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Scrutiny on global voluntary carbon market and changes to ETS led to Toitū dropping NZUs

Friday 1 Dec 23 11:00am

 

By Ann Smith

OPINION: Toitū’s decision last week to transition away from accepting New Zealand carbon credits brought the global voluntary carbon market, and debates about its integrity, into sharp focus. 

Debate on the voluntary carbon market has increased in intensity over the past four months, though it has been growing ever since the Paris Agreement was adopted in 2015. 

 

Headlines claiming that all carbon credits are junk, and the voluntary carbon market is failing have dominated news about the carbon market. These were countered by articles analysing and refuting the bases for the negative claims, including explanations of how carbon crediting works.


Looking back over the carbon market headlines from the past four months, they range from genuine concern about the integrity of the voluntary carbon market to apparent agendas to discredit the voluntary carbon market, which in turn have been met with vigorous defence from the carbon crediting industry:


“Majority of offset projects that have sold the most carbon credits are ‘likely junk’, according to analysis by Corporate Accountability and the Guardian”

 

Nearly 60 percent of carbon credit buyers reported lower year-over-year carbon emissions, compared with companies that do not participate in carbon markets. Companies that buy carbon credits are more than three times as likely to have science-based climate targets than companies that don't - Conservation International

 

Claims that demand for carbon credits has crashed due to the criticisms and confusion were countered with evidence that sales of carbon credits from certified projects were stable or had increased.


Many companies are hesitant to buy carbon credits as the market faces criticism - Wall Street Journal


“Trove estimates that the primary market for VCCs could grow to reach nearly $2 billion this year”


I can understand why observers may feel confused and worried.


These events were brought into sharp focus in New Zealand at the end of last week when Toitū Envirocare, the government’s carbon certification organisation, announced that they will no longer support the use of New Zealand Units issued to permanent forestry projects in the New Zealand Emissions Trading Scheme to offset unabated emissions of organisations seeking Toitū’s net carbonzero certification. In my view, this decision was inevitable regardless of the international debate on integrity of the international voluntary carbon market. More on that later.

 

Long history of trade to compensate for emissions

 

The development of tradeable units to compensate for emissions has a sixty-year history, with the idea of developing environmental solutions through a market approach suggested as early as 1960. An experimental regulated market was operating in the 1970s in the United States to address the emissions that contributed to acid rain, while the first voluntary carbon-based units were developed in 1988 by the World Resources Institute, though the concept was also being explored in other countries around this time.

 

The first Assessment Report of the Intergovernmental Panel on Climate Change was published in 1990 and this informed the development of the United Nations Framework Convention on Climate Change which was adopted in 1992 at the Rio Earth Summit. This led to the development of the Kyoto Protocol and the establishment of an international regulatory carbon market based on several types of tradable carbon unit arising from either the Clean Development Mechanism or the Joint Initiative.


During this period, the United Nations standards for national greenhouse gas inventory reporting were also developed and published in 1996. The Kyoto Protocol was adopted in 1997, establishing the now-familiar framework for developing projects and earning carbon units. Carbon units were issued by the United Nations after scrutiny of the verification report by a separate executive board.


Concerns not new


Despite the validation and verification process being detailed, thorough and onerous, there was scrutiny and criticism. Concerns focused on additionality, leakage, impacts on local communities - especially Indigenous peoples - perverse environmental impacts, measurement credibility and governance.


The Kyoto Protocol trading mechanisms operated from 2008 to 2012 (first commitment period) and 2013 to 2020 (second commitment period) between countries with emission reduction obligations and countries with approved projects that could earn carbon units. The adoption of the Kyoto Protocol in 1997 provided the private sector with the future regulatory certainty it was seeking to justify investment in emission reduction and removal projects.

 

ClimateCare was one of the first organisations to work with the corporate sector to facilitate investment in voluntary projects. In 2001, they were contracted by The Co-operative Bank to replant part of the rainforest in the Kibale National Park as part of the bank's effort to create a carbon neutral mortgage product. ClimateCare went on to create a new market for clean burning ethanol cookers in Kenya. Now called Climate Impact Partners, the company supports and works with hundreds of voluntary projects throughout the world.


