The pursuit of integrity and its impact on climate action

Carbon markets are at a pivotal moment. On one hand, there is the need to ensure integrity of credits. On the other, the perception of risk about credit quality may spook investors.

Pedro Moura Costa asks how to balance these forces to create the most climate impact?


Background: market confusion

The outgoing year saw an unprecedented interest in carbon markets. After a record year in carbon market investments, 2022 saw a flurry of private and public “regulators” publishing proposals on how to harness, govern and steer carbon markets. The various proposals and initiatives rallied behind the common but yet undefined concept of “integrity.”

An increasing number of NGO-led initiatives aim to influence corporate climate goals and carbon markets, including the Science-based Target Initiative (SBTi), the Integrity Council for Voluntary Carbon Market(ICVCM), the VCM Integrity initiative (VCMI), carbon credit rating agencies, and efforts to ‘align VCMs with Article 6” (including CAs).

Squeezed between the various requirements of integrity and an increase in allegations of corporate greenwash, carbon market buyers and investors occupy an increasingly uncomfortable space in the market. At the end, the rationale for corporates to engage largely depends on reputational gain which seems increasingly in question.  Lacking a clear regulatory anchor, the voluntary nature of the VCM makes it more complex, more vulnerable, and more volatile.

Indeed, there are first signs of significant market cooling. Large buyers stopped their carbon offsetting programs and the issuance of carbon credits decreased by one-fifth in the first half of 2022 (139 Mt) compared to the first half of 2021 (172 Mt).

Alternative approaches coming to market

It is important that we recognise that the VCM is not the only way to deploy climate finance. If the architecture of the VCM and offsets is dysfunctional, host countries, project developers and corporates will look for other approaches to raise funding (or deploy climate-related contributions, as in the case of corporates).

Some of these approaches overcome the orthodox rules of carbon markets, based on additionality, permanence and conservative measurements which are inherent to the individual project circumstances but may not be needed for large scale climate finance. For instance, both Uruguay and Chile issued NDC-linked bonds that pay lower interest rates if these countries to meet their NDCs.  The ‘sovereign carbon’ approach of Redd.Plus and Gabon provide another example of how to contribute to climate change mitigation relying on UNFCCC processes as opposed to VCM standards.  From the point of view of corporates, these may find easier to bypass the VCM by insetting their scope 3 emissions reductions within their supply chains, in the context of SBTi. More concerning, even, is if corporates decide to do nothing until regulation requires them to act.

Surprisingly, the ‘VCM establishment’ has not yet recognised that this trend could result in the demise of carbon markets, and continue to react strongly against these “innovations”.  Lack of integrity and safeguards are raised as concerns by many actors in this sector, stating that initiatives based solely on UNFCCC and NDC methodologies are not aligned with the protocols of Verra and Gold Standard. And, implicitly undermining the reputation of the UNFCCC process itself, creating additional risks to the viability of carbon markets as a whole.

Harmonizing integrity with reality, to ensure maximum climate impact

In the absence of a clear definition of integrity, this myriad of initiatives continue to create additional layers of scrutiny, rules and requirements on the creation and use of carbon credits. This, in turn, will further restrict the ability to scaling up funding to climate positive activities, in fear of supporting greenwashing.  In the process, many legitimate initiatives may not get funded as a result of the overzealous pursuit of ‘high quality’ and the fear of reputational risk.

It is important to define whether the amount of greenwashing purged by these nascent regulatory efforts outweigh the ‘false negatives’ that may be prevented from contributing to climate mitigation efforts. If not, regulatory ambitions need to be calibrated to ensure maximum climate impact for the bang.

The perfect may be the enemy of the climate.


Pedro Moura Costa is a director of BVRio Institute, member of the Steering Committee of the Voluntary Carbon Markets Integrity initiative (VCMI), Honorary Fellow of the International Emissions Trading Association (IETA), director of Oxford Climate Policy, non-executive director of ecosecurities Holdings S.A. and founder of Sustainable Investment Management.  The views expressed in this publication are those of the author, and not necessarily reflect the views and positions of these organisations.