Biden Administration Releases Joint Policy Statement and Principles for Voluntary Carbon Markets

The Biden Administration released a landmark Joint Policy Statement and Principles on May 28, 2024, formalizing the U.S. government’s approach to advancing high-integrity Voluntary Carbon Markets (“VCMs”) and affirming the importance of VCMs in efforts to decarbonize. The document is aimed at promoting confidence in VCMs, which have faced increased scrutiny and legal challenges in recent years. The Biden Administration’s guidance also comes on the heels of increasing state-level action regarding VCMs and a similar move by the European Union to create a uniform certification framework for carbon removal activities.

Because few businesses can achieve their stated net zero or carbon neutrality goals without seeking to offset their emissions, VCMs are seen as a critical component of global decarbonization efforts, especially in sectors where certain emissions are hard, if not impossible, to avoid currently. On the provider side, VCMs provide private capital to diverse actors, including farmers, technology companies, entrepreneurs, and landowners to develop carbon capture and carbon reduction projects, and can generate co-benefits such as economic development, resource and biodiversity conservation, and community investment. According to Bloomberg, VCMs are worth approximately $2 billion today and could grow to over $1.1 trillion annually by 2050.

VCMs, however, have been plagued with uncertainty regarding their quality and effectiveness in recent years. In 2023, for example, an investigation by The Guardian reported that over 90% of forestry credits certified by Verra, a leading VCM platform, did not represent real emissions reductions. Companies that participate in VCMs have increasingly become targets of lawsuits accusing them of greenwashing, in part due to the perceived unreliability of VCMs.

Though VCMs remain largely unregulated today, the Biden Administration’s move to guide their development, along with other state-level action, shows that governments recognize their utility in facilitating global decarbonization efforts and the need for standardization to ensure that VCMs deliver their promised benefits. While the Joint Policy Statement and Principles are not enforceable, buyers, sellers, and suppliers of carbon credits can expect increased scrutiny around the real-world impacts of carbon credit projects and their validation methodology with the formalization of the U.S. government’s policy regarding VCMs. As the integrity of VCMs becomes more assured, however, participants should be less vulnerable to greenwashing or other similar claims due to the transparent, robust data and verification underlying their carbon credits.

The Biden Administration’s Joint Policy Statement and Principles outlines seven principles for responsible participation in VCMs:

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

This principle covers two major areas: integrity of carbon offsets themselves and integrity of bodies that certify carbon credits. As to the carbon credits themselves, the document encourages several elements that a robust, credible carbon credit should possess:

• The decarbonization activity the credit represents should be additional, that is, the activity would not have occurred absent the incentives of the crediting mechanism and is not otherwise required by law or regulation.
• Credits should be unique and represent only one tonne of CO2 equivalent reduced or removed from the atmosphere with no double-counting.
• Emissions reductions or removals should be real and quantifiable, representing genuine impact that is replicable using credible methodologies.
• Greenhouse gas benefits should be reasonably permanent, meaning the emissions removed or reduced will be kept out of the atmosphere for a period of time sufficient for any credited results released back into the atmosphere to be fully remediated.
• Carbon credits should be based on robust baselines developed using robust methodologies that evolve over time based on advancements in climate policy, emissions pathways, and decarbonization practices and technology to avoid over-crediting.

The document further recommends that carbon credit certification bodies and their standards should:

• Ensure transparency, accountability, responsiveness, and longevity to responsibly certify removal activities.
• Operate or use a registry to transparently track the attributes, issuance, ownership, and retirement/cancellation of credits, including ensuring that activities are not registered with more than one registry.
• Ensure robust measurement, monitoring, reporting, and verification (“MMRV”).
• Have procedures in place to address double-counting, including preventing double-registration and double-selling.
• Require publicly available, accessible, comprehensive, and transparent information on crediting activities.
• Ensure that verification of reported emissions reductions and removal and validation of projects or programs is undertaken by independent third parties.
• Ensure their governance procedures are able to address real or perceived conflicts of interest in the body’s own governance as well as in registry administration and validation and verification of credits and projects.
• Enable equitable participation in VCMs, including by projects in developing countries.

