Scaling Voluntary Carbon Markets: Phase II Report

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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:

  1. the establishment of a new umbrella governance body to oversee the growth of voluntary carbon markets;
  2. the development of legal principles and contracts; and
  3. recommendations relating to the definitions of Core Carbon Principles ("CCPs") for credit level integrity.

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:

  1. a 'Phase II Report' (the "Report");
  2. governance 'Terms of Reference' and a call for expressions of interest;
  3. a 'Technical Appendix' containing analysis of the material in the previous two documents; and
  4. a summary document of the Report.

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

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.



10 November 2020 Taskforce publishes Phase I Consultation Document
13 November 2020 White & Case publishes client alert on Phase I Consultation Document
28 January 2021 Taskforce publishes Phase I Final Report and Summary on Taskforce
18 February 2021 White & Case publishes client alert on Phase I Final Report
21 May 2021 Taskforce publishes the Phase II Consultation Documents
16 June 2021 White & Case publishes client alert on Phase II Consultation Documents
21 June 2021 Deadline for market participants to provide feedback on Phase II Consultation Documents
8 July 2021

Taskforce publishes the Phase II Final Report Documents including:

9 August 2021 Interested parties to submit final expressions of interest for participation in the new umbrella governance body
September 2021 Taskforce's Advisory Board to recommend participants to assume roles on the new governance body



Phase II Report Overview

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:

  • Objectives and Focus of the Taskforce. The Taskforce has set a dual ambition of ensuring high-integrity carbon credits and robust, transparent and liquid markets. The remaining chapters of the Report set out in greater detail the methods to be adopted in achieving this ambition.
  • Governance. Building on the set of concrete recommendations for the mandate, organisational design and implementation path for the new umbrella governance body, this chapter goes into further detail on the structural aspects of the new body. The Taskforce is also seeking further feedback and recommendations from market participants on five key topics underpinning the body's operating model and principles which will be further developed ahead of the governance body's establishment.
  • Legal Principles & Contracts. This chapter focuses on the work of the Taskforce Working Group on Legal Principles and Contracts, of which Ingrid York was a workstream lead, which aims to standardise the legal framework underpinning the issuance of carbon credits and thereby promote liquidity. The working group has addressed this aim by defining use cases to drive awareness of the methods by which participants can utilise the market and by clarifying operational requirements for standard setters' terms of use and also developing general trading terms.
  • Credit Level Integrity. The new umbrella governance body will draw on the expertise of the Taskforce Credit-level Integrity Working Group, which was established to support the governance body on the development and curation of CCPs in particular. This process will be operationalised through an assessment framework for standards as well as a set of credit eligibility guidelines. The working group has also set out a proposal for the taxonomy of additional attributes for each CCP credit.


Topic One: Governance

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.

Mission and Mandate

The new umbrella governance body has a mandate that covers four main areas:

  • Greenhouse Gas Reduction and Removal. The new body will ensure that the voluntary carbon market serves its primary purpose of reducing and removing greenhouse gas emissions and accelerating the transition to net zero to mitigate climate change.
  • Core Carbon Principles. The new body will be responsible for the establishment, hosting and curating of:
  • CCP eligibility guidelines for different project and methodology types and additional attributes;
  • CCP assessment framework for new and existing standard setters; and
  • eligibility principles for existing market bodies including suppliers and Validation and Verification Bodies ("VVBs").
  • Oversight. The new body will provide oversight over standard setters on adherence to the CCPs. The body will be responsible for approving standard setters that apply for eligibility and conducting regular spot checks to ensure adherence.
  • Coordination. The new body will coordinate the work of, and manage the interlinkages between individual bodies and serve as a steward for, and endeavour to foster the responsible growth of, the voluntary carbon market by defining a roadmap for success.

Organisational Design

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.

Design of the New Umbrella Governance Body

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.

