The carbon-credit market has often suffered from criticisms of low quality, with projects accused of overstating their environmental and societal benefits. These allegations received significant media attention last year and likely contributed to a 28% fall in volume-weighted average credit prices during 2023, according to our analysis.
The Integrity Council for the Voluntary Carbon Market (ICVCM) was set up in 2021 to try to tackle such concerns. Just over a year ago, in a major milestone, it launched its Core Carbon Principles (CCPs) — a set of 10 principles that define what is required for a carbon credit to be of high integrity, with a focus on its governance, emissions impact and sustainable development.
The ICVCM’s CCPs
Today, the ICVCM passed its biggest milestone yet — announcing the first methodologies that meet the category-level criteria of its CCPs, following its approval of the first five CCP-eligible programs in April and May.[1] The seven CCP-approved methodologies are:
Landfill-gas methodologies[2]
- ACM0001 – Flaring or Use of Landfill Gas versions 15-19, used by Verra and Gold Standard
- AMS-III.G – Landfill Methane Recovery version 10
- ACR’s Landfill Gas Destruction and Beneficial Use Projects version 1-2
- CAR’s US Landfill Protocol version 6
Ozone-depleting substances
- ACR’s Destruction of ODS from International Sources version 1.0
- CAR’s Article 5 Ozone Depleting Substances Project Protocol versions 1-2
- CAR’s US Ozone Depleting Substances Project Protocol versions 1-2
These categories across the five CCP-eligible programs cover 99 projects that have issued credits to date, which represent 1.6% of currently registered projects and are equivalent to 1.2% of total credits issued to date (and 1.4% of credits issued in 2023). The individual CCP eligibility of over 5,000 registered carbon projects will soon be visible on the MSCI Carbon Markets platform.
Low on beauty, high on integrity
Landfill gas is not the most glamorous type of voluntary carbon project — unlike, say, reforestation of degraded land or new technologies to capture atmospheric carbon dioxide. However, landfill-gas projects represent 56% of the initial credits to receive CCP eligibility in today’s ICVCM release.
For existing MSCI Carbon Market Integrity subscribers, this should not be a surprise. When we launched our CCP likelihood indicator in September 2023, landfill gas was one of the project types we identified as most likely to receive CCP approval. We have since completed, and recently published on our platform, detailed project-by-project integrity assessments[3] for over 300 landfill-gas projects, as well as a deep-dive report on landfill gas integrity. When placing a high weighting on emissions-impact integrity,[4] such projects had one of the highest average ratings across all project types. This was particularly the case for those landfill-gas undertakings that are “flaring only”, which aligns with the initial set of CCPs that exclude large-scale “flaring and electricity” projects at this time.
Landfill gas is a relatively mature and well-understood project type. Decaying rubbish in municipal landfills generates methane that can be collected and either sold as a replacement for natural gas or used to generate electricity. Or, if those options are not available, it can be “flared,” or burnt in situ, so that the emission is carbon dioxide rather than methane, a relatively more damaging greenhouse gas.
Though there can be considerable variation at the individual project level, particularly driven by regulatory risks and common practice concerns within certain regions, these projects can be high-integrity across all our emissions-impact criteria (additionality, quantification and permanence). For instance, key quantification assumptions tend to be based on relatively reliable measured or metered data, and flaring-only projects tend to have high financial additionality as they receive no revenue other than carbon credits (assuming flaring is not required by regulation).
One important integrity risk factor for landfill-gas projects relates to estimates for the oxidation factor. This represents the amount of methane generated that would have been oxidized to carbon dioxide. MSCI Carbon Markets uses geospatial inputs on the key drivers of oxidation factors, such as soil type, moisture and temperature, to create a unique model that evaluates the appropriateness of each project’s oxidation assumption.
As shown in the exhibit, our modeling identified consistent underestimation of this oxidation factor by projects, which results in some overestimation of their emissions impact. Despite this, overall quantification risks for landfill-gas projects remain relatively low, as oxidation factor underestimates are often offset by conservative GWP[5] assumptions, exclusions of key emissions impact sources and reliably metered data for other estimates.
Oxidation factors used in landfill-gas project assumptions compared to our modeled oxidation factors, across 12 markets
The positive characteristics of landfill-gas projects tend to be reflected in credit prices. In mid-March this year, landfill-gas credits averaged USD 9.50 per tonne of CO2 equivalent, well above the average for the whole voluntary carbon market of USD 5.50. Pricing data for landfill gas has so far been patchy, however, and many credit buyers have concentrated on other more-glamorous-sounding project types.
The start of a bifurcated market?
To take an analogy from the bond markets, the CCPs were designed to allow buyers to differentiate between “investment-grade” (i.e., CCP labelled) and “high-yield” (or “junk”) carbon credits. Proponents hope that CCP-labelled credits will now become broadly accepted as being of sufficient quality for corporates to make claims of positive action. Until now, the difficulty of making such claims has been a key barrier to market growth.
The initial CCP-approved categories appear to have made this differentiation. Of the 3,500+ projects MSCI Carbon Markets has assessed on a detailed project-by-project basis,[1] around 50% received an emissions-impact integrity of lower than 3 out of 5, but only 3% of landfill-gas projects did so.
As with bonds, underlying quality will still vary among projects that achieve investment-grade (i.e., CCP-approved) status, and risks are not fully removed, but successfully marking projects as highly likely to be above an investment-grade bar is a major step forward for the market.
The next major challenge for the ICVCM is how to judge project categories where variability in integrity at the individual project level is greater. High-quality projects do exist within lower-quality methodologies and transitioning to CCP-approved methodologies could take time for such projects. Therefore, at least for a transition period, while CCP labels should give buyers confidence of investment-grade status, non-CCP credits should not automatically be viewed as low grade.
The ICVCM will release new approved categories over the coming months, and it has said it hopes to have completed its CCP assessments for the vast majority of credits on the market by the end of this year. MSCI Carbon Markets expects at least 15% to 20% of issued credits to eventually achieve CCP labels (see our previous blog post on this here). While attention will continue to be paid to future announcements from the ICVCM, in the near term, tracking prices of the newly CCP-labelled landfill-gas projects will provide interesting insights on the potential “CCP premium.”