Now that the UNFCCC process has finally put the last building blocks of Article 6 in place, what role does that leave for the voluntary carbon market?
It’s going to be a battle of standards. And credibility. And reputation.
Those of us who remember the Clean Development Mechanism and its infrastructure may well have already envisioned how it could develop: the Article 6 Supervisory Body (SBM) will become a sort of arbiter-in-chief, approving project methodologies, registering projects and issuing emission reductions according to instructions from host countries and project participants.
To be fair, these are the exact roles that the various VCM standards already carry out. The likes of Verra, Cercarbono and ACR already set methodologies. They already register projects and approve issuances.
So the choice is either that these two markets exist in parallel, serving different clienteles, or one of them grows larger and absorbs more demand from projects and from buyers.
Many of the participants at this week’s S&P Global Global Carbon Markets event were digesting the outcomes of COP29 in Baku, and from what they were saying, it looks a little gloomy for the VCM and its stakeholders. Here’s why.
To be sure most, if not all of these standards, have a role within Article 6 world. Standards like Verra can continue to develop project methodologies and submit them to the SBM for approval. And they can even operate these same methodologies for projects that wish to work outside the Article 6 universe.
Traders can still amass portfolios of appropriately registered credits and offer them to corporate buyers, as well as UNFCCC Parties looking to meet their NDCs.
And responsible corporates can buy and retire those credits, safe in the knowledge that they’re retiring the most highly-regulated carbon credits around.
And any companies that aren’t so worried about the highest standards of credibility – the corresponding adjustments, the authorisations – can buy credits that meet the same environmental standards at a lower price, simply because they aren’t Article 6 compliant.
This begs the question “what’s the difference?” If you buy a VCU from a biogas capture project from the VCM that operates to the very same standard as a project that is registered under Article 6, what are you losing?
There is no incentive for standards to operate a lower-standard methodology outside the Article 6 universe. So an emission reduction, or avoidance, or removal issued under the VCM will almost certainly be – literally – the same as one counted under Article 6.
It’s chiefly about perception. Will a corporate want to be perceived as having gamed the global market place in order to cut costs? Can they stand the hit to their reputation?
Sure, a taxi company in a second-tier city that wants to call itself “carbon neutral” might be able to get away with buying VCM non correspondingly-adjusted credits, but a publicly-quoted industrial company? Not likely.
These were all points of debate in my conversations with attendees in Barcelona this week. Most people believed that the VCM “qua” VCM is destined to become a fringe player at the edges of the far larger UN-sanctioned mechanism.
Host countries too, have a large role to play in this shift, and it’s here that the one big question crops up.
For most project host countries the UN is often seen as the guarantor of their interests. The UNFCCC process has given all of them a voice, a vote and a hand on the pen that drafts the rules. Consequently they have a vested interest in upholding the system they’ve helped to build.
And while the quality of VCM standards is not in question – after all, most of these standards were the mainstay of the CDM and will likely underpin Article 6 too – the perception might be that they are also leaning towards the project participants. While neither I nor any of the people I spoke to this week had any evidence to suggest this, everyone agreed that there is a perception problem.
The roles of the ICVCM and VCMI and their like are a little harder to foresee. They, particularly the ICVCM, have acted as self-anointed regulators, carrying out precisely the role that the SBM is now growing into. It’s hard to see how ICVCM has a role in an Article 6 world where the SBM makes all the decisions of import.
VCMI and SBTI are more targeted towards the demand-side of the market, and they too may well find that the mere existence of a vibrant Article 6 market means that their role of pushing for greater environmental integrity in terms of corporate claims just doesn’t exist any more.
Likewise, ISO and the various buy-side recommendations that have emerged in the past few years will likely lose a lot of their impact, if the UN is now setting the standard of what an acceptable emissions reduction, avoidance or removal is.
Fundamentally, the emergence of all these worthy and necessary institutions was made necessary by the lamentable delay in the UN’s agreement on all the elements of the Article 6 system. And now that Article 6 is finally implemented and operating, perhaps it’s time to call time on them and move on with what the entire world has agreed.
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