The 'Taskforce on Scaling Voluntary Carbon Markets' (the "Taskforce") is a private sector initiative working to scale an effective and efficient voluntary carbon credit market to help meet the goals of the Paris Agreement.
The Taskforce is spearheaded by Mark Carney, UN Special Envoy for Climate Action and Finance Advisor to UK Prime Minister Boris Johnson for the 26th meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) ("COP26"). The Taskforce is chaired by Bill Winters, Group Chief Executive, Standard Chartered, and sponsored by the Institute of International Finance ("IIF") under the leadership of IIF President and CEO Tim Adams. It is made up of more than 250 members and consultation group institutions, representing buyers and sellers of carbon credits, standard setters, the financial sector, market infrastructure providers, including Ingrid York of White & Case, civil society, international organisations, academics and relevant sector trade associations. The Phase I final report of the Taskforce (the "Phase I Final Report") was introduced by Bill Gates, Mark Carney, Bill Winters and Annette Nazareth at the Davos Agenda 2021.
On 21 May 2021, the Taskforce launched a new consultation process (the "Phase II Consultation") on three core topics:
Following the completion of the Phase II Consultation on 21 June 2021, the Taskforce has now published four documents as part of the Phase II Final Report (the "Phase II Final Report Documents") including:
The Phase II Final Report Documents were developed with the extensive engagement of Taskforce members and working groups. Overall, the Taskforce received 130 responses to the Phase II Consultation, including 58 open letters and 72 completed responses to the Phase II Consultation survey. The Taskforce has published each response at https://www.iif.com/tsvcm.
The Taskforce asserts that the Phase II Consultation revealed strong support amongst respondents for the mandate and mission of the governance body, which include setting legal principles to guide the market and setting the criteria for carbon credit integrity via the CCPs. Respondents also emphasised the importance of the governance body in unifying the currently fragmented market and ensuring the quality and integrity of carbon credits.
In particular, responses to the Phase II Consultation have provided the Taskforce with a clearer indication of where the potential obstacles and points to resolve are before the implementation of the Report findings. These issues are discussed in further detail below.
The Report represents the next output of Phase II of the Taskforce's project to scale-up voluntary carbon markets, being the 'Development and Implementation' phase and follows on from the Phase II consultation launched on 21 May 2021, which was summarised in our 16 June 2021 client alert: Scaling Voluntary Carbon Markets: Phase II Public Consultation.
White & Case has also previously published client alerts on the Phase I consultation on an initial blueprint for a voluntary greenhouse gas or carbon market, published on 10 November 2020, which was summarised in our 13 November 2020 client alert: Voluntary Carbon Markets: A Blueprint), as well as on the Phase I Final Report after such initial consultation in November and December 2020, which was summarised in our February 2021 client alert here: Scaling Voluntary Carbon Markets: The Final Report.
Taskforce publishes the Phase II Final Report Documents including:
The Report is structured across the same four chapters detailed in the Phase II Consultation and supplements these key topics with the responses from the Phase II Consultation as well as further input from Taskforce Working Groups and members. The four chapters include:
The Taskforce Governance Working Group has set out in a separate, deep-dive document the governance Terms of Reference and the call for expression of interest from interested parties to assume roles within the new governance body, which are published alongside the Report.
The development of the governance Terms of Reference are supplemented by the Taskforce's technical appendix, which provides in-depth analysis on how the new body can draw on some of the key features of other governance bodies operating in the carbon markets or financial markets. This analysis has informed the blueprint for the new governance body's design and framework as set out in the governance Terms of Reference.
The new umbrella governance body has a mandate that covers four main areas:
As part of the Report, the Governance Working Group has refined the proposed structure and composition of the new umbrella governance body by making more specific reference to the role that Funders (see 'Funding' section below) will play in its setup and steady state phases.
The new umbrella governance body will comprise five parts, each with their own tasks, composition and nomination process.
As noted in our previous client alert, it remains to be seen how credits developed in accordance with CCPs recommended under the new governance structure will interface with existing regulations in the financial services sphere – and, in particular, different jurisdictions' approaches to regulating specific types of financial instruments and the activities and services relating to these.
The publication of the governance Terms of Reference provides the market with clarity on the role this future umbrella governance body will play to oversee the growth of voluntary carbon markets.
The integrity of the market has been a pervasive theme across each aspect of the Taskforce's project to scale voluntary carbon markets in order to give confidence to buyers to enter the market at scale. To ensure that the structure of the new governance body also aligns with the overarching goal of market integrity, the Taskforce has requested market participants to assist in providing recommendations on five key topics ahead of the 9 August 2021 deadline for expressions of interest for participation in the new body. The five topics focusing on the governance body's operating model and principles include:
The Taskforce will collect recommendations received on the five key topics above for the Taskforce Advisory Board's review. The Taskforce Advisory Board will then make a non-binding recommendation to the Board of Directors of the governance body, which will have the final say on the adoption of the proposed recommendations.
