Final Report March 2022

‍

Customer:

Climate Change Committee (CCC)

‍

Customer reference:

BN/0222

‍

Confidentiality, copyright, and reproduction:

‍

This report is the copyright of MCC Economics Ltd (MCC) and has been prepared by MCC under contract Support summarising the Call for Evidence responses for Offsets dated 7 th March 2022.

‍

The contents of this report may not be reproduced, in whole or in part, nor passed to any organisation or person without the specific prior written permission of MCC. MCC accepts no liability whatsoever to any third party for any loss or damage arising from any interpretation or use of the information contained in this report, or reliance on any views expressed therein, other than the liability that is agreed in the said contract.

‍

Contact:

‍

PJ McCloskey

MCC Economics Ltd

Kemp House, 160 City Road, London, United Kingdom, EC1V 2NX

t: +447402255584

e: pj@mcceconomics.co.uk

Authors:

Shane Curran, Phil Wee and Sanah Sheikh

Approved By:

PJ McCloskey

Date:

31 March 2022

1. Introduction

‍

Purpose of the Work

‍

1. The Climate Change Committee (CCC) is planning on publishing a report on voluntary carbon offsets in 2022.

‍

2. The report will characterise the current and anticipated status of voluntary offset usage in the UK, evidence the risks and opportunities that accompany that, and generate recommendations for policymakers on how to direct voluntary offset activity in the UK.

‍

3. To inform the report, throughout February 2022 the CCC ran an online call for evidence on voluntary carbon offsets.

‍

4. The primary aim of this piece of work was to summarise the call for evidence responses, into a written report which can be published in 2022. Summarising the data

‍

5. A total of 56 stakeholders submitted responses to the call to evidence. Of these stakeholders, 16 were businesses, 5 were government agencies, 4 were individuals, 25 were NGOs, 2 were offset programme brokers, 1 was in research or academia and 3 were from other sectors.

‍

6. To summarise the data, all responses received were consolidated into a data table. This included responses received through the call for evidence online form and responses

received directly by the CCC by email. In parallel, all references to submitted evidence were highlighted, examined, and added to a summary table.

‍

7. Responses to each question were then initially analysed to develop a codeframe of common themes and issues, in order to group responses for further analysis and highlight areas of significant interest. All responses were then coded against this developed codeframe.

‍

8. This report provides an overview of these identified themes and issues discussed by respondents. Assessing the evidence

‍

9. A qualitative assessment of the evidence provided for each question (see Appendix C: Strength of evidence assessment) focused on three key dimensions, namely

‍

• Level of relevance of responses to the question, which considers the extent to which the responses seek to answer the question asked.

• Detail of responses, considering the extent to which the responses cover the different aspects of the question.

• Types of research cited, considering both the type and source of evidence provided.

10. This assessment of the quality of the evidence for each question was conducted in conjunction with the coding and analysis of responses, as the former requires an understanding of the relevance and detail provided for each question.

‍

Disclaimer

11. All views in this report belong to the respondents and do not necessarily represent theviews of MCC or CCC.

12. This report, therefore, aims to provide a snapshot of viewpoints and considerations seen in responses. As such, this report makes no claim that the views and statements included are true, accurate, or justified.

13. Further, the views and statements included in this report should not be taken as being representative of all possible respondents and are solely based on those of the individuals and organisations that responded to the Call to Evidence.

Overall risks and opportunities

‍

Overall Summary

‍

14. Most respondents highlighted risks relating to voluntary carbon offsets (VCO) markets transparency and incentives, carbon accounting concerns, and monitoring, verification, and reporting issues. Many respondents pointed to the opportunity VCOs present for directing private investment to tackle climate change, and the wider positive impacts that offset projects can have.

‍

VCO market issues

‍

15. Most respondents (39 of 51) suggested that the current status of the voluntary carbon market (VCM) represents a real risk. In particular, respondents noted that it may:

‍

• Provide credits that tend to be of lower quality and focus on offsets and reductions, rather than focusing on removals. This could lead to the market becoming saturated with options which do not meaningfully contribute to actual climate impacts as organisations make claims of carbon neutrality or net zero. Respondents note that widespread use of offsets by companies and public authorities can thus give a false impression of progress.

