In September 2020, the Institute of International Finance (IIF), the global financial services industry association, convened the Taskforce on Scaling Voluntary Carbon Markets. The Taskforce is working to scale a voluntary carbon market which would allow companies to meet their carbon reduction or net-zero commitments. In November 2020, the Taskforce released for public comment its Consultation Document, which includes a draft blueprint for a voluntary carbon market and a companion roadmap to implementation.
Why Needed? Many believe that companies will not be able to meet their voluntary carbon reduction or net-zero targets solely by reducing their own carbon emissions. Rather, companies would be required to purchase carbon offsets, or in layman’s terms, credits based on greenhouse gas emissions reductions made elsewhere to compensate for their own greenhouse gas emissions. If true, the global voluntary carbon market must grow a staggering 15 times, or double in size every 2.5 years, over the next decade, to meet these targets. The Taskforce will seek consensus on the legitimacy of offsetting and establish best practices for buyers and investors.
Mark Carney, UN Special Envoy for Climate Action and creator of the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures, or TCFD, initiated the Taskforce. The Taskforce is chaired by Bill Winters, Group Chief Executive, Standard Chartered, with the leadership of IIF President and CEO Tim Adams. Annette Nazareth, a partner at Davis Polk and former Commissioner of the U.S. Securities and Exchange Commission, serves as Operating Lead for the Taskforce. The Taskforce has over 50 members representing buyers and suppliers of carbon offsets, standard setters, the financial sector and market infrastructure providers. McKinsey, as well as a separate consultation group composed of experts from over 80 institutions, provides additional knowledge, advice and support.
Key Topics for Action and Recommended Actions
The draft blueprint was informed by the following four principles:
- The solution should be open-source.
- Voluntary carbon markets must have high environmental integrity and minimize any risks of negative consequences.
- The work should amplify existing and ongoing work of parallel initiatives.
- Incentives for emissions mitigation should not be undermined.
With these four principles in mind, the draft blueprint outlines the following 17 recommendations organized by six topics to scale a fully functional voluntary carbon market:
I. Core Carbon Principles and Attribute Taxonomy
- Establish Core Carbon Principles and Taxonomy of Additional Attributes. The market needs to align on a set of Core Carbon Principles (CCPs) setting out the threshold quality criteria to which a carbon credit and the supporting standards and methodologies should adhere. CCPs should be hosted and updated by a third-party organization. The third-party organization should also define a taxonomy of additional attributes, such as offset project type and location, that can be used to classify all offset projects and credits.
- Assess Adherence to the Core Carbon Principles. A separate independent third-party organization should assess standards, methodologies and validation against the CCPs and the additional attributes.
II. Core Carbon Reference Contracts
- Introduce Core Carbon Spot and Futures Contracts. Standardized spot and futures core carbon contracts, based on the CCPs, with physical delivery of certificates, will allow a transparent, daily market price to develop.
- Establish an Active Secondary Market. A secondary market would allow buyers and sellers to manage and hedge risk exposures and support long-term financing for offset project developers.
III. Infrastructure: Trade, Post-Trade, Financing and Data
- Build or Utilize Existing High-Volume Trade Infrastructure. To include existing exchange, i.e., access to market data and cybersecurity standards, and over-the-counter (OTC) infrastructure.
- Create or Utilize Existing Resilient Post-Trade Infrastructure. To include working with clearinghouses and meta-registries.
- Implement Advanced Data Infrastructure. Data providers should offer transparent reference and market data and collect and offer historical project and project developer performance and risk data to facilitate structured finance and the formulation of OTC contracts.
- Catalyze Structured Finance. To do this, the Taskforce recommends:
- developing data transparency on risk, including previous project/supplier performance;
- training financiers to rapidly assess execution risk;
- recognizing banks that finance offset projects, for example, through “green” labels;
- encouraging development and green investment banks to commit to increase lending facilities for suppliers; and
- upholding transparency.
IV. Consensus on the Legitimacy of Offsetting
- Establish Principles on the Use of Offsets. The Taskforce recommends establishing two sets of principles. One would set out guidelines on the use of offsets for corporate buyers. The other would set out principles for the design of offset product or point-of-sale offerings to customers.
- Align Guidance on Offsetting in Corporate Claims. Alignment should be achieved across ongoing initiatives.
V. Market Integrity Assurance
- Institute Efficient and Accelerated Verification. This should include establishing an integrated process that allows verification entities to continuously monitor and validate integrity as offset projects are developed and is consistent across the markets for all carbon credits issued.
- Develop AML/KYC Guidelines. Robust anti-money-laundering and know-your-customer guidelines need to be established and subsequently hosted by a governance body.
- Institute Governance for Market Participants and Market Functioning. A governance body should be set up and tasked with ensuring market integrity for participant eligibility and participant and market-functioning oversight responsibilities.
VI. Demand Signals
- Offer Consistent Investor Guidance on Offsetting. Clear and aligned investor guidance on offsetting, including the appropriate use, needs to be developed.
- Enhance Consumer Product Offerings, Including at Point of Sale. This should include implementing the CCPs for consumer products.
- Increase Industry Collaboration and Commitments.
- Create Mechanisms for Demand Signaling.
The Taskforce invites the public to comment on its Consultation Document here through December 10, 2020. The Taskforce will issue its final report, including an updated blueprint and implementation roadmap, in January 2021.