As part of the publication of the Report, the Taskforce is also calling upon interested parties to share expressions of interest in assuming roles on the new umbrella governance body. The Taskforce is also calling upon corporates, philanthropic institutes and public sources to aid with funding contributions.
The governance Terms of Reference set out in more detail the following key points:
The specific forms provided by the Taskforce for each of the different roles on the new body are oriented around the recommendation guidelines mentioned above in order to assist in evaluating each potential party's suitability for the role in question.
The new body will operate on a not-for-profit basis, with a phased-approach to its funding requirements as follows:
The Taskforce believes that the first three to six months of the setup phase represents the critical ramp-up phase for the new umbrella governance body to oversee the growth of voluntary carbon markets. During this time, the body will take decisions on topics that are key to establish it as a legal entity and enable its functioning as well as on five key topics mentioned above that will be further developed ahead of the establishment of the governance body.
As the governance body transitions to steady state operations, the focus and specific objectives of the new body will shift once the foundations for the body and its role within the global voluntary carbon market have been laid. The shift will see the new governance body adopt a more coordination-focused role within the voluntary carbon market and manage interlinkages between existing bodies. It is anticipated that the new body will transition from the setup phase to the steady state phase after three years, with the transition applying across all aspects of the body, including the mission and mandate, organisational design and funding needs.
Standards should have in place rigorous onboarding procedures that Users undergo upon registration (to be implemented, if needed, in collaboration with third parties, such as banks); periodic spot checks will be performed on a regular basis thereafter.
The governance body will have the mandate to define minimum documentation required by the standard setters.
Standards shall suspend services and/or close the User's account if they reasonably suspect that the User has engaged in fraudulent, unethical or illegal activity – the governance body will define a minimum threshold of such prohibited practices.
Standards make all reasonable efforts to ensure that neither developers nor their subcontractors engage in such practices, e.g., through onboarding due diligence and periodic spot checks.
The Taskforce asserts that currently, the general trading terms of carbon credit contracts lack uniformity, thereby adding to fragmentation and illiquidity in the voluntary carbon credit market.
The Working Group on Legal Principles and Contracts has set out proposals for a harmonised contractual foundation for key trading terms. Enhanced clarity over trading documentation will widen access to smaller market players in particular, allowing them to circumvent complex and redundant drafting procedures and associated legal expenses.
These general trading terms will be of more particular relevance to OTC contracts. In relation to exchange-traded contracts, the Taskforce's expectation is that exchanges may follow the recommendations in building on their existing trading rules.
The full language and analysis of the key general trading terms set out below can be found in the technical appendix. These terms can be adapted to parties' requirements and readily integrated into OTC and exchange trading contracts.
The Seller warrants to the Buyer that they have not and will not use or make any claims with respect to the CCPs being traded, and that they have not sold, transferred, retired, or otherwise created any interest in the CCPs other than as contemplated by the Agreement.
In a primary sale, the Seller commits not to double count, i.e. not to have registered CCP credits in more than one Standard.
Upon being transferred the CCP credit, the Buyer commits to use, make claims with respect to, or further sell the credit exclusively one time on behalf of either themselves or subsequent Buyers.
The Taskforce recommends that potential technological solutions be explored and considered which can help avoid double counting / claiming / use (e.g. blockchain-based logs; reference number systems).
For OTC: Parties hold accounts in one specific Standard, agreed upon upfront.
For Exchange-traded contracts: Parties hold accounts in all Standards that the Exchange shall transfer the credits from.
Parties are given two options:
(i) Physical delivery / deemed delivery (retirement by the Buyer)
(ii) Financial settlement / retirement without deemed delivery
Parties are expressly encouraged to consider the legal implications which different delivery mechanisms have in different jurisdictions (resulting in CCPs being considered commodities, securities, or other types of assets).
(i) Where credits already exist, the Party breaching the Agreement will reimburse the other
(ii) Where the credits are in development, the Parties either apply the same provisions, or negotiate appropriate remedies for non-delivery
The Parties choose one among three modalities of termination payment:
(i) No termination payment
(ii) Partial termination payment
(iii) Full termination payment
Each party compensates the other for claims directly incurred in connection with:
(i) any violation of applicable law, regulation or order by such party; and/or
(ii) any breach of a representation or warranty by such party.