Further Recommendations: Five Key Topics

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:

  • Modalities and Procedures for the Board of Directors. The development of details on the decision process of the Board of Directors, to include processes to manage conflicts of interest, ensure transparency of Board decisions and provide market participants with opportunities for rebuttal or appeal on decisions taken by the body.
  • Transparency Mechanism. The governance body will seek to operationalise a transparency mechanism focusing on transparency of the body's procedures and that of the trading of carbon credits:
    • Procedural Transparency: Recommendations and decisions on CCPs, as well as the strategic roadmap of the governance body, will be publicly disclosed. It will also provide detailed finance statements, require members to disclose and address real and perceived conflicts of interest and provide public annual reports on its activities and developments.
    • Trading Transparency: The Board of Directors will decide on the type of information which should be publicly disclosed as part of the trading of carbon credits. The information could include which parties are participating in trades and how (for example in real time).
    • Open Book Accounting: The governance body may consider open book accounting to ensure each transaction is fully transparent, including the particulars of the deal, the project baseline and proof of additionality, counterparties, ultimate beneficiaries and benefit-sharing arrangements. The body should consider if there would be any cost and administrative benefit with delayed transparency.
  • Grievance Mechanism. The governance body will seek to operationalise and implement a grievance mechanism ensuring that disputes and their resolution feed directly into decision making. Current proposals and features under discussion include:
    • provision of a publicly available complaints form to bring forward complaints against the governance body and to be reviewed by the Executive Secretariat;
    • public disclosure of complaints against the governance body with the aim of commenting on and resolving conflicts within three months of submission of the complaint form;
    • limiting grievance mechanisms dealing with disputes between market participants to conformity with the CCPs;
    • ensuring standard setters have their own grievance mechanisms in place to regulate market disputes. This may become an eligibility requirement for standard setters to operate under the CCPs;
    • the governance body assuming a mediator role for those disputes that cannot be resolved among market participants, such as disputes over adherence of projects to the CCPs, validation and verification of projects and adherence to the CCP eligibility criteria; and
    • harnessing the information from market grievances to inform any required adjustments to the CCPs, eligibility principles or the body's role in overseeing standard setters and the market more generally.
  • Transversal Approach. The new governance body will act as the steward for the voluntary carbon markets and will therefore need clarity on how to effectively manage the relationships between the various different bodies operating in the governance of voluntary carbon markets.
  • Key Performance Indicators ("KPIs") and Definition of Success. It is crucial that the new governance body clearly defines and measures its success in scaling voluntary carbon markets and, more generally, its overall contribution to the transition to net-zero greenhouse gas emissions. The development of KPIs and the assessment of whether these are achieved will also form the basis for the regular effectiveness review that the governance body will undergo every three years. Potential KPIs could focus on the following targets:
    • measuring the specific amount of tonnes of carbon dioxide reduced;
    • attaining a specific threshold figure of investments in high-integrity carbon credits which have been validated by the governance body;
    • the average price of carbon credits;
    • the number of methodologies reviewed by the governance body;
    • the percentage of carbon credits which qualify under the CCPs;
    • adoption rates of CCPs; for example, the number of tonnes traded by each standard setter or the number of companies purchasing high-integrity CCPs by a certain date; and
    • the number of grievances successfully settled.

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.

Conflicts of Interest

  • Overview. The governance body will establish a conflicts of interest policy requiring members to disclose any conflict or potential conflict, whether real or perceived. Guardrails may be put in place for those entities who are active market participants to prevent comprising the integrity of the governance body. To support an accelerated implementation of the governance body, the Taskforce is welcoming proposals for processes to manage conflicts of interest from members and the public ahead of the 9 August 2021 deadline for expressions of interest for participation in the new body.
  • Organisational Conflicts. The governance body will only consider Founding Sponsor and Executive Secretariat Host organisations that are not-for-profit NGOs, industry or investor associations or public organisations. These types of entities will also be required to disclose any active carbon market activities and justify how they will minimise conflicts of interest arising out of these activities. For-profit organisations generating revenue in the voluntary carbon markets will not be considered eligible for these roles but may be eligible to become member consultation group representatives.
  • Individual Conflicts of Interest. Individuals serving on the Board of Directors and Expert Panel will act in their personal capacity and will be required to adhere to a 'Code of Conduct'. Conflicts of interest on the Board of Directors and Expert Panel will be prevented by a set of guardrails which will allow for the inclusion of market participants whilst avoiding significant conflicts of interest.

