 🌍

Enjoy 🌞

What is a high integrity carbon credit?

Supplying high integrity carbon credits is key to enabling the VCM to play an effective role in delivering the net zero aims of the Paris Agreement. This consists of guaranteeing essential quality criteria and more subjective characteristics, originally explored in this previous post.

Quality generally refers to one carbon credit being equal to one tonne of carbon reduced or removed from the atmosphere. Achieving this depends on the presence of four key credit characteristics:

1. No over issuance of credits
   The amount of carbon that a project developer claims will be reduced or removed by a project needs to be calculated correctly. Calculating accurate, credible baselines can be assisted by referring to reference scenarios and adopting a more conservative overall claim to account for any discrepancies.
   
2. Additionality
   A tonne of CO2 is considered additional if the avoidance or removal would not have occurred without money from the sale of carbon credits. This is hugely important, as if a credit is non-additional it has no impact on reducing or removing carbon from the atmosphere, making any resulting claims false. For example, using a strongly protected forest with no chance of being cut down as source of carbon credits would be non-additional, as this carbon would not have be released regardless of the credit being purchased.
   
   Methodologies and definitions relating to additionality are likely to change over time. For example, despite still representing a large portion of the VCM, large scale renewables projects have not been accepted by the Verra registry since 2020. This is due to the reducing costs of wind and solar technologies, which means they are built anyway without the need for carbon market revenues to make them viable.
   
3. Permanence
   While the carbon reduced or removed by a credit should ideally stay out of the atmosphere for 100,000s of years, permanence is commonly considered as 100 years into the future.
   
   Projects therefore must reduce the risk of carbon being released back to the atmosphere by events such as natural disasters, climate change or human activities. Credits linked to a forestry project for example, must manage risks including deforestation or forest fire, which could cause carbon to be released after just a few years. To account for these potential reversals, projects should produce a certain amount of ‘buffer’ credits beyond those sold. These unallocated credits are then available to mitigate a certain level of loss if this occurs.
   
4. Leakage
   Leakage occurs if a carbon project merely displaces where carbon is emitted; for example, if an afforestation project was to trigger the deforestation of an area of forest nearby. Leakage can best be managed during initial project design and via strong community engagement, ensuring that it makes sense within the broader socio-economic landscape.

Accurately measuring and managing these characteristics is extremely challenging, as it is very difficult to anticipate adverse effects on myriad different project types over many years into the future.

Beyond these measures of quality, other characteristics offer more subjective measures of credit integrity, dependent on the preferences of the buyer:

• Sustainability co-benefits
  There is a growing interest in the co-benefits of carbon credit projects in relation to tackling the UN Sustainable Development Goals. Many organizations are interested in credits that not only offset their carbon footprint but show their commitment to environmental, social and governance (ESG) targets. Indeed, a recent survey by the Forest Foundation found that 29% of respondents evaluated projects based on their co-benefits. This means that certain buyers will pay a premium for projects proven to address particular aspects of sustainable development.
  
• Growing popularity of removals
  At present, the majority of VCM credits are based on reducing the amount of CO2 entering the atmosphere, as opposed to directly removing it. As more innovative long-term removal solutions emerge, some organizations are now willing to pay $100’s and even $1000’s a credit  in light of their integrity. While there’s some debate around the value of removal over reduction, there’s currently a clear need for both with an expected shift towards long-term removals after 2040. You can read more on the emerging removals market here.

To guarantee the quality and integrity of carbon credits, developers should clearly and ongoingly demonstrate that key project milestones are being met. This is achieved by transparently recording and sharing measurement, reporting and verification (MRV) data, a process considered to be highly resource intense.

Reducing the MRV burden on project developers is therefore also key in scaling high integrity credit supply. This can be addressed via greater upfront financing and digital MRV solutions, as well as the tokenization of carbon credits to increase transparency and price signalling.

Assessing integrity

It is extremely difficult to develop a universal benchmark against which credit quality and integrity can be assessed, as each project possesses a unique mix of characteristics. This however makes it difficult for different industries to navigate market complexity and ensure they are investing in high quality credits.

Several organisations and ratings are emerging that seek to overcome this by providing more accessible tools and definitions, some of which are explored below.

• The Integrity Council for Voluntary Carbon Markets (IC-VCM) is developing the Core Carbon Principles (CCPs), which will be finalized in Q4 2022. The CCPs seek to outline a definitive global standard for quality assessment via a checklist of credentials that provide a general quality threshold that projects should adhere to.
  
• The Carbon Credit Quality Initiative (CCQI) is an independent initiative that offers free, transparent information on the quality of carbon credits. They recently launched the Carbon Credit Quality scoring tool, which scores the quality of carbon credits based on project type, standard, methodology and host country. This provides an impartial, easy to access assessment on a scale from 1-5 of the likelihood of quality, which can help project developers identify areas of risk and provide buyers with more nuanced credit information.
  
• Other rating providers are developing highly robust quality measures. Sylvera for example, seek to complement standards like the CCP by enabling bottom-up due diligence by leveraging satellite imaging and AI learning to develop credit ratings. These range from AAAA-D, with each assessment taking up to 6 weeks. Another example is BeZero Carbon, that provide a free basic grading for 230 different projects based on rating aspects including additionality and transparency of information.

In the realm of web3, projects including Open Forest Protocol and the Regen Network are developing their own high-standard credit methodologies that are then independently validated using on-chain MRV data. We will be covering more of the advantages for web3 in driving market scale in a future post!

Conclusion

As the VCM scales, each carbon credit needs to reliably reduce or remove one tonne of carbon from the atmosphere. Understanding and upholding complex aspects of integrity is therefore key to driving effective climate action.

A clear understanding of what quality entails and how project developers can be supported in delivering this needs to be developed. This will include improved upfront financing, digital MRV and price transparency- all market aspects that web3 can improve.

The ongoing development of quality ratings are also key to enabling all potential market actors to understand and engage in purchasing high quality carbon credits.

In our next post, we will explore how the supply of high quality credits needs to be complemented by high quality demand from end users ✨