Developments in Voluntary Carbon Markets Policy and Regulation

On May 28, 2024, the Biden Administration released the Voluntary Carbon Markets Joint Policy Statement and Principles (the “Joint Policy Statement”), which aims to demonstrate the US Government’s dedication to promoting the responsible growth of voluntary carbon markets (“VCMs”) by creating economic opportunities and ensuring that safeguards are in place to protect market integrity. 

The Joint Policy Statement comes on the heels of recent California legislation mandating disclosures by sellers and purchasers of voluntary carbon offsets. It is also the latest development in a broader set of international efforts to improve VCM integrity. The agreement reached at the 2015 UN Climate Change Conference (the “Paris Agreement”) recognized that VCMs will play an integral role in limiting global warming to 1.5°C. At the 2023 UN Climate Conference, the United Arab Emirates, the US State Department, the Bezos Earth Fund, and the Rockefeller Foundation announced their Energy Transition Accelerator project, which would focus on creating carbon markets at the sector level (e.g., by establishing emissions baselines for an entire country’s power sector, which could then be used to generate carbon credits). In June 2024, the Integrity Council for Voluntary Carbon Markets (“ICVCM”), a non-profit, independent governance body that aims to improve VCMs to help achieve the UN’s Sustainable Development Goals and the objectives of the Paris Agreement, approved seven carbon crediting methodologies under its Core Carbon Principles (“CCP”) program. The CCP program establishes a global benchmark for high-integrity carbon credits, including through rigorous disclosure thresholds. The Science Based Targets Initiative (“SBTi”) is also expected to release draft rules for the use of environmental attribute certificates for Scope 3 emissions abatement this month. SBTi is a corporate climate organization backed by the UN that develops standards and guidance to help companies set emissions reduction targets in line with what is needed to achieve the objectives of the Paris Agreement. 

Joint Policy Statement

The Joint Policy Statement is a non-binding guidance document that reflects the federal government’s position that high-integrity and high-functioning VCMs, in which carbon credits are traded voluntarily among companies and other stakeholders, have the capacity to advance decarbonization efforts both domestically and internationally by stimulating investment and creating demand for emissions reductions that are enduring and independently verified. The Joint Policy Statement also claims that VCMs generate numerous benefits beyond their role in promoting decarbonization efforts, including bolstering economic development, supporting local communities, and preserving natural resources and biodiversity.

Seven Principles for Responsible VCM Participation

The Joint Policy Statement acknowledges that further steps are necessary to overcome challenges in the current market for carbon credits, such as projects failing to deliver their expected climate benefits and issues related to market integrity and credibility. In response to these challenges, the Joint Policy Statement lays out seven non-exhaustive principles for responsible VCM participation:

(1) Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization. The Joint Policy Statement calls for rigorous certification of activities and credits in VCMs to ensure that activities are additional (incentivized by the crediting mechanism and not mandated), credits are unique (representing only one ton of carbon dioxide equivalent and not double-issued), emissions reductions are real and quantifiable, validation and verification are conducted by independent third parties, benefits are permanent, and baselines are robust.

(2) Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing. Credit-generating activities should consider both climate and social impacts, and should aim to prevent negative effects on local communities, land use rights, food security, nature, and biodiversity. Projects should prioritize delivering verified co-benefits like sustainable development and biodiversity, and they should involve stakeholders in their design and implementation.

(3) Corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains. Businesses aiming for long-term climate goals should integrate VCMs into broader net-zero strategies that also include efforts to reduce emissions within their own value chains, including by auditing and reporting on Scope 1, 2 and 3 emissions and collaborating with suppliers to support decarbonization efforts.

(4) Credit users should publicly disclose the nature of purchased and retired credits. Credit users should annually disclose information about purchased, cancelled, or retired credits. They should adopt a standardized format to ensure transparency, accessibility, and comparability across stakeholders.

(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. Claims by credit users (e.g., emissions reduction or net-zero claims) should rely on credits that meet current integrity standards (Principles 1 and 2) and are coupled with corporate climate strategies prioritizing emissions reductions within value chains (Principle 3).

(6) Market participants should contribute to efforts that improve market integrity. Stakeholders should focus on incentivizing high-integrity credit development, enhancing transparency, ensuring fair treatment of suppliers, preventing fraud, and promoting global standards and equitable market participation.

(7) Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs. Expanding market opportunities for credible credit providers is essential, and addressing barriers like high transaction costs for suppliers (such as farmers and small businesses) can improve VCMs' ability to produce high-integrity credits. Policymakers and credit buyers should ensure market certainty for providers by making long-term investments in decarbonization.

Federal Tax Credit Programs

Although the Joint Policy Statement does not directly impact federal tax credit programs under the Inflation Reduction Act, the statement was issued in the wake of proposed Treasury Regulations with respect to the clean hydrogen production tax credit. The proposed Treasury Regulations were met with some concern by industry participants given the relatively strict requirements necessary to utilize renewable energy credits for purposes of calculating the lifecycle of greenhouse gas emissions implicated in the hydrogen production process (and therefore the credit amount). The Joint Policy Statement, therefore, reflects a trend toward requiring greater accountability and verification with respect to carbon offsets generally.

California’s AB 1305

In October 2023, California enacted three new laws requiring climate-related reporting by certain public and private companies. SB 253 requires reporting of greenhouse gas emissions, SB 261 requires reporting on climate-related financial risks, and AB 1305 requires reporting on the sale and use of voluntary carbon offsets.

As discussed further in our recent article, AB 1305 is plagued by a number of ambiguities, so the full scope of the law’s impact remains to be seen. What is clear, however, is that AB 1305 will require public and private companies that operate in California to purchase or use voluntary carbon offsets, and make claims regarding net-zero emissions, carbon neutrality, or significant emissions reductions to disclose detailed information about such offsets on their public websites, including information about the offset seller, the offset project, and any third-party verification. The law also requires offset sellers to disclose information about the offsets they are marketing or selling, including information about accountability measures to be taken if an offset project is not completed or does not meet projected emissions reduction or removal benefits.

In many ways, AB 1305 aligns with the Joint Policy Statement (especially Principles 4 and 6), but unlike the Joint Policy Statement, it imposes binding disclosure requirements on public and private companies and authorizes hefty penalties (up to US$500,000 total) for violations. Other states may follow in California’s footsteps and enact similar carbon offset disclosure laws. California could also choose to enact more rigorous legislation establishing substantive requirements (e.g., third-party verification requirements) for carbon offsets sold in the state. Public and private companies that purchase carbon offsets, especially those that rely on offsets to support emissions reduction or carbon neutrality claims, should pay close attention to future legal developments in this area, both in California and more broadly.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. John Rousakis, an O'Melveny partner licensed to practice law in New York; Eric Rothenberg, an O'Melveny of counsel licensed to practice law in New York and Missouri; Alexander Roberts, an O'Melveny partner licensed to practice law in New York; and Chris Bowman, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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