Call for Expressions of Interest

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:

  • Timelines and Process for Implementation of the Governance Body. Interested parties have until 9 August 2021 to express their interest in adopting one of the roles in the governance body. The Taskforce Principals will provide the Taskforce Advisory Board with draft recommendations, at which point the Taskforce Advisory Board will devise a shortlist of interested parties. Following the selection process detailed below, the Taskforce Advisory Board will recommend Founding Sponsors, Independent Board Members, Expert Panel Members and the Executive Secretariat Host in September 2021. At this point, the Taskforce will also elect member consultation group representatives, whose role will be to provide regular input to the Expert Panel and Executive Secretariat.
  • Recommendation Guidelines. The Taskforce has set out governance design and recommendation guidelines to help inform on which parties would be capable of fulfilling the specific roles in the new body. These recommendations in respect of each role are set out in further detail in the governance Terms of Reference and include criteria such as whether parties will be able to contribute funding, whether their experience and expertise is sufficient for the given role and which specific areas of the value chain parties wish to represent.
  • Submission of Interest. Parties who are interested in fulfilling roles in the new body are requested to submit an expression of interest form for their desired role at Following this, the expressions of interest received will be examined against the recommendation guidelines using a scoring matrix to assess the candidate's expression of interest against the guidelines, with special consideration granted to the encouragement of representation across all stakeholders and all geographies. The Taskforce is also encouraging parties to submit joint expressions of interest for the Founding Sponsor and/or Executive Secretariat Host roles.

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:

  • Setup Phase (First Three Years). The initial setup phases will require seed funding of approximately USD 23 to 33 million, with responsibility for securing this funding falling on the Founding Sponsors of the new body and the Taskforce. Key sources of funding will include governments, contributions from corporates and philanthropic donations. The setup phase will see the new body focus on establishing, hosting and curating CCPs, as well as on providing oversight over standard setters on adherence to CCP principles.
  • Steady State Phase. The steady state phase will require approximately USD 7 to 10 million per year to cover the new body's expenses. Funding schemes may include membership fees and/or a service-based user fee; e.g. based on CCP credit issuance or retirement which could potentially be levied on CCP credit purchasers. If expectations of the predicted voluntary carbon market growth come to fruition, the steady state funding requirements will amount to less than 0.4 per cent. of the predicted voluntary carbon market size in 2024.


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.


Topic Two: Legal Principles and Contracts

Current Legal Landscape

  • The Taskforce asserts that the current legal landscape in carbon markets is characterised by fragmentation and a lack of standardisation between the various market participants. The ambiguous legal landscape creates a significant burden on market participants, who must navigate the following issues across their portfolio of credits:
    • Methodology Types: Different project types make it more or less challenging to ascribe rights over carbon credits issued to the parties involved.
    • Standards: Different standard setters apply varying definitions of a carbon unit and the associated rights attached to it.
    • Fragmentation: The heterogeneous supply chain consists of small players, multiple trading venues and different contracts. The high volume of small suppliers can also make it costly and complex to interface with exchanges.
    • Unclear Liabilities: In most contracts, the current position is that legal liability rests with the verifier, which can prove to be an unattractive business model.
    • Complexity from Emerging Services: New services such as distributed ledger technology (DLT) applied through a meta-registry or trading network add further complexity to the legal underpinnings.
    • Lack of Access to Financing: Access to financing and the often significant lag between a project receiving financing and credit being produced provides serious challenges to market growth.
    • Different Jurisdictions and Financial Regulatory Frameworks: Different legal frameworks across jurisdictions have given rise to different legal rights associated with carbon credits and the rights of governments and private stakeholders to them. In relation to Article 6 of the Paris Agreement specifically, the Taskforce has made it clear that more work will need to be done to ensure voluntary carbon markets comply with the rules of the Paris Agreement once the outcome of the hotly debated Article 6 negotiations becomes clearer.
    • Fraud Risks: The presence of bad actors in the market can pose risks of money laundering, tax fraud (e.g. EU ETS-related incidents), consumer fraud and double counting.

