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As reports in early 2023 document the increasing gap between the promise and reality of forestry-based carbon emissions market crediting, two public-private initiatives have been launched to support emissions offset credit trading. Because these initiatives are in their early stages, it is premature to forecast the likelihood of their success, even on their own terms. But it is not too early to characterize the emissions credit integrity crisis that these initiatives are attempting to manage. 

One initiative, announced in February, is a cooperative program between the U.S. State Department and Ecosystem Marketplace (EM), a data aggregator for unregulated, private Voluntary Carbon Markets (VCMs), to provide three years of technical assistance for to up to eight developing country governments. The program’s stated purpose is to enable these governments to implement cross-border emissions offset trading under the auspices of the United Nations Framework Convention on Climate Change’s (UNFCCC) “Paris Agreement.” Presumably, cooperating governments will be expected to support U.S. positions at the UNFCCC Conference of the Parties (COP) negotiations to implement the Paris Agreement.  

According to the announcement, with State Department funding, “The new EM International Carbon Credits Console will capture data on carbon markets and results-based payments, including, e.g., their sustainable development benefits, monetary value, and trends in carbon credit demand for national and net-zero emissions targets and CORSIA [Carbon Offsetting and Reduction Scheme for Civil Aviation].” The State Department has supported emissions offset trading since the 1997 UNFCCC Kyoto Protocol, which ended with the 2015 adoption of the Paris Agreement.  

EM will provide training in use of the Console to assist trading of emissions offsets among governments (under Article 6.2 of the Paris Agreement) and between governments and the private sector (Article 6.4). CORSIA credits are mostly based on deforestation avoidance and tree-planting projects, such as those under a current barrage of investigations. (Consult here for more on CORSIA credits as the underlying asset of the Chicago Mercantile Exchange’s Global Emissions Offset futures contract.) 

The second initiative comes in the form of an International Organization of Securities Commissions (IOSCO) discussion paper that asks whether and how IOSCO member government regulators should collaborate with private VCM standards organizations, such as the Integrity Council for Voluntary Carbon Markets (ICVCM) and the Voluntary Carbon Market Initiative (VCMI). IOSCO’s 234 members are primarily securities regulators. However, IOSCO’s Sustainability Task Force’s Carbon Markets Workstream, chaired by U.S. Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam, includes regulators of the derivatives markets on which ICVCM standardized contracts could be traded. According to a fact sheet, “IOSCO participated in COP27 in Sharm el-Sheikh, Egypt, where it issued two reports on carbon markets and outlined its regulatory priorities for sustainability disclosures, mitigating greenwashing and promoting integrity in carbon markets.” 

IATP responded to the discussion paper here. All responses will be published when IOSCO releases non-binding recommendations to its governments on VCM engagement, likely in advance of the 28th COP, scheduled to take place November 30-December 12 in Dubai, United Arab Emirates. Before outlining IATP’s response to the IOSCO paper, we summarize recent reporting on failed deforestation emissions avoidance projects and the emissions offset industry response to both the reporting and the broader claim that offsetting is a dangerous distraction from direct investments to reduce greenhouse gases. 

There are at least two kinds of carbon market integrity failure. The first kind is the fraudulent sale by offset credits brokers who know that the credits sold greatly overestimate emissions avoided or reduced. At the end of January, Follow the Money published a lengthy investigation of Swiss based South Pole, which offers credits for sale from over 700 offset projects to hundreds of clients, such as Volkswagen, Gucci and Ernst & Young. South Pole knew for months that its Kariba project to conserve a huge forest in Zimbabwe was far from producing the promised emissions avoidance. Nevertheless, South Pole continued to sell Kariba credits even after Follow the Money told company executives that the credits vastly overestimated emissions avoided. According to a review of internal documents, confirmed by South Pole, “the company has sold roughly 100 million euros worth of Kariba carbon credits to hundreds of clients since the project started.”  

In mid-January, the English language edition of Die Zeit reported on a second kind of carbon market integrity failure: inadequate supervision of offset projects by the companies that certify emissions avoidance and reduction projects.  Die Zeit’s investigation focused on the Washington, DC-headquartered Verra, the source of up to 75 percent of all Verified Carbon Units (VCUs) currently traded. About 40 percent of Verra-certified VCUs come from forestry avoidance projects. Companies that advertise their “carbon neutrality” or large emissions cuts to their insurance companies, bankers and shareholders do so by buying and mostly holding VCUs while waiting for their price to increase.  

According to an investigation by Die Zeit, The Guardian and the investigative consortium Source Material, Verra’s easy-to-manipulate accounting methodology and supervisory failures of forestry conservation projects produced this result:  

89 million tons of CO₂ ended up on the carbon credit market despite representing nothing at all, the equivalent of annual emissions from Greece and Switzerland combined. . . And the 89 million tons only represent the third of Verra-certified projects that were part of the analysis. The true number of unbacked credits is likely to be far higher. 

IATP very briefly referenced these VCU and VCM integrity failures in our February 10 letter to IOSCO. The reports had produced a rebuttal, cited in our letter, signed by most of the major VCM players, save for Verra and Gold Standard, a certification protocol that does not issue VCUs based on forestry conservation projects. Verra responded separately to reporting in The Guardian. IATP’s letter to IOSCO references the ICVCM project to resolve the VCM integrity controversy. However,  Verra has rebuffed the ICVCM’s proposed review of Verra’s carbon credit accounting methodology and procedures. In a mid-January announcement, ICVCM announced that its Core Carbon Principle and Assessment framework for evaluation certification protocols will be published in March. ICVCM expects VCM trading of contracts with its “high integrity label” to begin by the third quarter of 2023. Implicitly, whether or not Verra cooperates, the ICVCM will claim to begin the trading of “high integrity” VCUs just in time for COP28 and will present itself as a model of how to implement the sale of VCUs from developing countries to the private sector under the Article 6.4 framework.  

