The Biden administration has announced a comprehensive approach aiming to advance high-integrity voluntary carbon markets (VCMs) and drive private investment to accelerate decarbonization and achieve global net-zero emissions by 2050. The administration’s new policy statement underscores the role of VCMs in incentivizing businesses to reduce emissions, particularly in hard-to-abate industries, and the importance of private financing for projects that curb carbon emissions.
VCMs facilitate voluntary transactions of carbon credits, each representing one ton of carbon dioxide equivalent reduced or removed from the atmosphere. In contrast to compliance markets like California’s cap and trade program, VCMs are driven by corporate commitments to reduce emissions and achieve net-zero goals. Proponents argue that purchasing carbon credits allows businesses to financially support projects that generate emissions reductions or removals that would not have occurred otherwise, thus encouraging further investment in decarbonization technologies.
However, the role of carbon credits in achieving net-zero remains contested. Most carbon credits currently represent emissions reductions rather than removals, raising concerns about their effectiveness and potential for greenwashing. Addressing these issues, the Biden administration’s joint policy and principles highlight the need for rigorous standards to build confidence in credited emissions reductions and removals.
The administration’s policy aligns with global market-led initiatives and regulatory interventions, such as those by the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative. It supports the Commodity Futures Trading Commission’s regulatory role, the State Department’s work on Article 6.4 of the Paris Agreement, the Treasury’s expanded 45Q tax credit under the Inflation Reduction Act, and the Department of Energy’s carbon dioxide removal award, among others.
The policy emphasizes principles of supply and demand integrity and seeks to lower transaction costs, thus promoting market efficiency and integrity. For supply integrity, it calls for carbon credits to meet credible atmospheric standards and for credit-generating activities to avoid environmental and social harm. On the demand side, corporate buyers must measure, disclose, and accurately reflect their emissions reductions and the climate impact of their credits. The lowering of transaction costs is also underscored to improve market efficiency.
This governmental support for VCMs aims to enhance the market’s robustness, increase demand for carbon credits, and provide stable revenue streams for emissions reduction projects. The administration’s approach, while broadly consistent with market-led initiatives, is not overly prescriptive. It instead seeks to complement private-sector efforts to ensure the integrity of VCMs and stimulate innovation in decarbonization technologies.
The article from Kirkland & Ellis partners Paul Barker and James Dolphin provides a detailed analysis of the policy and its potential impact on the carbon market. Further details can be found on the Bloomberg Law website.