Current Legal Nature of Carbon Credits

  • Market Scaling: Market scaling is hindered by the hesitancy of market participants to commit to transactions, where the legal implications of doing so are unclear.
  • Fungibility: The divergence of treatments of carbon credits across regimes hinders liquidity and trading.
  • Existing Documentation: Providing the necessary legal underpinning to general trading terms by way of sound legal opinions presents a challenge given the uncertain and fragmented legal treatment.
  • The Working Group on Legal Principles has sought to address these legal issues by:
    • providing clarity over use cases which demonstrate how harmonised contracts and standard clauses and procedures can help scale the market. These use cases are discussed further in the accompanying technical appendix;
    • providing operational requirements for standard setters' terms of use; and
    • providing key general trading terms.
  • The Taskforce sets out an implementation phase from July to October/November 2021 during which:
    • the newly formed governance body will host and update operational requirements for standard setters' terms of use recommended by the Taskforce; and
    • external industry bodies (e.g. IETA, ISDA and EFET) will be able to integrate key general trading terms recommended by the Taskforce into the contract templates.

Standard Setters' Terms of Use

As part of the Phase II Consultation, the Working Group on Legal Principles set out proposals which could be introduced across all standard setters' terms of use. Some of the key areas of focus are highlighted in the graphic below and discussed in further detail within the technical appendix. These provisions will be set out in more detail by the governance body and regularly updated to take account of innovation and relevant developments in the market.

Although current practice shows it is possible to trade multiple standard setters' credits under one reference contract, the Taskforce asserts that a more legally uniform product, backed by harmonised terms of use across standard setters, will provide clarity to buyers on the legal structure underpinning their investment in carbon credits.

Operational Requirements for Standards' Terms

Topic Proposal
Uniform onboarding procedures

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.

Force Majeure Standards will not be held liable for losses incurred under Force Majeure.
Limitation of Liability Registry users will assume full responsibility and risk of loss from their use of the registry and will have no claim against the Standard or any of its contractors.
Prohibited practices and suspension of service

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.

Dispute Resolution The Taskforce recommends Standards require arbitration.
Auditable logs Standards commit to keeping auditable transaction logs and secure transfer procedures – the governance body may specify relevant best practices and/or internationally recognized security standards (e.g. blockchain-based logs).
Tax compliance Standards ensure to the maximum degree possible that developers pay all taxes and charges imposed by governmental authorities related to the use of the Standard.
Cybersecurity Standards should have in place cybersecurity systems adequate to minimize risks related to hacking and fraud – the governance body may specify relevant best practices and/or internationally recognized security standards.
Termination The governance body will specify a minimum period of notice Parties will give each other before terminating the Agreement.
Replicated with the permission of the Taskforce on Scaling Voluntary Carbon Markets


General Trading Terms

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.

Key General Trading Terms

Topic Proposal
Definition of Products The product is defined as either a removal or an avoidance/reduction CCP credit – or either - that has been issued by one of the Standards approved under the governance body and that meets all of the requirements of the CCPs as well as some of the additional attributes specified.
Avoidance of double counting

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).

Settlement and Delivery

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).

Failure to Deliver

(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

Force Majeure

The Parties choose one among three modalities of termination payment:

(i) No termination payment

(ii) Partial termination payment

(iii) Full termination payment

Limitation on Liability Neither Party is liable for any loss of income, loss of profits or loss of contracts, or for any indirect or consequential loss or damage.

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.

Change in Law

Parties are given two options:

(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.

Dispute Resolution

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.

Benchmark price/source In the long term, if benchmark prices are used for CCP credits, they should comply with IOSCO principles.
Tax Compliance The Seller will pay all taxes arising prior to delivery; the Buyer will pay all taxes after delivery. Where the Seller is required by law to pay taxes that are the Buyer's responsibility, the Buyer will reimburse the Seller.
Replicated with the permission of the Taskforce on Scaling Voluntary Carbon Markets



Role of Market Participants

The process of harmonising standard setters' terms of use and general trading terms will require the assistance and expertise of a wide-range of market participants, including in respect of trading terms for example the input of international industry bodies such as the International Swaps and Derivatives Association, Inc. (ISDA), the International Emissions Trading Association (IETA), the European Federation of Energy Traders (EFET) and the Futures Industry Association (FIA) and intergovernmental bodies such as UNFCCC, UNCITRAL and UNIDROIT who have significant expertise in the development of nascent markets and model laws.