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

This principle calls for safeguards against adverse impacts on local communities, land use, food security, and biodiversity. It encourages the enhancement of positive impacts and mandates that projects and programs engage with relevant stakeholders and obtain informed consent where applicable.

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

This principle promotes the use of VCMs to complement direct emissions reductions as part of broader net-zero strategies, emphasizing inventory and regular reporting of Scope 1, 2, and 3 emissions, setting near-term emissions reduction targets, and executing transition plans. This principle further urges credit buyers to cooperate with suppliers to undertake decarbonization efforts.

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

To further transparency, credit users should disclose purchased, cancelled, or retired credits on at least an annual basis, and such disclosures should include details that enable outside observers and stakeholders to assess whether the credits are of high integrity and avoid environmental and social harms. The format of disclosure should respond to evolving practices while also encouraging standardization and comparability.

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 regarding the climate impact of retired credits should only rely on the impacts of credits that meet high integrity standards at the time they are made. Further, credit users should not rely on credits that have been reversed, inflated, or failed environmental or social safeguards unless remediation has occurred.

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

This principle, while not pre-supposing any particular structure for VCMs, encourages stakeholders to improve market functionality for various market participants. This includes developing and purchasing high-integrity credits; improving transparency; promoting fair treatment of suppliers; preventing fraud; supporting global interoperability of standards, market infrastructure, and reporting; and supporting robust and equitable participation in VCMs.

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

This principle urges policymakers and market participants to work together to address issues facing VCMs, including the barriers facing credit-generating suppliers such as farmers, ranchers, forest owners, small businesses, and developing country jurisdictions. These suppliers often undertake significant, long‑term investments in decarbonization planning to use VCM revenues to finance their activities. The use of robust models can help reduce MMRV costs for these suppliers.

The principles outlined by the Biden Administration largely align with standards that have emerged independently within the VCMs in response to concerns about the integrity of carbon offsets. For example, the Integrity Council for the Voluntary Carbon Market (“ICVCM”), a non-profit, independent governance body, has its own set of principles for VCMs, which similarly emphasize effective, transparent governance, robust third-party validation, additionality, permanence, no double-counting, and avoiding environmental and social harm. The ICVCM assesses and verifies carbon crediting programs, including Verra’s Verified Carbon Standard, under these principles. Another independent non‑profit organization, the Voluntary Carbon Markets Integrity Initiative(“VCMI”), also recently released its VCMI Claims Code of Practice, which outlines best practices for making claims regarding a company’s emissions and VCM participation, focusing on the use of high-quality carbon credits, public disclosure of emissions and carbon credit use, and substantiation through third-party verification.

With respect to the EU, the European Parliament recently adopted a Carbon Removals Certification Framework (“CRCF”) regulation that establishes criteria for high-quality carbon removals, requiring quantification, additionality, long-term storage, and sustainability. The CRCF regulation further mandates third-party verification and publication of certification-related information in an EU-wide registry. The EU is currently in the process of developing tailored certification methodologies for various types of carbon removal activities through its Expert Group on carbon removals, which will be used to evaluate the quality of carbon removals once the CRCF regulation enters into force. The CRCF is voluntary, but will advance the goals of the European Green Deal, the EU’s climate neutral by 2050 goal. The CRCF will further assist private actors in implementing their decarbonization efforts under frameworks such as the Science Based Targets Initiative, which is currently considering revising their standards to allow companies to count carbon credits toward their climate goals.[1]

The Biden Administration’s publication of this set of principles advances the existing voluntary frameworks and is the latest in a line of government actions aimed at VCMs. As more companies consider and commit to emissions reduction targets, of which VCMs are a critical component, the reliability of VCMs will only become more important. For companies participating or considering participating in VCMs, understanding the difference between high-quality and “junk” carbon credits is critical for accomplishing climate goals while mitigating litigation, enforcement, and commercial risk arising from potential greenwashing claims.

MoFo’s collaborative teams of Environmental, ESG, and Social Enterprise Impact Investment lawyers regularly advise clients regarding VCMs, climate disclosures, and carbon project development. MoFo remains at the forefront of these areas as regulations develop on the state, federal, and international level.

[1] To date, the SBTi Net-Zero Standard only allows companies to count carbon credits toward mitigating residual emissions or to finance additional climate mitigation beyond their science-based emission reduction targets.