In our letter, a topline message was that IOSCO regulators must not be the passive recipients of private sector VCM standards, refraining from regulating carbon market participants and trading platforms because of industry threats of litigation. IOSCO holds both virtual and physical workshops for its regulators. These workshops should provide critical evaluation of VCM claims and a broader understanding of the economics of climate change. The workshops should not be simple venues for the VCM industry to explain how it will increase market integrity and how governments can support the private sector by agreeing only to general principles for regulation, but not by regulating.  

We urged IOSCO to advise its member regulators to expand their understanding of what comprises “market participants” to include the people on whose land emissions avoidance, reduction or removal projects are carried out. In a 2020 survey by the Task Force for Scaling Voluntary Carbon Markets, 45 percent of those surveyed expressed “concern about the lack of environmental and society integrity” in offset projects (slide 50). “Social integrity” requires that prior informed consent be given to the use of land for offsets and that a fair share of proceeds be contractually guaranteed for those who live on offset project lands. Otherwise, VCUs derived from these projects would have little integrity and would present legal and reputational risk for market participants. 

IATP noted that according to the Intergovernmental Panel on Climate Change, long cycle fossil fuel related emissions are not offset by short term land-based removals on a one-to-one ratio (Executive Summary, p. 9 and Chapter Because corporations claim to offset their emissions by buying VCUs to achieve “net zero” emissions targets, IOSCO should recommend that its member regulators should seek the assistance of climate scientists to evaluate the basis for the claims. ICVCM anticipates that most carbon credits after 2030 will be derived from technologies such as Carbon Capture and Storage and Direct Air Capture, which are energy intensive and not proven at commercial scale. IOSCO regulators should seek independent evaluations of these technologies as a prudential regulatory measure to help prevent technological failure from resulting in VCM disruptions, to say nothing of exacerbating climate change impacts. 

We strongly advised against IOSCO support for using digital ledger technologies, e.g., Blockchain, to convert retired VCUs into tokens for trading on crypto currency markets. In our view, this process further erodes the integrity of the VCU. From our letter: 

CarbonPlan estimates that 21.6 million VCUs had migrated from registries to the blockchain as of April 2022... The ensuing carbon crypto price bubble has burst, taking with it retail investor funds that would have been much better spent as donations to or investments in projects that mitigate emissions or adapt to climate change. Greenwashing crypto has been the main product of crypto carbon joint ventures. 

If, despite all the red flags, IOSCO decides to advise its members to support the very rapid and large expansion of VCMs envisioned by ICVCM and other carbon market proponents, we advised IOSCO to recommend that regulators require market participants to be transparent in reporting their use of offset credits to regulators, insurers, bankers, standards organizations and the public. We gave the example of a proposal by NGOs, including IATP, to the U.S. Securities and Exchange Commission (SEC) to require SEC-regulated companies to disclose each fiscal year the notional (initial contracted price) value of their emissions offset trading in cash and futures markets in the climate financial risk section of SEC’s 10-K form (pp. 22-26). 

IATP agrees with most of the “key considerations” identified by IOSCO for principles for VCM regulations. We urged IOSCO to develop those “key considerations” in greater and critical detail for its member regulators. Finally, we asked IOSCO to respond to a challenge from Carbon Market Watch to the Task Force on Scaling Voluntary Carbon Markets:  

There has also not been a detailed discussion [in TSVCM documents] of why the existence of a secondary futures market, as well as financial products such as carbon index funds, would benefit the climate. It is important to not take it for granted that more money (and liquidity) means greater impact in addressing climate change. Exchanging carbon credits between financial speculators does not benefit the climate and can create price volatility which will in fact be detrimental to investments in mitigation action. (Italics in the original)  

In a mid-January EM blogpost, VCM consultant Charlotte Streck ascribed the troubled state of VCMs to a plethora of inconsistent offset certification standards and the unclear legal relationship of VCM standards to the implementation of Article 6.4. She concluded her assessment with this claim: “at this moment voluntary carbon markets remain the most effective cooperative tool to channel finance into mitigation projects and programs in developing countries. As public finance for climate finance remains shockingly scarce, it may be worth thinking twice before demonizing carbon markets.” (Bold in the original)  

Criticism of VCMs is not “demonization.” Nor is it certain that VCMs are the most effective tool for financing greenhouse gas reduction in developing countries. As Carbon Market Watch reported in “Secretive Intermediaries,” in the long supply chain from the forest dwellers and farmers cooperating in offset projects to the certification protocols to the carbon credit brokers in the cash markets to the emissions offset futures markets, the prices, fees and financial benefits for GHG reduction are far from transparent, much less effective.  

Before assuming that VCMs are the “most effective tool to channel finance,” IOSCO regulators, particularly in developing countries, should consider where they want VCMs operating in their jurisdictions and whether there might be more effective tools, such as those reported in EcoEquity’s “The Imperative of Cooperation.” It is true that “public finance for climate finance remains shockingly scarce.” However, part of the reason for that truth is that UNFCCC Parties have resisted implementing Article 6.8 on public finance until COP26 in Glasgow. If VCMs continue to fail to deliver effective mitigation finance, Parties should prioritize rapidly and hugely scaling up public finance for direct climate mitigation and adaptation, preferably under the auspices of Article 6.8 implementation.  

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