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.

Legal Framework

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.


Topic 3: Credit-level Integrity

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.

Assessment Framework for Standards

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:

  • Additionality: Projects or activities yielding CCP credits must demonstrate additionality before credits are issued to them, including:
    • Financial Additionality Test: This ensures the environmental gain would not have occurred without the revenue from carbon credits.
    • Penetration Level Test: The penetration level of project activity must be below an appropriate threshold to demonstrate low availability. This only applies to avoidance/reduction type carbon credits.
    • Regulatory Additionality Test: In order to demonstrate regulatory additionality, the project must not be in response to legal or regulatory obligations under laws or regulations in a jurisdiction and the project must not be in response to legal or regulatory obligations arising from laws that have already been approved but have not yet taken effect.
  • Permanence: Standard setters should ensure credits are issued only for projects and activities in which greenhouse gas reductions or removals are permanent or, for those activities which carry a 'reversal risk', adhere to a minimum permanence timeframe and a comprehensive risk mitigation and compensation mechanism.
    • Standard setters must require monitoring and safeguards for any reversals for the duration of the minimum permanence timeframe.
    • Standard setters will be expected to maintain a reversal compensation procedure; for example, through insurance or a buffer pool in order to compensate for any reversal events (intentional and unintentional) during a credit's minimum permanence period for methodology types that include storage.
    • Minimum buffer requirements by methodology type will be defined by the new governance body and will vary depending on the level of the reversal risk associated with the different methodology types. The governance body will conduct stress tests on standard setters' buffer pools to ensure they are sufficient for their project portfolio risk.
    • In case of a reversal event, the relevant standard setters will retire the same number of credits as are affected by the reversal event from the buffer pool to which the invalidated credits belong.
    • Standard setters must include the requirement to project or activity owners to notify likely reversals within a specified number of days (to be defined by the governance body) of their discovery, indicating whether the reversal is avoidable or unavoidable.
  • Leakage Minimisation: Standard setters must require leakage assessments for those projects or activities where leakage is identified as a risk. Credit issuance volumes should be adjusted to mitigate for any increase in emissions outside the boundary of the project or activity. Leakage must be monitored on a continual and systematic basis during the credit period where standard setters are using the confirmed leakage approach for deductions and standard setters must require the publication of leakage estimates and monitoring results in the interest of transparency.
  • Baseline Setting Approach: Standard setters must require the estimation and use of conservative and independently audited baselines for any activity or project aiming to receive CCP credits.
    • At the start of each new crediting period, standard setters must ensure developers revise baselines where necessary and indicate triggers for revisions of baselines.
    • Baselines must be independently audited and endorsed by third-party specialist experts.
    • The Taskforce has published in the Report the results of the differing market views on realistic and credible baselines for forestry credits specifically. Baselines for forestry credits have the added difficulty in calculating baselines due to the requirements for extrapolation of deforestation rates across time and regions.
  • Verification: Assessments of projects and activities must be calculated in a conservative and transparent manner, based on accurate measurements and quantification methods. The monitoring of emissions reductions and removals must be validated and verified by accredited validation/verification bodies.
  • Real: No CCP credits can be issued on an ex-ante basis on the basis of potential emissions reductions or removals. Equally, CCP credits must not be issued for activities where the decision to initiate them occurred before the decision to pursue credit revenue.
  • Do No Net Harm: Any emission reductions or removals against which CCP credits are issued must be the result of activities that, at a minimum, do no net environmental or social harm.
    • Standard setters can ensure the projects' overall impact prevents any net social or environmental harm by conducting impact assessments and regular community or stakeholder consultations.
    • Standard setters must indicate the safeguards in place to prevent social and environmental risks and define dispute resolution mechanisms to address issues relating to the net impact of projects.

