By Chris Snyder, Britt Harter
The world needs to reduce carbon emissions this decade by 28% in order to meet the Paris Agreement 2°C pathway.1 Carbon credits, verified emission reductions generated from specific projects, are viewed by many as a key part of reducing carbon emissions, including their use by companies to help meet voluntary commitments. The global voluntary carbon market in 2022 had a value of at least $2 billion.2
Voluntary carbon markets involve the use of carbon credits to support voluntary corporate environmental objectives, e.g., carbon neutral claims. In contrast, compliance carbon markets involve mandated corporate carbon emission reductions via government regulation, e.g., the European Union Emissions Trading Scheme or the Regional Greenhouse Gas Initiative.
The voluntary carbon markets have grown and evolved over the past few decades into a large and broad market with standardized processes for carbon credit origination through carbon credit registries. The voluntary carbon markets have encountered recent controversy over the validity of certain projects underpinning the credits and over the climate-related claims made by firms purchasing the credits. Development of voluntary standards are now coming in to place,3 but to date there have been no mandatory disclosure requirements related to the pedigree and use of voluntary carbon credits.
In California, the governor recently signed Assembly Bill 1305, the Voluntary Carbon Market Disclosures Act (VCMDA), that will require disclosure related to the use of voluntary carbon credits for making climate-related claims. This is the first such disclosure requirement in the U.S. and became effective on January 1, 2024.
The VCMDA is effective as of January 1, 2024, with violations subject to a civil penalty of not more than $2,500 per day, up to a maximum of $500,000 per violation when information is not available or is inaccurate, as disclosed on the entity’s website.
Purchasers of voluntary carbon credits for use in voluntary decarbonization strategies should review both the pedigree of the voluntary carbon credits purchased (past and present) and existing climate-related claims made.
Understand —First, review the voluntary carbon credits that you have in your portfolio and in your pipeline, including all relevant data related to their pedigree. During this process, firms may discover that they do not have a robust process to identify the purchase of voluntary credits across global operations. Second, review any climate-related claims made and the information that supports these claims.
Assess — Complete an assessment of these voluntary carbon credits and climate-related claims against the requirements of VCMDA, including any clarifications on VCMDA requirements, and identify any gaps to compliance with the disclosure requirements. Firms can also take this opportunity to assess any additional risks or opportunities related to their voluntary carbon credit portfolio.
Roadmap —Based on the assessment, make an action plan with concrete steps and timeline to comply with the VCMDA and build a proactive carbon credit strategy. This work often includes engagement with a variety of internal and external stakeholders, including operations, finance, government relations, ESG/sustainability, and risk and regulatory departments.
Transform — Revise your climate strategy to ensure that ongoing approaches will comply with the VCMDA and will minimize reputation risk. The strategy should include a process for ensuring climate-related claims are consistent with evolving best practice. This process should also ensure that voluntary carbon credits purchased are specifically selected after appropriate due diligence to ensure they can credibly support climate-related claims.
Based on our decades of experience in the global carbon markets, combined with our deep sustainability expertise, Guidehouse can help you assess your voluntary carbon credit portfolio and climate-related claims, develop action plans, and work with you to revise your climate strategy in light of these new disclosure requirements.
©2024 Guidehouse Inc. All rights reserved. This content is for general informational purposes only, and should not be used as a substitute for consultation with professional advisors. This publication may be used only as expressly permitted by license from Guidehouse and may not be otherwise reproduced, modified, distributed, or used without the expressed written permission of Guidehouse.
1. United Nations Environment Programme (November 20, 2023), “Emissions Gap Report 2023: Broken Record – Temperatures hit new highs, yet world fails to cut emissions (again),” Nairobi, https://doi.org/10.59117/20.500.11822/43922. A 42% reduction is required yet this decade to meet a 1.5 °C pathway.
2. Forest Trends’ Ecosystem Marketplace (November 28, 2023), State of the Voluntary Carbon Markets, Washington, DC, Forest Trends Association.
3. For example, the Core Carbon Principles as developed by the Integrity Council for the Voluntary Carbon Market (principles that describe credible carbon credits), or the Voluntary Carbon Markets Initiative’s Claims Code of Practice (guidance on how to use carbon credits effectively).
4. California Legislative Information. 2023. “AB-1305 Voluntary Carbon Market Disclosures.” n.d. Leginfo.legislature.ca.gov. Accessed November 9, 2023. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1305.
5. This appears to capture companies of all size that do business in CA, unlike monetary thresholds contained in other recent, climate-related laws such as SB253, the Climate Corporate Data Accountability Act, and SB261, the Climate-Related Financial Risk Act (for further information, see https://guidehouse.com/insights/energy/2023/california-bills-and-climate-related-disclosures.
Complexity demands a trusted guide with the unique expertise and cross-sector versatility to deliver unwavering success. We work with organizations across regulated commercial and public sectors to catalyze transformation and pioneer new directions for the future.