• Raise real concerns about the risk of illegitimate carbon claims, due to a lack of an appropriate governance and regulatory framework. Current rules and governance arrangements of different carbon crediting programmes differ widely, including on:

a) eligible mitigation activities

b) levels of transparency and oversight

c) effectiveness of third-party auditing

d) timings for when credits can be used

e) provisions to avoid double counting

• Need to address the current complexity and integrity of the market. Some of the infrastructure for a fully functioning carbon market in the UK has not yet been

‍

developed. For example, there is a lack of:

‍

a) price transparency, which is vital to success

b) clarity on the legal nature of voluntary carbon credits

c) a definitive threshold standard for high-quality credits or how those credits should be used as part of a credible net zero pathway

• Not yet be fully transparent, deep, standardised, or scalable and that this may inhibittrading and investment.

‍

Carbon accounting

‍

16. Many respondents (23 of 51) highlighted the risks related to carbon accounting. In particular, respondents noted that:

• The lack of permanence and additionality in both nature-based and engineered systems – paying for offsets when those reductions may well have occurred anyway.

• Double counting emissions reductions if robust accounting procedures are not implemented, in particular to avoid two entities, such as a company and a host country, claiming ownership for the same emissions reduction or removal.

• Leakage, where the offsetting scheme leads to increased emissions elsewhere. For example, superficial offsets observed in South America can see tree planting in one area be replaced by deforestation elsewhere.

‍

Monitoring, verification, and reporting issues

‍

17. Many respondents (20 of 51) identified that problems relating to monitoring, verification, and reporting (MVR) across the VCM represent very real risks. In particular, respondents noted that:

‍

• There is a lack of transparency and recognition that fossil and biological carbon arenot equivalent and that companies should assess and report emissions and removals from the two sources separately.

• Sequestered carbon must be scientifically measurable according to robust, highintegrity methodologies. With insufficient MVR many schemes will fail to deliver promised greenhouse gas abatement, further undermining trust in ecosystem markets. This will also create a barrier to a more effective and efficient market.

• Inaccurate and overestimated baselines may be used to calculate carbon credits.

• Greenwashing represents a reputational risk to companies, which can be through misleading or false claims, or inconsistent claims made by carbon offset providers that are difficult to monitor and verify.

• There is a trend for businesses in the UK to want a standard or formal verification of carbon neutral status to avoid greenwash accusations. However, respondents noted that currently, the only option is PAS 2060:2014, with the demand for this likely togrow.

‍

Private investment in tackling climate change

‍

18. Most respondents (29 of 51) suggested that the VCM presents opportunities for private nvestment to supplement government funding. Respondents noted that:

‍

• VCMs can finance tackling the interlinked climate and nature crises, while saving public money for other critical infrastructure and services.

• High-quality carbon markets play a role in raising ambition on climate action from corporates and governments, and direct significant sums of private finance into:

‍

a) restoring and enhancing nature

b) large scale habitat protection and restoration

c) peatland restoration

d) carbon positive farming practices

‍

• VCMs create a funding mechanism that can channel investment into new carbon mitigation and adaptation initiatives.

• Voluntary offsetting helps finance mitigation in countries where:

‍

a) costs and a lack of the required expertise are barriers to achieving more ambitious Nationally Determined Contributions (NDC)

b) a steady stream of financial flows can increase local capacity

c) it can accelerate the shift to low-emissions development paths Contributes to net zero

‍

19. Many respondents (24 of 51) argue that VCMs provide wide-ranging, flexible options toincrease and accelerate action to achieve net zero. In particular, respondents noted that:

• They provide the opportunity to reduce and remove greenhouse gas emissions at the speed and scale necessary to meet the 1.5°C goal.

• The acceleration allows time for harder-to-abate emissions to be tackled and thenecessary new technologies to be developed and implemented.