The Gold Standard began development of its voluntary programme in 2003 and the Voluntary Carbon Standard (now called the Verified Carbon Standard) was established in 2005. Both organisations provided standards, approved methodologies, independent validation/verification, and certification of projects leading to the issue of carbon units. The Gold Standard offered both voluntary carbon units and Kyoto units with an additional stamp of approval based on sustainable development goals also being met.


More scrutiny and criticism


In the lead up to 2008 when the first Kyoto Units were issued, the voluntary carbon market was developing fast but attracting scrutiny and criticism. A number of organisations, including CarbonZero in New Zealand, offered voluntary carbon credits based on their own bespoke standards as well as certification that enabled companies to make carbon neutral claims.


Once the Kyoto Protocol came into force in 2008, the compliance and voluntary carbon markets operated alongside each other. Organisations could hold accounts in the national carbon unit registries. This made it possible for organisations to purchase Kyoto units from project owners and trade them or voluntarily retire or cancel them to offset their emissions.


At the same time, various industry groups were working to establish the credibility of the voluntary carbon market. The International Carbon Reduction and Offset Alliance (ICROA) was founded in 2008, providing best practice guidance on how the different players in the voluntary carbon market were expected to operate if they wished to be members. Today, members can achieve ICROA accreditation subject to independent assessment of their operations against a set of rigorous requirements.


Risk of double counting


With the conclusion of the Kyoto Protocol and the adoption of the Paris Agreement, voluntary action became complicated due to the risk of double counting. Under the Kyoto Protocol, countries with emission reduction obligations could purchase carbon units from countries that did not have these obligations. However, under the Paris Agreement all countries have a Nationally Determined Contribution, which in most cases is an emission reduction obligation.


Because all countries have obligations under the Paris Agreement, it is highly likely that emission reductions associated with voluntary carbon units will also be counted for that country’s reduction obligation. Double counting can only be avoided if the project’s host country is willing to deduct those carbon units from its carbon accounts or the emission reduction has occurred in a sector not included in a country’s Nationally Determined Contribution.


Under Article 6.2 of the Paris Agreement, trading of Internationally Traded Mitigation Outcomes (ITMOs) can occur between countries provided the country selling these carbon units deducts them from the national carbon accounts used to report against their Nationally Determined Contribution. This mechanism is a corresponding adjustment.


Rules currently under debate at COP28


Article 6.4 of the Paris Agreement creates a global carbon market overseen by a United Nations supervisory body. Projects must be approved by both the host country and the UN before they can earn, and trade, United Nations-recognised credits known as A6.4ERs. These can be bought by countries, companies, or even individuals. The draft rules for creating and issuing these carbon units are being debated at COP28 which started yesterday. The host country is expected to provide a corresponding adjustment, as double counting will not be permitted in this “official” system. These units are unlikely to be available for some time.


Voluntary carbon units created outside the Article 6.4 system should not be used to make a carbon neutral claim. A contribution (to the Nationally Determined Contribution) claim has been proposed where double counting occurs.


Concerns have led to new standards


The concerns about the integrity of the voluntary carbon market have led to a range of initiatives such as the Oxford Principles, the Voluntary Carbon Market Integrity initiative, and white papers from a number of highly respected non-governmental organisations. The voluntary carbon market seems to have settled on the Integrity Council for Voluntary Carbon Markets and its Core Carbon Principles.

 

The Integrity Council has launched a programme assessment framework that will offer certification to carbon crediting organisations such as the Gold Standard and Verra. Verra has already submitted their application for certification. Toitū has signed up to the Core Carbon Principles in addition to its accreditation by the International Carbon Reduction and Offset Alliance.


