New code to confirm companies use carbon credits credibly

Nick Thomas, Brendan Bateman and Cloe Jolly
24 Jun 2022
Time to read: 3 minutes

The Voluntary Carbon Markets Integrity Initiative is seeking consultation on its recently released Claims Code of Practice. The Code is being developed to verify the credible use of carbon credits and associated claims, and to encourage those who adopt it to reduce their reliance on carbon credits to offset their emissions over time.

In 2021, the Voluntary Carbon Markets Integrity Initiative (VCMI) launched a consultation program with stakeholders, including from civil society, the private sector, Indigenous Peoples’ groups, governments, and businesses, to gather views on how carbon credits can be voluntarily used and claimed by businesses as part of credible net-zero strategies.

Following this consultation, the VCMI has now released its long-awaited Provisional Claims Code of Practice to guide the credible, voluntary use of carbon credits and associated claims. The Code has been released for public consultation and “corporate road-testing”. It's expected to become a global benchmark for assessing whether organisations are using carbon credits in a legitimate way and are making credible claims about their progress towards a longer-term net zero commitment.

Why create a Provisional Claims Code of Practice?

The VCMI is an international platform with the purpose of engaging with various stakeholders to drive credible, net-zero aligned participation in voluntary carbon markets (VCMs). It also provides a certification or recognition scheme for the credibility of claims about carbon credit use.

Ensuring the integrity of VCMs is essential to unlocking private sector capital. Increasingly, stakeholders are requiring assurance that the use of carbon credits is legitimate and strengthens, not undermines, global climate action. This is important not only for addressing climate change, but also for testing carbon reduction claims, which are increasingly important for investment and all steps in the product and service supply chains.

More and more organisations, both public and private sector, are making commitments to reduce carbon emissions to certain levels, or become net-zero, within specific time frames, and to decarbonise their supply chains.

However, there are several factors that undermine confidence in the integrity of the VCM, and in these commitments more broadly, even when they are genuine. These factors include (for example) a lack of clarity about what these commitments and claims mean, lack of transparency about climate performance, and inconsistent use of terminology to describe climate commitments and action.

Further, many stakeholders are expressing concern that the use of carbon credits to meet these targets and commitments could hinder, delay or replace the greenhouse gas (GHG) abatement action within companies and their supply chains that is essential for addressing climate change long-term.

The primary purposes of the Code are:

  • to provide clear guidance to companies and other non-state actors on when they can credibly make voluntary use of carbon credits as part of their net zero commitments; and
  • to ensure the credibility of their claims regarding the use of credits.

According to the Code, the guidance is intended for:

  • companies seeking to make credible, voluntary use of carbon credits and associated claims;
  • individual and institutional consumers seeking to make climate-friendly purchases;
  • investors and other stakeholders who want to judge the credibility of a company’s climate achievement that includes use of carbon credits alongside broader decarbonisation efforts; and
  • governments considering the role of regulatory agencies in strengthening the credibility of carbon credit use and associated claims by companies through corporate reporting requirements, advertising, and consumer protection standards and other regulations.

The Code builds upon other frameworks for the regulation of VCMs, including the Science based Target initiative’s (SBTi) Net Zero Standard, The Oxford Principles for Net Zero Aligned Carbon Offsetting, and the Carbon Pricing Leadership Coalition’s (CPLC) Report of the Task Force on Net Zero Goals.

Drawing upon these existing frameworks, the Code adopts the following key design principles:

  1. carbon credit use must be additional to policy and corporate decarbonisation;
  2. companies should follow the accepted “mitigation hierarchy” (a concept central to the SBTi’s Net-Zero Standard, that expects companies to set emissions reduction targets within their value chains as a first order priority ahead of actions or investments to offset emissions);
  3. reward achievements, not just commitments; and
  4. incentivise continuous improvement.

The ability to demonstrate the credible use of carbon credits is becoming increasingly important for businesses both in Australia and globally. Compliance with the Code is voluntary. However, if it becomes an accepted standard in Australia, opting in to the Code may provide a way in which Australian businesses, particularly those which are not already involved in Climate Active and have genuine science-based emissions reductions targets, can demonstrate integrity in their carbon offsetting efforts. This, in turn may help them to attract investors who are looking to effectively allocate capital in sustainable businesses and help consumers direct their purchasing power.

By contrast, organisations making non-credible claims when using carbon credits to meet their carbon reduction and net-zero targets face significant risks, ranging from reputational damage through to potential litigation and/or regulatory action for engaging in “greenwashing”.

The Code’s four-step process

The Code sets out a quite prescriptive four-step process that a company must adhere to in order to make a “VCMI Claim” and receive a VCMI certification/recognition that it is making credible claims about its voluntary use of carbon credits in accordance with the VCMI Code.

Step 1: Meet the prerequisites

The VCMI requires that companies only use carbon credits “in addition to – not as a substitute for – science-aligned decarbonisation across their value chains”. The VCMI Prerequisites are designed to ensure that this is the case and to offer guidance to companies on steps they should take to align with the goals of the Paris Agreement.

Before making voluntary use of carbon credits (and making a VCMI Claim), companies must:

  • Make a public commitment to achieve science-aligned long-term net zero emissions no later by 2050, covering Scope 1, 2 and 3 emissions.
  • Set and make public interim emission reduction targets that:
    • include a first near-term emission reduction target for 2025, or within two years of making a public long-term net zero commitment;
    • include subsequent emissions reduction target(s) with target dates no more than five years apart, established by the date of the preceding target; and
    • follow the SBTi guidance for setting the target boundary and emissions coverage (this means 95% coverage of Scope 1 and 2 emissions, and 67% coverage of Scope 3 emissions if Scope 3 emissions represent over 40% of the inventory from all scopes).
  • Provide detailed information on the plans and strategies adopted to achieve their targets, including their current and expected use of high-quality carbon credits.
  • Maintain a publicly available GHG emissions inventory that follows the GHG Protocol (or equivalent) and covers all Scope 1, 2 and 3 emissions.
  • Make a public statement declaring that the company’s advocacy activities – either individually or through trade bodies of which it is a member – are consistent with the goals of the Paris Agreement and do not represent a barrier to ambitious climate regulation.

