This blog post originally appeared on trove-research.com in September 2023. MSCI acquired Trove Research — now known as MSCI Carbon Markets — in November 2023.
In March 2023, the Integrity Council for the Voluntary Carbon Market (ICVCM) launched its Core Carbon Principles (CCPs) — a set of 10 principles defining high-quality credits with a focus on governance, emissions impact and sustainable development.[1]
The CCPs will be operationalised through an Assessment Framework, split into two parts.[2] The first, the Programme-Level Assessment Framework, was published in March 2023 and assesses the integrity of the carbon-crediting programme (i.e., registry or standard) under which credits are issued and was published with the CCPs in March (watch our webinar on these here). The second, the Category-Level Assessment Framework, was published in July 2023 and assesses the integrity of different categories/types of projects that a registry issues. Over the summer, we published some initial reflections on the CCP Assessment Framework (here).
The ICVCM’s Core Carbon Principles
So far, the Assessment Framework only offers clues as to which projects may already be CCP compliant. As a next step, the ICVCM category working groups will assess whether different categories (i.e., methodologies) meet the CCP’s criteria. Exactly which credits meet the CCPs standards therefore depends on how the category working groups interpret the more nuanced sections of the framework.
To help guide market participants and investors on which way the ICVCM category working groups are likely to go, we have created a project-level ‘CCP-likelihood’ metric for over 4,000 registered projects. For each of the relevant CCP requirements, we analyzed individual project data to determine the likelihood that each project would fulfil them.
A pragmatic but demanding approach
The CCPs aim to strike a balance between a demanding yet pragmatic approach. We estimate that fewer than 20% of currently registered projects have a high or very high likelihood of being CCP eligible. In contrast, nearly 10% clearly fail a key part of the eligibility, while 45% of projects have a low likelihood. This likelihood differs significantly, however, across project types. While over 65% of carbon-engineering projects appear to have high likelihood of eligibility, fewer than 10% of renewable-energy projects do.
Estimated proportion of projects achieving CCP eligibility by project type
One of the key challenges in assessing CCP eligibility status, is the degree to which projects have previously had to document requirements that now form part of the CCP eligibility process. For example, based on existing project documentation, clean-cooking projects (categorised within energy efficiency) appear one of the least likely project types to meet the CCP’s additionality test requirements (common practice analysis and either barrier or investment analysis). This is because many of these projects were determined to be ‘automatically additional’ by their methodologies at registration, meaning they were not required to submit evidence or detailed documentation regarding their additionality.
Despite this, and as described in a recent webinar here, we have found that clean-cooking projects tend to be highly additional on average. More guidance is clearly required on how stringently these additionality tests will apply to projects that had initially claimed ‘automatic additionality’ from being CCP eligible, or if they will be required and/or allowed to submit more evidence.
Moving markets
If the CCPs were applied to all currently registered projects, and only those that were CCP eligible were allowed to issue credits, we estimate that issuances would reduce by between 50% and 80%. Such a material reduction in supply would have significant impact on carbon-credit prices. It remains to be seen, however, how strictly the CCPs would be enforced, when they would be applied and how the market would react to non CCP-eligible projects and credits.
Overall, it is unlikely that demand for non CCP-eligible projects and credits would completely dry up, hence we would expect credit prices to bifurcate, with CCP-eligible credits commanding a clear and immediate price premium. In our webinar on the state of integrity, more than 90% of over 300 respondents thought CCP-tagged credits would command a premium, with over 55% predicting over USD 2 (as shown in the exhibit below). Given the average price of a carbon credit at the time we ran the poll was just USD 6/tonne of carbon dioxide equivalent (tCO2e), this represents a 30+% premium.
Poll responses on price premium for CCP-tagged credits
Trove Research provides regular price forecasts for subscribers. On the supply-side, we model two scenarios — ‘loose’ and ‘tight’. In the loose scenario, quality standards are not widely adopted and hence it remains relatively easy to bring credits to market at low cost. In the tight scenario, quality standards like the CCPs are broadly adopted, supply is more constrained and costs are higher. By 2050, we anticipate average credit prices would be 50-80% higher in a tight supply scenario versus a loose supply scenario.
The end of project integrity?
The likelihood of CCP eligibility does not align completely with underlying carbon-credit integrity, as measured by our carbon-credit integrity assessments on over 4,000 projects. This is not surprising as the CCPs are designed to assess crediting methodologies rather than carbon-credit projects. For example, some projects can be high quality, having gone above-and-beyond what was required by their methodology, but still not be CCP compliant, often due to a lack of documentation.
Overall, the introduction of the CCPs will be a major step forward for the global carbon-credit market, as it will start the formal process of defining what good looks like. This is essential for confidence in the market to continue to grow. The next challenge will be in implementing the CCPs and dealing with the legacy of issued and retired credits from sub-standard projects.