‍

Positive wider impact

‍

20. A significant number of respondents (17 of 51) mentioned the wider positive impact of VCMs. In particular, respondents mentioned:

‍

• That nature-based carbon credits and the restoration of nature can have the cobenefits of improving:

a) biodiversity

b) flood and drought resilience

c) air and water quality

d) crop yields

‍

• Research by Imperial College, which found that each tonne of carbon reduced has additional benefits such as:

a) poverty alleviation

b) infrastructure development

c) nature conservation

2.Quality and duration of offsets

‍

2.1. Summary of responses to Q2

‍

Over all Summary

‍

21. While some respondents highlighted available data on UK offset activities, most respondents suggest that there is limited data available on VCOs, particularly relating to the ownership, quality, pricing of offsets. Many respondents highlighted concerns about the use of data for greenwashing, while many pointed out the need for change in the future, particularly calling for increased regulation and use of standards.

‍

Some data or evidence exists

‍

22. A small number of respondents (6 of 38) reported that some data exists about activities that are being purchased and produced in the UK, which includes:

‍

• Data on the scale and range of offsets from peatland restoration projects, available through the official IHS Markit registry, which catalogues carbon units associated with each project and any sale of credits. Pricing is more difficult as this information is not publicly available for individual transactions. However, there is a broad price

range.

• The scale and range of the Woodland Carbon Code and Woodland Carbon Guarantee. Projects are also given a score for their potential to deliver biodiversity, water, community, and economic benefits. These two schemes are active in the UK, well-regarded, and referenced for use within corporate greenhouse gas reporting, which is under the government’s guidance for Streamlined Energy and Carbon Reporting.

• Research recently coordinated by WWF-UK and Green Alliance which estimated that about 600 square kilo metres of land in the UK is being managed under VCMs, equivalent to roughly the extent of Greater Manchester, or 0.25 per cent. of UK l This includes planned Woodland Carbon Code and Peatland Code projects and anassumed 147 soil carbon projects at 100 hectares each.

• However, there is limited evidence of the quality of Woodland Carbon Code andPeatland Code projects, given how recently such codes were established, whichhighlights a need for transparent ways of scrutinising the verification process forprojects, together with open consultation for improving the codes when newversions are designed.

‍

Little or limited data exists

‍

23. About half of respondents (19 of 38) reported that there is very little data on the range, price, and quality of voluntary offsetting activities, and that developing these insights is challenging, in the UK and globally. Respondents highlighted several points, noting that:

• Publicly available data confirms there is a significant supply of credits today, but it is unclear where they are located, which raises questions about scale and quality.

• There is an inability to uniformly track the ownership and retirement of credits, as information is not required to be reported in VCM registries, which aim to:

‍

a) track offset projects and issue offset credits for each unit of emissions reduction or removal that is verified and certified

b) create a credible, fungible offset commodity

c) record the ownership of credits

• As a voluntary market, it is difficult to obtain thorough information on purchased offsets as disclosure is not mandatory, with prices depending on factors such as the:

‍

a) type of habitat, for example, peatland, woodland, or soil

b) profile of the site restored

c) location

d) co-benefits

e) duration of the project

f) willingness of the buyer to pay

• The registry set up in the UK has limited flexibility and only allows end buyers to open registry accounts to hold carbon credits, which is dissimilar to the international carbon market.

• Even within public registries such as IHS Markit, Gold Standard, Verra and the UN Clean Development Mechanism (CDM), there is a lack of traceability and transparency on the trading of carbon credits.

• International credits under Gold Standard, Verra, Climate Action Reserve (CAR), and American Carbon Registry (ACR) make up the bulk of offsets, whereas the UK domestic market is limited in size and by its design is unable to compare or competewith demand, corporate requirements, and carbon efficiency.

‍

Gaps in data

‍

24. Many respondents (12 of 38) also referred to general and specific gaps in data, though this was not specific for the UK or globally. Respondents noted that these include limitations in:

‍

• The types of credits available under VCMs. Although some early-stage work is in development to provide transparency to buyers and the wider market, at present there is no clear and centralised data source for VCMs to utilise.

