Policy news round up - October 31 2023

1. EU's carbon removal certification bill passes first Parliament step with wide support

Summary

The EU’s first draft legislation defining a framework for certifying carbon removals was backed almost unanimously during a vote in the European Parliament’s cross-party environment committee on Tuesday. Technologies judged to be permanent currently include direct air capture and storage (DACS) and bioenergy with carbon capture and storage (BECCS), but not biochar, afforestation or enhanced rock weathering. Also defines two additional categories beyond removals: carbon farming and carbon storage in products. The next step is a parliament vote in November. Full text here. 

So what?

The next steps of this process are to define specific methodologies for removals and define how these credits can be used. This will interact with recent EU legislation such as the empowering consumers directive and also will be a key part of discussions about what credits can be included in the EU ETS.

2. China issues key regulatory framework for 2023 VCM restart

Summary

The Chinese government greenlighted a set of regulations for its domestic voluntary carbon market (VCM), signaling a major step towards relaunching the scheme before the end of this year, according to an official document released on Friday. Full text here.

So what?

The Chinese VCM has been suspended for more than 6 years, with the ETS only covering the power sector. Reviving the scheme could create demand for 350-400 million credits a year through inclusion in China's ETS. Some expect the ETS to expand to more sectors in coming years, perhaps accelerated by the EU's CBAM, expanding it to cover 7-8 billion tonnes of emissions a year.

3. Voluntary carbon market mulls future ahead of crunch Article 6 crediting talks

Summary

As observers hope for clarity about crediting carbon projects under Article 6 of the Paris Agreement at the fast-approaching COP28 climate talks, key players in voluntary carbon are weighing up how the embattled market may fit alongside the UN mechanism. Full text here.

So what?

This is an interesting deep dive into how Article 6.4 markets could impact the voluntary carbon market - with some commentators suggesting the VCM should fully transition to Article 6, but others pushing back strongly against that. As discussed last week, it's likely to be 2026 before we see 6.4 credits - so there is still time for the market to adapt.

4. Primary voluntary carbon investment holds up in 2023 even as prices crash

Summary

Despite the criticism facing the voluntary carbon market, early-stage investment has held relatively firm in 2023, with some in the market pointing to an emergent 'flight to primary' trend, as investors seek to avoid reputational risk in secondary and tertiary credit buying and instead channel capital directly into project development. Full text here.

So what?

Businesses of all sizes are looking to invest upstream, or in other words, fund carbon projects early in development before credits have been issued on the market. To learn more about the different stages of a carbon credit's lifecycle and how pre-issuance projects are a viable opportunity to create a high-quality credit supply, read here.

5. More companies retiring voluntary carbon credits this year despite a downturn in overall volumes

Summary

Thousands more companies have retired carbon credits this year than last, data show, even as negative media coverage has seen buyers back away from the market and prices crash. Full text here.

So what?

Data showing that digging into retirement data shows a potentially more optimistic picture than headline numbers. Although retirements are down nearly 20% YOY, most of this trend is driven by three major buyers retreating. 63% of companies are retiring more credits this year, and more small buyers are entering the market, but it is still true that retirements are dominated by relatively few big buyers. It's also worth highlighting that a significant proportion of retirements are still unmatched by buyers - highlighting the huge problem the VCM has with a lack of transparency and therefore the potential impact of upcoming disclosure rules.

6. EU Commission to delay adoption of sustainability reporting standards by 2 years

Summary

Europe’s executive arm is proposing a two-year delay in implementing a key element of its sustainable finance framework, as complaints mount that businesses can’t keep up. The European Commission said cutting red tape is critical to ensuring that the region’s companies remain competitive, according to a document laying out its agenda for 2024. That means extending the deadline for the adoption of sectoral elements of the European Sustainability Reporting Standards, or ESRS, currently due to come into force in June. Full text here.

So what?

This stalling will not affect disclosure requirements around carbon credit use for EU companies (under the CSRD). However, it is a reflection that while some parties in the EU parliament are keen to enact world-leading climate rules, it is seen by others as an undue burden to business. Similar objections are a key reason for the long delay to the SEC’s disclosure proposal in the US.

7. IC-VCM, VCMI guidelines in line with new California rule: law firm

Summary

Legal analysis suggests that companies will be in compliance with California's new Voluntary Carbon Market Disclosures Business Regulation Act (VCMDA), also known as AB1305, if they follow ICVCM and VCMI guidance. Full text here.

So what?

From the legal analysis of California's AB1305, this rule could affect any company 'with a connection to California, even if seemingly remote', and carries a hefty penalty for non-compliance. Guidance exists to empower credit buyers to act with confidence, and better transparency is much more of a risk for companies doing nothing than those following the guidance and trying to do the right thing.

8. Malaysia unveils tax break to boost VCM participation

Summary

Malaysia's government has unveiled tax breaks in its 2024 budget plan for companies developing carbon projects in a bid to encourage greater participation in the country's voluntary carbon market (VCM). Prime Minister and Finance Minister Anwar Ibrahim proposed Friday a tax deduction of MYR300,000 ($63,450) for companies for "costs incurred" in the development and monitoring, reporting and verification of projects. Full text here.

So what?

As many host countries look to tighten up carbon trading rules and access a bigger slice of the pie, Malaysia is offering tax breaks to developers. The breaks only apply if credits are sold through Malaysia's own marketplace, incentivizing domestic trading.

9. First integrity-tagged voluntary carbon credits delayed to early next year

Summary

The first batch of credits to be tagged with the Integrity Council for the Voluntary Carbon Market's (ICVCM) label of quality will now be seen in "early 2024", rather than the previous end-of-year target, the head of the cross-stakeholder initiative said on Friday. Full text here.

So what?

The complexity of the task facing the ICVCM means it is not surprising that its assessments are taking longer than the ambitious first estimates. However, many market players will be unhappy with this news, as the uncertainty around how credits will be judged is being cited by some as a key reason for the market slump this year.

10. UN implies first Article 6.4 activities unlikely to start until 2026

Summary

The first accreditation assessments by validation and verification bodies (VVBs) under Article 6.4 of the Paris Agreement are unlikely to occur until late 2025 or 2026, and that assumes the process is finalized and agreed at COP28 in Dubai, according to draft procedures published by the UN on Tuesday. Full text here.

So what?

After several supervisory body meetings where very little progress was made, there is more optimism for upcoming meetings and COP. However, even if these discussions go smoothly, it is expected to take many months to address all unresolved issues. After that, as we've seen in many news updates recently, host countries will want time to adjust their rules and infrastructure, and projects also take time to implement.