Voluntary Carbon Markets Integrity Publishes Provisional Claims Code of Practice

Latham & Watkins LLPThe Claims Code seeks to ensure the integrity of voluntary carbon markets to support achievement of the Paris Agreement goals.

The Voluntary Carbon Markets Integrity (VCMI) Initiative is “a multi-stakeholder platform to drive credible, net-zero aligned participation in voluntary carbon markets.” The VCMI Initiative, for which the UK government announced its support in March 2021, is co-funded by the Children’s Investment Fund Foundation and the UK Department for Business, Energy, and Industrial Strategy. A central objective of VCMI is to issue guidance for companies and other non-state actors on how carbon credits can be voluntarily used and claimed as part of credible net zero decarbonization strategies. To further this objective, VCMI published for public consultation a Provisional Claims Code of Practice (Claims Code) on June 7, 2022.

The Claims Code is the latest in a series of guidance, frameworks, and standards being developed for companies seeking to make climate commitments and use voluntary carbon credits to meet those commitments. The Claims Code comes a little over two months after the US Securities and Exchange Commission (SEC) published its proposed climate disclosure rules, discussed in a recent Latham Client Alert, which would similarly require detailed disclosure of any carbon credits used to support achievement of voluntary climate commitments. While the SEC’s proposed climate disclosure rules would apply only to publicly listed companies, the Claims Code is intended for use by any company seeking to make “credible, voluntary use of carbon credits and associated claims.”

The Claims Code also indicates the VCMI’s intention for the Claims Code to work to create a coherent governance framework alongside various other standards, initiatives, and schemes that establish rules or guidance on climate-related commitments and the use of carbon credits, including the Science Based Target initiative (SBTi), the Greenhouse Gas (GHG) Protocol, the International Sustainability Standards Board, and the Carbon Offsetting and Reduction Scheme for International Aviation.

The Claims Code outlines “four steps for making credible claims,” discussed below.

1. Meet the Prerequisites. Before making voluntary use of carbon credits and making a claim under the VCMI, the Claims Code would require companies to meet certain prerequisites to ensure that carbon credits do not substitute science-aligned decarbonization across companies’ value chains, and such prerequisites must be confirmed by a credible, independent third party. To meet these prerequisites, companies must:

  • make a public commitment to achieve science-aligned long-term net zero emissions by 2050, covering Scopes 1, 2, and 3 GHG emissions;
  • set and make interim emissions reduction targets, including by following SBTi guidance for setting boundary and emissions coverage;
  • provide detailed information on the plans and strategies to achieve their targets;
  • maintain a publicly available greenhouse gas emissions inventory consistent with the GHG Protocol and encompassing Scope 1, 2, and 3 emissions; and
  • make a public statement declaring that the company’s advocacy activities are consistent with the Paris Agreement.

2. Identify Claim(s) to Make. Companies can make “Enterprise-Wide Claims” or “Brand-, Product-, and Service-Level Claims,” each of which are subject to different guidelines.

Enterprise-Wide Claims “represent achievement toward a company’s long-term next zero commitment.” Enterprise-Wide Claims require reduction of Scope 1, 2, and 3 emissions and the purchase and retirement of carbon credits to cover some or all remaining emissions. There are three achievement levels:

  • Gold: A company must be on track to meet its Scope 1 and 2 emissions reductions required to meet its interim targets, on track to meet its Scope 3 emissions reductions required to meet its interim targets, and cover 100% of its remaining unabated emissions through the purchase of high-quality carbon credits.
  • Silver: A company must be on track to meet its Scope 1 and 2 emissions reductions required to meet its interim targets, on track to meet its Scope 3 emissions reductions required to meet its interim targets, and cover at least 20% of its remaining unabated emissions, increasing over time.
  • Bronze: A company must be on track to meet its Scope 1 and 2 emissions reductions required to meet its interim targets. For its Scope 3 emissions, a company must be partially on track to meet its emissions reductions to meet its interim target and may use carbon credits to cover up to 50% of its remaining Scope 3 emissions, with the proportion decreasing over time. This option is only available until 2030. At least 20% of its remaining unabated emissions must be covered in the first year, increasing over time.

Brand-, Product-, and Service-Level Claims “help raise awareness of climate-responsible consumption.” To make a VCMI carbon neutral brand, product, or service-level claim, a company must:

  • meet the prerequisites outlined in the first step at the company level;
  • maintain a public inventory of emissions associated with the brand, product or service, including Scope 1, 2, and 3 emissions;
  • demonstrate ongoing reductions associated with the brand, product, or service;
  • cover remaining emissions with high-quality carbon credits;
  • avoid creating a false impression of the beneficial environmental impacts of the brand, product, or service; and
  • obtain verification by a credible, independent third party and comply with applicable regulations.

3. Purchase High-Quality Credits. The Claims Code does not provide detailed guidance on what constitutes “high quality,” and instead outlines certain basic criteria that must be met, including that the credits:

  • be associated with a recognized and credibly governed standard-setting body;
  • have high environmental quality; and
  • where relevant, come from activities that (i) are compatible with human rights, (ii) promote equity, apply social safeguards, and demonstrate positive socio-economic impact, and (iii) contribute to the protection and enhancement of environmental quality.

4. Report Transparently on the Use of Carbon Credits. VCMI identifies transparent, public reporting as an essential final step for substantiating a credible claim. The Claims Code requires companies to report “full information” and make that information available to the public in the form of a corporate sustainability or similar report. Such information should include identifying features of the carbon credits purchased as well as how those carbon credits are used to fulfill a claim. When applicable, the public report must indicate that the mitigation underlying a carbon credit may also count towards the relevant host country’s Nationally Determined Contribution (i.e., the climate plan put forward by a nation as party to the Paris Agreement).

In addition to requesting public feedback on the Claims Code through August 12, 2022, VCMI will carry out a pilot program with several large companies between June and mid-August 2022 to clarify, streamline, identify gaps in, and ensure proper implementation of the Claims Code. A finalized version of the Claims Code is expected in late 2022 or early 2023.

In addition to VCMI, other groups are working to further voluntary carbon markets. The Integrity Council for Voluntary Carbon Markets (formerly known as the Task Force for Scaling Voluntary Carbon Markets, a private sector-led initiative created by Mark Carney) is also working to bring greater quality and integrity to the voluntary carbon markets to meet the goals of the Paris Agreement.

This post was prepared with the assistance of summer associate Lindsay Martin.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP
Contact
more
less

Latham & Watkins LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.