Response: Government Consultation on Voluntary Carbon and Nature Markets
The government consultation on Voluntary Carbon and Nature Markets is a welcome recognition of the importance of carbon markets in the fight against climate change and nature degradation.
The consultation looks to support the Voluntary Carbon Market (VCM) by providing structures, frameworks, and guidance to firms, whilst simultaneously helping to build the infrastructure required for a mature carbon market. Although the consultation lays a solid foundation, it still lacks depth, namely in the following areas:
Use of the VCMI Claims Code poses issues surrounding accessibility for global players, and capacity to scale. Clear, practical guidance and support for project developers, especially in emerging markets, will be essential to ensure integrity standards do not inadvertently restrict growth of the carbon markets.
The Government should be providing guidance in support of interim Net Zero targets and encourage the use of high integrity carbon credits to close companies’ emissions gaps, especially in respect to Scope 3 emissions, which often lie beyond a company’s direct control and are challenging to measure accurately. The use of carbon credits here is fundamental on the road to Net Zero.
The government should mandate that a certain percentage of a firm’s carbon offset portfolio should be in nature-based solutions. Moreover, nature-based credits should have their pricing reflected in the ecosystem services they provide (e.g. water regulation, habitat provision, soil health etc…) in addition to carbon sequestration. This could be done in line with releasing a standardised definition of ‘high integrity’, which includes a focus on co-benefits depending on the type of credit.
There is also a need for providing Contracts for Difference with the carbon market which could benefit from a UK Government backstop of credits. This could be done by the UK government using its own land (MOD etc.) to create projects and set floor prices and backstop pools for credits.
The UK Government needs to work to define the accounting treatment of carbon credits. Proper accounting treatment helps to build the business case for using a carbon credit, therefore helping relevant C-suite executives to understand clarity on financial exposures and risks, whilst supporting wider strategic decision-making. Being able to hold credits as an asset on the balance sheet will be a huge motivator for firms interacting with carbon markets and while this is now starting to be done, explicit government endorsement will help supercharge momentum.