Market Debate: Financial Additionality Requirements

  • Background: Not all standard setters currently require project developers to demonstrate financial additionality and instead make use of a variety of types of additionality tests, including also regulatory additionality and performance against benchmarks. Respondents to the Phase II Consultation identified the tension between financial additionality adding an extra layer of verification and integrity to projects versus the burden developers will face in demonstrating and proving financial additionality.
  • Pros: Arguments in favour of requiring financial additionality include:
    • Additional Requirement: Financial additionality should be a requirement on top of other additionality tests and not simply one of many ways to demonstrate overall additionality. In the latter case, developers are often incentivised to choose the path of least resistance, with projects becoming validated that would have failed the remainder of the additionality tests.
    • Added Protection: Although financial additionality tests can be difficult to calculate, when used in conjunction with other additionality requirements, they constitute an added layer of protection against low quality and non-additional credits.
  • Cons: Arguments against requiring financial additionality include:
    • Subjectivity: Estimating and proving financial additionality may be subjective and open to manipulation by developers.
    • Misrepresentative: Under the old Kyoto Protocol's Clean Development Mechanism, projects that proved their overall additionality solely through financial additionality were often found to be non-additional.
    • Tailored Approach: The requirement for financial additionality should be decided at a methodology-type level. For example, removal methodologies may not be suitable for a financial additionality requirement.
    • Rewarding Incumbent Players: Requiring financial additionality rewards incumbent players making small adjustments towards avoided, reduced or removed emissions instead of smaller players with disruptive technologies that would become profitable in the short term.
    • Increased Costs: Demonstrating financial additionality added to both the workload and costs of developers.
    • Achieving Financial Additionality: Financial additionality may be hard to implement in regions where financial parameters such as required rates of return are volatile.

Market Debate: Financial Additionality Testing

  • Background: Linked to the requirement of financial additionality is the issue of the methods of testing and demonstrating financial additionality. In order to demonstrate financial additionality, many players in the voluntary carbon markets use common practice tests (certifying that the project activity is not widespread in the market and hence does not represent a commonly available technology), investment barriers tests or positive-lists to pre-determine financially additional methodologies. One of the current talking points is whether financial analysis tests would be a more accurate method of assessing financial additionality.
  • Pros: Arguments in favour of requiring financial analysis tests include:
    • Objective Basis: Financial analysis tests are required in order to establish an objective basis for negative profitability or lower returns on capital of projects without carbon credit revenue. Investment-related tests are not as effective, since the purpose of carbon credit revenue should not be to ease investment barriers for profitable projects with high returns on capital.
    • Present Leniency: Many market participants believe current formulations of financial additionality are too lenient and that only projects which show that profitability would not be possible without carbon credit revenue should have CCP status.
  • Cons: Arguments against requiring financial analysis tests include:
  • Sufficient Existing Methodologies: Common practice tests which certify that the project activity is not widespread in the market and hence does not represent a commonly available technology, as well as investment barriers tests, are sufficient for measuring and demonstrating financial additionality.
    • Subjectivity: Financial analysis tests can be highly subjective and therefore open to manipulation by developers.
    • Concluding Remarks: The Taskforce believes that the responses above to the Phase II Consultation have now provided the future governance body with a picture of where the market tension in respect of financial additionality lies. It will be one of the tasks of the governance body to assess the requirements and methodologies for financial additionality and adopt a position for the benefit of voluntary carbon markets as a whole.

Operational Considerations for Standard Setters:

  • Programme Governance: Standard setters must be managed by government or nonprofit organisations which set out in a transparent manner their governance structure.
  • Programme Transparency: Regulatory documents (e.g. standards), core normative references (e.g. statutes, bylaws and principles) and the different quantification methodologies must be made publicly available. Standard setters are also obliged to put in place provisions for public stakeholder consultation on the development of programme rules and procedures, accounting methodologies and project and governmental programmes.
  • Independent Third-party Verification: The standard setter must publish requirements for independent third-party verification, including provisions to assess and avoid conflicts of interest, and for accreditation and oversight of validation and verification bodies.
  • Legal Underpinning: Standard setters must ensure a robust legal framework to underpin the creation and ownership of credits.
  • Publicly Accessible Registry: Standards setters must establish a publicly available registry that tracks the credits issued and provides the basic functionality to:
    • provide access to all underlying project information;
    • transparently issue, retire and cancel credits;
    • individually identify the credits through unique serial numbers to avoid practices such as double counting;
    • identify unit status; and
    • track the chain of custody, from creation to retirement and keep auditable transaction logs and secure transfer procedures.
  • Registry Operation: Standard setters must establish procedures to ensure all account holders meet rigorous onboarding procedures and agree to legal requirements regarding the use of the registry. The registry must guard against service provider conflicts of interest and also have robust security and provisions for matters such as redundant data storage, regular security audits and systems backups.
  • Mis-issuance of Credits: The governance body will be tasked with defining a mechanism for withdrawing CCP status where mis-issuance of CCP credits has occurred. The governance body will also have a mandate to strip standard setters' of their ability to issue CCP credits where a standard setter falls short of compliance with the Assessment Framework.
  • Registry Terms & Conditions: Some of the key provisions for standard setters to consider include dispute resolution procedures, tax compliance and termination provisions. The terms and conditions should also set out the circumstances where a user's account may be suspended or closed; for example, following engagement in fraudulent or illegal activity.

