The Voluntary Carbon Markets Initiative (VCMI) has issued guidance on how investors and companies should treat carbon credits in net zero strategies.
The body, established in 2021 to set clearer rules in the offsetting space, published its Claims Code of Practice today, which seeks to help investors and other stakeholders assess the credibility of corporate carbon credit purchases.
It is based on a provisional code that has been out for feedback over the past year or so, but is still not the complete rulebook – VCMI said it would continue to develop labels and metrics over coming months.
For now, the Code of Practice lays out a three-tier system for companies wanting to claim they align with VCMI’s rules: silver, gold and platinum.
All three require entities to have a science-aligned net zero strategy in place, which they can then support by purchasing and retiring high-quality carbon credits. They must be able to demonstrate that they’re making progress on decarbonisation within their own value chains before they can use carbon credits.
There has been disagreement about how much room investors should give companies to count the purchase of carbon credits towards meeting their net zero targets.
Some stakeholders believe it makes sense to let companies pay for carbon reductions beyond their own activities if it’s a cheaper way to achieve the same level of decarbonisation in the real world.
But this argument is falling out of favour, in part because it allows polluting companies to dodge the need to improve their business practices over the long term, and because it drives demand for cheap, plentiful and often low-quality carbon credits that don’t actually contribute to new emissions reductions.
“We’ve agreed through the Paris Agreement that absolute emissions need to come down, so there’s no longer space for the traditional ‘offsetting only’ approach – direct emissions need to come down in companies’ own value chains,” said Lydia Sheldrake, head of policy and partnerships at VCMI.
Earlier this year, the Net Zero Asset Owner Initiative updated its rules to say that offsets could not be counted towards its members’ portfolio- or sector-level climate goals until after 2030 on the basis that, for now, companies and investors should focus all their efforts on decarbonising their own emissions.
By the end of the decade, they will then be able to use carbon credits to offset residual emissions – those that cannot be reduced through reasonable efforts.
“Quality offsets should form part and parcel of any effective net zero strategy”
Maria Nazarova-Doyle, head of responsible investments at UK pension fund Scottish Widows
But Maria Nazarova-Doyle, head of responsible investments at UK pension fund Scottish Widows, told IPE that “quality offsets should form part and parcel of any effective net zero strategy,” arguing that “without offsets, there cannot feasibly be a net reduction to zero emissions.”
“More and more often I hear that offsets should be reserved for when we’ve exhausted all other decarbonisation possibilities. However, this logic is flawed. We need to both decarbonise as fast as possible, and invest in long-term climate solutions. It shouldn’t be an argument of one or the other, they should be done in parallel.”
David McNeil, head of responsible investment research at £683bn asset manager Insight Investment, said VCMI’s Code of Practice was likely to contribute to increased costs for high-quality carbon credits.
Prices have been growing steadily in line with demand for credits that can demonstrate additionality and broader environmental benefits, such as biodiversity restoration.
“VCMI is likely to effectively become pre-regulation over the next couple of years, in the same way that we’ve seen with TNFD,” he added, referring to the Taskforce on Nature-related Financial Disclosures, another set of voluntary guidelines that have been viewed as a precursor to corporate reporting rules on biodiversity.
Sheldrake said the intention was to “develop best practice rules and get buy-in, in the hope it will help inform and accelerate regulatory approaches” to the voluntary carbon markets. “So if we’re successful, these guidelines will become embedded into regulatory frameworks,” she added.
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