A project that aims to reduce emissions and earn carbon credits is both an experiment and an investment with associated risks. The processes used by carbon crediting organisations are detailed and robust. The due diligence undertaken by the intermediary service providers who support projects, and facilitate access to carbon units is equally robust. These processes are not foolproof, but they have evolved in response to experience and learning. It is a market and markets adjust over time.


Changing standards in VCM - and changes to NZ ETS


Toitū Envirocare’s decision to stop using New Zealand Units was partly driven by the integrity adjustments taking place in the international voluntary carbon market. The decision was also driven by the changes that have been made to the Emissions Trading Scheme.


The Permanent Forest Sinks Initiative was established in 2006 and organisations were able to use these New Zealand Units for voluntary action. The scheme has been disestablished and replaced by the Permanent Post 1989 Forest category which will operate in the Emissions Trading Scheme from January 2024. The Ministry for the Environment has advised that the New Zealand Units issued to the new scheme are not suitable for voluntary action.


Through various consultations on the New Zealand Emissions Trading Scheme, a number of organisations called for the government to seek international recognition of the new permanent forest scheme; for example, through the International Carbon Reduction and Offset Alliance. Carbon crediting programmes operated by the Australian, Canadian, United Kingdom and United States governments have this international recognition.


NZUs don’t meet international integrity criteria


New Zealand Units are not able to be traded internationally and there are no linkages with other emissions trading schemes. Overseas customers of New Zealand exporters do not recognise the New Zealand Units issued to permanent forestry as meeting international integrity criteria. 

 

There are no other sources of New Zealand carbon units that can be used for voluntary action.


Earlier this year, the previous government undertook consultation on proposals to review the Emissions Trading Scheme to incentivise emission reductions. The Cabinet paper signalling the consultation included the following statement “A framework for how a domestic voluntary carbon market could work in Aotearoa New Zealand is being developed.” There are no details available on this proposed framework and the new incoming government has announced that the review has been scrapped.


Throughout its history, Toitū has continuously evolved in response to relevant scientific developments and international integrity expectations. It was the first programme of its type in the world to become accredited to ISO 14065, an international standard for bodies that certify greenhouse statements and carbon claims. That move was “encouraged” by the government to ensure that the voluntary carbon claims made by New Zealand exporters would be recognised by international market gatekeepers. This was about New Zealand’s international reputation.


The international gatekeepers are both customers and regulators. International customers have a sophisticated understanding of voluntary carbon markets and require independently verified carbon footprints, approved science-based emission reduction targets and accredited certification of carbon claims.

 

In my view, the Toitū decision to stop using New Zealand Units is as much about domestic policy and lack of supply as it is about the carbon market changes created by the Paris Agreement and evolving international integrity requirements.


NZ exporters might soon have to pay border carbon tax


With the introduction of the Carbon Border Adjustment Mechanism in Europe and other countries, New Zealand exporters, subject to this regulation, may need to pay the border carbon tax. We do not yet know how products that have been voluntarily offset will be treated. I would expect an A6.4ER used to make a voluntary carbon neutral claim to be recognised where there are border taxes.

 

“If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.”


The European Union is also developing a voluntary EU-wide framework to certify carbon removals generated in Europe. It sets out criteria to define high-quality carbon removals and the process to monitor, report and verify the authenticity of these removals.

 

“To receive certification, the carbon removals will need to be correctly quantified, deliver additional climate benefits, strive to store carbon for a long time, prevent carbon leaks, and contribute to sustainability. The proposal also sets out requirements for third party verification and certification of carbon removals, in order to harmonise the certification process, ensure environmental integrity and build public trust.”

 

Finally, a new international standard on carbon neutrality will be published tomorrow - ISO 14068-1 Climate change management - Transition to net zero - Part 1: Carbon neutrality. This standard also includes integrity criteria for the carbon units used to compensate for unabated emissions.


The voluntary carbon market will continue to evolve and present new challenges.


Dr Ann Smith, aka Professor Zero, is former chief executive of climate action certification organisation Toitū, and writes regularly at Letters from the Atmosphere.

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