(i) if changes in law do not materially impact on the quantity of credits to be delivered, it is the Seller's responsibility to comply with those changes; if they do, the Buyer may terminate the Agreement.
(ii) if any of the Parties is prevented by the change of law from complying with its obligations under the Agreement, the Parties seek to agree on amendments in good faith; if such agreement cannot be found, either Party may terminate the Agreement.
Parties are given two options based on standard ISDA language, which they can adjust to their needs (choice of court, choice of jurisdiction, Arbitration Body):
(i) Jurisdictional clause (exclusive / non-exclusive)
(ii) Arbitration clause.
Role of Market Participants
The expertise of these entities will need to be complemented by the experience of various other existing and new market participants within the voluntary carbon markets in order to ensure wide acceptance and usage of the respective terms.
We note that the Taskforce has specifically called upon external industry bodies (e.g. IETA, ISDA and EFET) to integrate key general trading terms recommended by the Taskforce into their contract templates, as well as such entities to commission legal opinions on the legal nature of carbon credits, and on international governmental bodies (e.g. UNFCCC, UNCITRAL and UNIDROIT) to provide respective recommendations.
As noted above, it remains to be seen how credits developed in accordance with CCPs recommended under the new governance structure will interface with existing regulations in the financial services sphere – and, in particular, different jurisdictions' approaches to regulating specific types of financial instruments and the activities and services relating to these.
In addition, current financial market infrastructure global principles and post-crisis regulation applicable to trading platforms and financial market utilities will similarly need review and potential revision in order to clarify their application to and interface with rapidly scaling voluntary carbon markets and to ensure that they do not stifle these innovative markets as they grow and develop.
Such reviews will also inevitably consider these markets' interoperability with wider trading and post-trade ecosystems across areas such as clearing, settlement, reporting and market surveillance. They will also likely draw regulators' post-pandemic focus on these markets' operational resilience, third-party risk management, cybersecurity and use of risk-concentrated cloud services.
A major challenge in these reviews will be determining how aligned current and any amended regulatory frameworks are and can be, taking into account the global and cross-border nature of climate change risks, together with many governments' policy drivers to encourage all industry sectors to focus on mitigating them, both directly and indirectly.
Governments may take the view that the financing of reduction and removal projects overseas is just as impactful as domestic investment and direct their regulators in legislation, via mandated regulatory objectives or otherwise, to seek global regulatory alignment.
In this regard, we note that the Taskforce has invited jurisdictional regulators to review their treatment of voluntary carbon credits with the aim of providing further guidance on their legal nature, aligned across jurisdictions.
The newly formed Credit-level Integrity Working Group was established to support the new umbrella governance body by providing input on the key documentation it would need, including in both developing and operationalising the CCPs. The main purpose of the CCPs is to provide for a threshold standard for high quality credits at the credit level and to ensure integrity of the bodies assessing these thresholds at the participant level. The Taskforce asserts that tackling these issues around credit quality and credit assessment will foster confidence in the market and drive buyer demand.
In this Phase II, the Credit-level Integrity Working Group has produced a draft assessment framework for standard setters, an analysis of a set of credit eligibility guidelines and an initial set of additional attributes that will act as an identifier of each CCP credit based on its specific characteristics. The intention is that the development of these initiatives will enable the CCPs to have a tangible impact on the integrity of credits and the voluntary carbon credit market. The governance body will refine the proposed assessment framework for standards and take this framework to the next level.
The assessment framework for standards will be used by the new governance body to evaluate which standard setters may issue CCP credits. The aim of further developing CCPs has been both to harmonise and also exceed quality standards currently in the market. The below proposal is a first draft that the governance body will refine and develop.
Assessment Framework for Standard Setters:
Market Debate: Financial Additionality Requirements
Market Debate: Financial Additionality Testing
Operational Considerations for Standard Setters:
The Credit-level Integrity Working Group has carried out an analysis of the current credit eligibility guidelines used by standard setters in the market today.
The strong support in favour of the governance body's mission and mandate is a positive outcome from the Phase II Consultation.
The Phase II Consultation also helped to draw out some of the key points and arguments in those areas of debate in the market, particularly in respect of the development and implementation of an assessment framework for standards. Responsibility for deciding on the outcome of these debates will fall on the governance body.
Achieving the ambitions of the setup phase of the governance body will require key market stakeholders to heavily engage from the outset in the development of the new voluntary carbon market infrastructure and trading terms. This engagement will require stakeholders to provide both their knowledge and expertise, as well as (in some cases) their financial support.
Further details regarding the Taskforce can be located here.
The Report can be located here.
Vic Sohal (White & Case, Trainee Solicitor, London) contributed to the development of this publication.