• The various origins arising from the different standards that the VCM actors follow and limited obligations for reporting.

• The purpose and evidence about completed transactions in relation to entities’ retiring credits.

• The nature of pricing, where sellers and buyers are not required to disclose the price at which credits are sold.

• The distribution of proceeds from the sale of credits, where there is a lack of clarity on the ultimate beneficiaries and the proportions that are received by brokers, intermediaries, or the underlying projects.

• The contribution of offsets to the UK NDCs when corresponding adjustments are fully implemented.

‍

Concerns about data and evidence

‍

25. Some respondents (8 of 38) identified concerns about aspects of data relating to VCO activities, such as:

‍

• Quality of VCMs, regarding whether credits on offer are of good quality. The available data puts this into question as, in 2021, activities which often have numerous flaws that undermine their quality or call into question their suitability for offsetting made up the vast majority of the 284 million total credits issued on the four largest VCM registries. These included:

a) 106 million credits from Reducing Emissions from Deforestation and forest Degradation (REDD+) activities

b) 105 million credits from renewable energy activities

c) 30 million credits from other nature-based activities

‍

• Greenwashing, with respondents stating concerns regarding the claims made by buyers on the purchase of credits, including incorrect or misleading claims. While there is no widespread data on this subject, the analysis that exists suggests that many buyers make inappropriate claims or exaggerate the actual impacts of the credits. This could be a result of the lack of both transparency and a regulatoryenvironment for these activities

• Types of VCM, as the market has rapidly increased in volume over the last five years, with the majority of this increase due to an upsurge in avoidance offsets rather than an increase in removals. As a result, and according to a recent paper published by Bloomberg New Energy Finance, the market could be oversupplied at present.

• Pricing of certain credits, as there are discrepancies between domestic and international offerings, such as REDD+ Lowering Emissions by Accelerating Forest finance (LEAF) pricing of USD 10 tCO2e in the UK.

• MVR and quality, as there is growing evidence that verification and certification mechanisms, such as Verra and Gold Standard, are not working to ensure the quality of offsets. This is potentially indicative of a problem with the structure of verification and certification mechanisms as a whole, as opposed to specific offset projects. A potential conflict of interest is also highlighted as certification companies and verification schemes can receive commissions for issuing offsets (on a per tonne basis), which could create a vested interest in positively verifying offset projects.

‍

Changes needed in the future

‍

26. Many respondents (12 of 38) identified the need for changes in the future that would enable better data on price, scale, range, and quality to be available. Respondents noted that these changes include:

‍

• Regulation, through a transparent and regulated trading body that will eventually have to be in operation, with sufficient volumes, to make carbon markets work

• Minimum standards to ensure transparency and that UK natural climate solutions is "High Integrity" in line with post-COP26, Article 6, which goes beyond MVR to communicating variation in carbon and importantly biodiversity co-benefits specific to a given offset

• A registry, with all carbon credit sales, purchases, and retirements listed on a government-owned public domain

• A clearer focus on quality, to recognise the difference between carbon credits which represent avoidance, reduction, or removal of greenhouse gas emissions aligned with the Oxford Principles. This is being driven both by regulators, who are starting to look at the issue in the context of potential greenwashing, as well as by the media and public opinion, which increasingly expects a robust focus on environmental integrity.

• A robust approach to assessing quality, to include the:

‍

a) wider benefits

b) locality of the credits to the emissions being offset

c) traceability of the credits

d) longevity of the credits

• An international market for VCOs, with the adoption of a variety of VCOs across global markets and a unified international approach for counting carbon offset under an international governance and compliance regime. There is existing precedent for such internationally administered schemes to exist in the global energy market, such as the Energy Charter Treaty. The UK government can lead here by encouraging overseas offsets, such as United Nations Framework Convention on Climate Change (UNFCCC) REDD+ to be correspondingly adjusted. In this way, UK-domiciled corporates can contribute to the climate finance of an overseas developing country while continuing to reduce the overall UK NDC

3. Voluntary offset market regulation andstandards

‍

3.1. Summary of responses to Q3

‍

‍