Can the new European sustainable finance rules improve the integrity of voluntary carbon markets?

Abstract

In this Policy Brief we assess how new and pending EU legislation on sustainability reporting and disclosure can improve the integrity of voluntary carbon markets. Corporations use voluntary carbon credits to support their net zero strategies. Over a fifth of the 2000 largest public companies have now committed to net zero. The demand for carbon credits is growing with the number of these commitments. However, the integrity of these voluntary carbon credits remains questionable in the absence of clear rules on the monitoring, verification and reporting of the carbon emissions reduction or removal at the origin of the credits for Core Carbon Principles and an Assessment Framework. Under the slogan “build integrity and scale will follow”, the Integrity Council of the Voluntary Carbon Market has published a proposal, which focuses on the supply side of the market, i.e. the producers of carbon credits. In this Policy Brief, we focus on the demand side of the market: the corporations and financial market participants who buy these credits. We found that the European Commission proposal for the Corporate Sustainability Reporting Directive could establish the world’s first explicit and legally binding reporting standard for the use of voluntary carbon credits by European companies. If both sets of rules are enacted, the voluntary carbon market would get a major transparency boost. Other jurisdictions could learn from this experience to establish their own rules. The EU itself can also learn from this proposal, as the earlier Sustainable Finance Disclosure Regulation did not provide the same clarity on how to disclose investment in voluntary carbon credits or in companies that hold them. We recommend some regulatory changes and additions in order to complete the demand-side regulation of voluntary carbon markets.