Credit Eligibility Criteria

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 analysis highlights issues around which methodology types require greater degrees of assessment in order to give effect to the CCPs. For example, the Credit-level Integrity Working Group identified that the CCP relating to the permanence of reductions or removals from a project would require a greater degree of assessment for afforestation projects than it would for renewable energy generation activities.
  • By taking a tailored approach to designing individual methodology protocols, standard setters will be able to evaluate and identify which specific methodologies comply with the relevant credit eligibility guidelines and CCPs. Market participants can therefore be confident that CCP credits achieve their intended purpose.
  • The Credit-level Integrity Working Group has set out within the technical appendix detailed analysis in relation to each of the CCPs mentioned above, explaining the current market practices across standard setters. In conjunction with this analysis, the working group has provided some key questions for the future governance body to take into account in seeking to define credit eligibility guidelines.

Taxonomy of Additional Attributes

  • The Credit-level Integrity Working Group has identified proposed additional attributes which will serve as mandatory tags, thereby codifying attributes that all standard setters must specify in issuing CCP Credits. Additional attributes allow for CCP credits to be easily differentiated by buyers and sellers in the market and provide clear price signals and price differentiation for CCP credits.
  • Additional attributes will not substitute any information attached to a carbon credit; rather, they will act as mandatory additional labels to enhance the categorisation of CCP credits.
  • The additional attributes put forward by the Credit-level Integrity Working Group in this Phase II include:
    • Type of Credit: Specifies whether a CCP represents a tonne of carbon dioxide which has been avoided/reduced or removed.
    • Removal/Reduction Method: Identifies the methodology used in removing or reducing carbon dioxide – for example, nature-based or tech-based methodology types.
    • Storage Method: Allows buyers to select credits with storage methods that may carry a lower reversal risk.
    • Co-benefits: Buyers may want credits that deliver wider benefits beyond the specific removal or reduction project, such as achieving Sustainable Development Goals or achieving broader ESG targets. As the market scales, more granular attributes must be considered.
    • Corresponding Adjustments: Buyers may require CCP credit with letters of authorisation from host countries specifying that steps have been taken to avoid issues such as the double counting of credits.
  • Exchanges will be capable of creating contracts for CCP credits from different standard setters that share common underlying additional attributes. In the OTC market, additional attributes will allow credits to have standard supplements with price signals from the exchange market.
  • Specifically labelled CCP credits will permit corporate participants to take a more targeted approach to achieving their corporate claims, whether that be achieving net zero, carbon neutral status or individual corporate claims. This will have a corresponding effect on suppliers, who will be incentivised to develop projects in line with the demand profile in the market.
  • The new governance body will ultimately be responsible for finalising the recommendations of the Credit-level Integrity Working Group into a standard taxonomy of additional attributes and will provide oversight over standard setters to ensure credits are labelled appropriately. The governance body will also need to specify questions such as, the appropriate redress mechanisms for credits with incorrectly labelled additional attributes.
  • As the carbon markets grow, the governance body may need to consider how it strikes a balance between retaining the flexibility to adjust and update CCP credit labels as technologies and climate objectives shift, whilst also providing a consistent and reliable identification system for buyers and sellers.


Concluding Remarks


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.

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