US government endorsement of VCM: promoting corporate carbon credits as global climate action

Backing carbon market integrity

On Tuesday (28 May), the Biden administration issued a Joint Policy Statement and Principles for Responsible Participation in Voluntary Carbon Markets with a high-level media event featuring heads of the US treasury, energy and agriculture departments along with top international climate official John Podesta. Designed to show that the entire executive branch of the US government supports voluntary carbon markets as a legitimate means for private sector emission reduction targets, the event also showcased several existing programs through which the US supports VCM actions, including a prize for direct air capture techniques and grants for research as well as infrastructure for US landowners to sell carbon credits for sustainable land use practices.

The seven principles (see Textbox 1) largely mirror Core Carbon Principles (CCP) of the Integrity Council for the Voluntary Carbon Market (ICVCM), stating that high-quality credits must be real, additional, permanent and avoid double counting. They also emphasize the need for effective governance, transparency, and robust independent third-party validation and verification. Principles three to five address demand-side considerations, reflecting the work of the Voluntary Carbon Market Integrity initiative (VCMI) on its Claims Code of Practice: they address what claims companies should be allowed to make about their purchase of carbon credits, e.g. whether they can say they have offset their own emissions by sponsoring reductions of greenhouse gases in other jurisdictions. They correlate with the four steps outlined in the Claim Code of Practice, which recommends that companies adhere to foundational criteria and obtain third-party assurance following the VCMI Monitoring, Reporting, and Assurance (MRA) framework.

“Stamp of approval”

While the principles themselves are not introducing new concepts, they endorse the voluntary market’s own self-regulatory efforts aimed at counteracting media characterizations of offsetting and carbon market activity as ‘shady’ or ‘intransparent’ in recent years. Particularly Principle Five, focusing on public claims, holds potential to increase demand for voluntary credits as it indicates the US government's support for companies offsetting their Scope 3 emissions. This reflects recent controversy surrounding the Science-Based Targets initiative (SBTi), a climate action group whose board's statement allowing companies to use carbon credits to address their Scope 3 emissions triggered internal dissent and the resignation of an SBTi adviser last month - see our analysis on this here.

Official endorsement from the government of one of the world’s biggest emitters will change companies’ outlook on voluntary carbon markets: negative media portrayal of offsetting and carbon market activities in recent years has deterred some corporate entities from engaging in carbon credit purchases. Companies buying carbon credits in the VCM to bolster their sustainability profile will now be able to do so with reference to the US government's support of such actions.

Market effects

We thus expect increased demand for carbon credits in the VCM over the medium and long term, as companies increase the degree to which offsetting/carbon credit purchases account for their climate change mitigation strategies now that they have US “government endorsement.” However, we do not expect to see significant impacts on prices in the short term. Precisely because the administration’s endorsement defers to existing self-regulatory initiatives from the ICVCM and the VCMI, the outcomes of those initiatives are what will really determine which carbon credits companies deem “high quality” and therefore want to buy more of.

Market participants are awaiting the first category-level assessment results from the Integrity Council for the Voluntary Carbon Market this June (see our latest analysis on this here), which will indicate which credits meet the organization's integrity standards and are thus considered more desirable. Additionally, the forthcoming revision of the SBTi’s Corporate Net-Zero Standard V2 will play a crucial role in shaping the market.

Wider political context

While the US government endorsement of the VCM constitutes significant news for companies already engaged in the voluntary carbon market or considering carbon credit purchases as part of their corporate sustainability engagement, the emphasis on incentivizing private sector climate change mitigation has wider implications for US climate diplomacy. Other rich country governments are implementing policies aimed at reducing emissions, such as mandatory carbon pricing domestically and financing of mitigation efforts in developing countries - the US is instead encouraging private sector entities to put money toward mitigation activities via voluntary carbon credit purchases.

The 28 May event involved no new targets for the US under the Paris Agreement and no new US programs aimed at financing developing countries’ energy transition. Indeed, it characterized the Energy Transition Accelerator (ETA) it invented, that no other rich country is part of, as one of many international carbon market development initiatives the US participates in – see our commentary on the ETA here.

Energy Secretary Granholm touted the US government’s ability to “create demand” in the VCM by subsidizing private sector transactions of credits (e.g. for carbon dioxide removal) through prizes and “purchase challenges” involving grants aimed at securing private sector buyers for such units. Since the VCM is by definition voluntary, however, the demand this creates can only vaguely be characterized as a US mitigation action in the context of the UN Framework Convention on Climate Change and its Paris Agreement.

As we pointed out in our April assessment of global VCM credit supply, VCM credits are not subject to the “normal rules” of supply and demand given that their use is optional and the target they contribute to fulfilling can be changed anytime by the companies that set them. Other governments - including those in Europe, China, South Korea, and New Zealand – instead limit their emitters’ greenhouse gas output and require the purchase of permits, which creates the mandatory carbon markets currently facilitating the transition to low-carbon economies. The private sector’s optional purchases of carbon credits constitute acts of “sponsorship” or charity in comparison, given that the mitigation actions those carbon credits pay for are being credited toward the Paris Agreement target of the country the action took place in. Unless countries specifically forego counting mitigation toward their own tally under the Paris Agreement (see Trend 3 in our Carbon Market Trends piece here), buyers cannot claim to be offsetting or reducing their own emissions.

All the US can offer?

Characterizing this wholesale “mobilization of the private sector” as a significant act of climate change mitigation by the US government lines up with the Biden administration’s actions since taking over from Trump. In the current US legislature, actual carbon pricing policies or enforceable emission reduction measures (other than incentives and subsidies for clean technologies - i.e. the Inflation Reduction Act) are not able to pass. Neither is any significant climate finance for developing countries, as US voters – like many of their counterparts in Europe – are increasingly unwilling to see their tax dollars go toward mitigation projects abroad.

Encouraging private sector engagement in climate change mitigation through voluntary carbon markets participation is thus one of the only avenues the US executive branch can take to reduce the growth in global greenhouse gas output. More direct measures - like putting a price on greenhouse gas emissions by implementing a mandatory ETS - risk losing Biden’s already tepid support in an election year. What it means for US leverage at this year’s UN climate negotiations in Azerbaijan remains to be seen: the biggest agenda item at that meeting is a fundraising target being demanded by developing nations, and US diplomats will face demands that their government make stronger financial commitments. Will support for companies’ voluntary carbon credit purchases count as a financial commitment?