Voluntary Carbon Markets: U.S. Increases Focus on Ensuring Market Integrity

In May 2024, the White House announced a Joint Policy Statement and Principles (Statement ) on voluntary carbon markets (VCMs) in conjunction with the U.S. Department of Energy, the U.S. Department of the Treasury, and the U.S. Department of Agriculture. The Statement endorses the use of VCMs to reduce global greenhouse gas (GHG) emissions, reach global net-zero emissions by 2050, and limit warming to 1.5 °C. The White House also announced the semifinalists from which it will purchase the federal government’s first carbon offset credits. These semifinalists included companies working on carbon storage, biomass projects using plants and algae, rock weathering, and mineralization.

At the same time, federal enforcement is increasing. The U.S. Department of Justice (DOJ) and the Commodities Futures Trading Commission (CFTC) are devoting resources to regulating the market. In the coming year, both buyers and originators of carbon credits will come under increasing scrutiny. Navigating the risks and opportunities of this market will require careful planning.

Key Takeaways

The federal government appears committed to supporting VCMs in the U.S. This includes direct monetary investments, market guidelines, and increased enforcement scrutiny. Consistent with prior approaches (including CFTC’s 2011 report on carbon markets), the federal government also has signaled that it will treat carbon credits like other commodities and delegate enforcement authority to the CFTC and DOJ to ensure a well-functioning market. Buyers and originators of carbon offsets should keep these three simple guideposts in mind when operating in this maturing marketplace:

1. Is the offset what it purports to be? Conduct adequate due diligence to ensure that each offset or other instrument is connected to a valid project or program.
2. Focus on high-quality carbon assets that can withstand regulatory scrutiny and enable actual GHG reductions.
3. Remain aware of emerging disclosure requirements and the importance of transparency to buyers and regulators.

Unpacking The Joint Policy Statement

The Statement outlined seven principles that the federal government believes are key to the continued growth of the carbon offset market. These are aimed at carbon markets broadly and encompass carbon credit standards, governance and transparency, credit use, transparency (including consumer transparency, which is further governed by the Federal Trade Commission’s Green Guides and state laws), and market integrity and efficiency. A summary of the principles is as follows:

1. Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.

Asserts that activities generating credits and the credits themselves should adhere to a robust standard for design and measurement, monitoring, reporting, and verification (MMRV) to ensure core integrity principles such as non-duplication, leakage protection, and validation. The Statement also highlights additionality and permanence as core integrity principles, along with proper and robust baselines against which GHG benefits are measured.

Credit certification bodies (e.g., carbon registries, independent issuers) have a key role to play and should adopt and implement standards governing transparency, accountability, and longevity (permanence); manage registries to accurately track credits; address double-counting risks; make information on crediting activities publicly available; require third-party verification; and have governance procedures to address conflicts of interest.

2. Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.

Encourages establishing safeguards to detect and prevent potential negative effects on individuals and the environment, particularly concerning local communities, land usage and ownership rights, food security, and biodiversity. The creation of co-benefits is also encouraged, particularly with respect to sustainable development and biodiversity.

3. Corporate buyers that use credits (credit users) should prioritize measurable emissions reductions within their own value chains.

Endorses consistent reporting of Scope 1, 2, and 3 emissions, the establishment of short-term emission reduction goals and long-term net-zero targets, and the development and implementation of transition strategies.

4. Credit users should publicly disclose the nature of purchased and retired credits.

Promotes disclosure of purchases, cancellations, or retirements of credits at least annually, providing details that allow observers and stakeholders to evaluate the integrity of the credits and their avoidance of adverse environmental and social effects.

5. Public claims by credit users should accurately reflect the climate impact of retired credits and should rely only on credits that meet high integrity standards.

Cautions that claims should not be based on credited emissions reductions or removals that are reversed, inflated, or fail to meet environmental or social safeguards (unless they have been remediated, for example, by being replaced with buffer pool credits).

6. Market participants should contribute to efforts that improve market integrity.

Suggests that stakeholders should strive to enhance market functionality by incentivizing the development and purchase of high-integrity credits, promoting transparency, ensuring fair treatment of suppliers, managing conflicts of interest, preventing fraud, providing appropriate accounting and legal treatment of credits, enabling global interoperability of standards, and supporting robust and equitable market participation.

7. Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

Expresses that policymakers and buyers should explore strategies to boost market certainty for credit providers by making substantial long-term decarbonization investments reliant on VCM revenues and, where suitable, apply scientifically robust models to reduce MMRV costs and enhance credit integrity.

Intersection with Other Standards

Many of the principles set forth in the Statement align with existing standards established by major carbon registries, as well as the Core Carbon Principles of the Integrity Council for the Voluntary Carbon Market (ICVCM).

The ten ICVCM principles are:

Governance Principles

1. Effective governance
2. Tracking (meaning registry integrity)
3. Transparency
4. Robust independent third-party validation and verification

Emissions Impact

5. Additionality
6. Permanence
7. Robust quantification
8. No double counting

Sustainable Development

9. Sustainable development benefits/safeguards
10. Contribution to net-zero transition

All of the above are already components of the voluntary carbon market and shape how credit buyers and consumers perceive different carbon assets.

Separately, the Voluntary Carbon Markets Integrity Initiative (VCMI) maintains its Claims Code of Practice, providing a “code” for how companies use and claim carbon credits. The Claims Code focuses on how companies and other organizations can “credibly make use” of carbon assets to achieve voluntary short- and long-term emissions reduction and net-zero objectives. The Joint Statement contains some principles that align with the Claims Code but is considerably less prescriptive.

In addition to these general, third-party standards, many carbon registries have internal requirements and codes of conduct that aim to ensure integrity in crediting and establish similar criteria with respect to credit quality. With recent uncertainty in voluntary carbon markets, the Joint Statement builds on these existing frameworks in an effort to create a more aligned and trustworthy U.S. voluntary carbon market—while also sending a clear signal on what is and is not acceptable in the eyes of the federal government.

The Federal Government Increases Enforcement

Although the Joint Policy Statement does not direct oversight of VCMs to a particular federal agency, federal enforcement writ large is increasing. In June 2023, the CFTC announced the creation of the “Environmental Fraud Task Force” to combat carbon credit fraud and to “increase trust in the market.” Further, according to public reports, the Department of Justice and the CFTC are both engaged in a far-reaching probe into one of the largest purported brokers in the carbon credit market. Finally, recent public scrutiny of carbon credits will likely only increase enforcement activity. These initial enforcement actions show that the carbon offset market is now, and will increasingly be, targeted for prosecution.

The CFTC recently approved final guidance regarding listing voluntary carbon credit derivative contracts. It aims to standardize voluntary carbon credit derivative contracts to enhance transparency, liquidity, accurate pricing, and market integrity. It outlines three key characteristics for designated contract markets (DCMs) to include quality standards (transparency, additionality, permanence, and robust quantification), delivery points and facilities (governance framework and tracking mechanisms), and inspection provisions (certification procedures for compliance verification). This guidance is designed to ensure the reliability and effectiveness of voluntary carbon markets. It purportedly incorporates feedback from public comments and collaboration with a wide range of market participants, including agricultural stakeholders, ranchers, foresters, landowners, commercial end users, energy market stakeholders, emission-trading entities, CFTC-registered exchanges and clearinghouses, carbon-credit rating agencies, crediting programs, public interest groups, academics, and other key stakeholders in the voluntary carbon market.

Conclusion

The U.S. is stepping up its role in safeguarding the integrity of voluntary carbon markets, while also ramping up federal enforcement efforts. This heightened involvement may aid the expansion of VCMs in the US by enhancing transparency and quality, while creating both opportunities for stakeholders and potential risks for those caught in the crosshairs of the DOJ, CFTC, or other federal agencies. 

Beveridge & Diamond’s ESG and Air and Climate Change practice groups help clients navigate complex and interrelated legal and reputational issues in the fast-moving area of sustainability. We work with private sector clients in many industries, as well as municipal clients, to navigate all aspects of carbon markets and climate change initiatives, including state and federal regulatory programs, obligations arising under international agreements, private governance, and sustainability initiatives. For more information, contact the authors.