Compliance with all the prerequisites must be confirmed by a credible, independent third party.

Step 2: Identify what types of claims are being made

The Code proposes a three tiered recognition system -

VCMI Gold – To achieve VCMI Gold, an organisation:

  • must be on track to achieve its next interim target for Scope 1, 2 and 3 emissions, through emissions reductions within its value chain; and
  • must have covered all (100%) remaining unabated emissions through the purchase and retirement of high-quality carbon credits.

VCMI Silver – To achieve VCMI Silver, an organisation:

  • must be on track to achieve its next interim target for Scope 1, 2 and 3 emissions, through emissions reductions within its value chain; and
  • must have covered at least 20 percent of all remaining unabated emissions through the purchase and retirement of high-quality carbon credits.

The proportion of remaining unabated emissions covered through the purchase and retirement of carbon credits must increase over time. For example, if an organisation purchases and retires carbon credits to cover 20 percent of its remaining unabated emissions in the first year in which it makes a VCMI Silver claim, it must purchase and retire credits to cover more than 20 percent of unabated emissions in the following year in order to retain the claim.

VCMI Bronze – VCMI Bronze is more flexible about the handling of Scope 3 emissions and will only be available until 2030 (by which time a company must be fully on track to achieve its next interim target for Scope 3 emissions through internal emissions reductions only and thereby graduate to VCMI Silver).

  • must be on track to achieve its next interim target for Scope 1, 2 and 3 emissions, through emissions reductions within its value chain; and
  • must have covered at least 20 percent of all remaining unabated emissions through the purchase and retirement of high-quality carbon credits.

To achieve VCMI Bronze, an organisation:

  • must be on track to achieve its next interim target for Scope 1 and 2 emissions through emissions reductions within its value chain;
  • must reduce its Scope 3 emissions through a combination of emissions reductions within its value chain and the purchase and retirement of carbon credits to the level required for its interim target (the proportion of carbon credits that can be used to cover Scope 3 emissions to meet the next interim target is limited initially to 50 percent and this proportion must decline over time to ensure continuous improvement); and
  • must have covered at least 20 percent of all remaining unabated emissions through the purchase and retirement of high-quality carbon credits.

Step 3: Purchase high-quality credits

The Code requires all credits which are used as the basis for VCMI credible claims to be high quality and meet basic criteria. The Code does not provide detailed guidance for what constitutes a "high-quality" carbon credit. Instead, it acknowledges the work of CORSIA and the IC-VCM.

The credits must be:

  • associated with a recognised and credibly governed standard-setting body that meets certain criteria set out in the Code;
  • have high environmental quality meaning they:
    • reflect reductions and/or removals that go beyond what would occur in the absence of demand for carbon credits;
    • are monitored, measured, quantified and independently verified by a credible, independent third party; and
    • are generated from activities that have measures in place to address material risks of non-permeance and leakage;
  • generated from activities that, where relevant, are compatible with human rights, and promote equity, apply social safeguards and demonstrate positive socio-economic impacts (in accordance with the minimum standards set out in the Code); and
  • generated from activities that contribute to the protection and enhancement of environmental quality.

This means that, at a minimum, those activities include environmental safeguards that avoid, minimise and mitigate adverse impacts, and the carbon credits comply with the environmental laws in the jurisdiction in which they were generated.

The Code notes that activities should strive to generate environmental co-benefits, such as improving water quality, enhancing biodiversity, creating more resilient energy delivery and improving soil health.

Step 4: Report transparently on the use of carbon credits

The Code states that transparent reporting of information is essential for substantiating a claim. Organisations must report full information in publicly available annual sustainability (or similar) reports to demonstrate that prerequisites and claim requirements have been met.

Organisations must communicate in these reports how they use carbon credits toward their climate commitments, goals, targets and claims, including providing the following specific information:

  • number of credits purchased and retired to make a claim, the proportion use to cover emissions beyond a company’s targets and the proportion use to cover Scope 3 emissions;
  • certification standard name, project name, ID and issuing registry for each credit used;
  • host country;
  • credit vintage;
  • methodology / project type; and
  • whether or not the carbon credit is associated with corresponding adjustments (as evidence by authorisation and authorised use) by the host and/or buyer country.

Progressing the Code

The Code is open for public feedback until 12 August 2022. Stakeholders are also invited to sign up for the Code’s road test.

In parallel with public consultation and testing, VCMI will continue to work with partners to refine several areas of the Code, including:

  • financial and emissions analysis to better understand the likely potential uptake of the Code across various sectors and places;
  • analysis of the potential impacts and implications of including carbon credits associated with corresponding adjustments within VCM transactions on the availability of credits, credit prices, purchasing decisions and achieve and enhancement of countries’ Nationally Determined Contributions (NDCs);
  • development of methodologies and frameworks for assessing organisations' progress toward meeting their interim emission reduction targets; and
  • development of clearer guidance on quantifying, accounting and target setting for Scope 3 emissions.

The VCMI intends to issue a final Code in late 2022 or early 2023 the outcomes of road testing, public consultation and learnings through additional assessment. Beyond this, VCMI expects to carry out a full review of the Code in 2025.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.