Comment Text:
BeZero Carbon welcomes the opportunity to comment on the CFTC’s request for information on Climate-Related Financial Risk. Our comments, feedback and recommendations pertain to the Voluntary Carbon Markets (VCM), specifically Question 22, related to “ways in which the Commission could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets”.
We wholeheartedly support the intention to enhance the integrity of the VCM and foster transparency, fairness, and liquidity in those markets. This purpose is very much aligned with BeZero’s own mission to provide ratings, research and analytics that help market participants assess quality and manage risk, that help to build and scale the VCM, and that ensure the VCM contributes positively to global climate change mitigation goals.
Summary Conclusions & Recommendations
As outlined in the sections below there are a number of features of the current market setup that hamper that mission. Here we summarise our recommendations to the Commission to address and overcome these obstacles to increased integrity in the VCM.
While this could be achieved through voluntary industry initiatives such as the IC-VCM, the Commission could also consider tougher rules and regulations that mandate this (as we see in other asset markets).
1. Raise levels of transparency and disclosure from VCM projects
BeZero advocates measures that lead to raised levels of transparency and disclosure from VCM projects. Mandating much stronger minimum standards of disclosure addresses a key flaw in the VCM as it exists today.
BeZero considers the provision of basic project information (e.g. on the project location and proponents) to be essential for all stakeholders and the wider public to gain confidence in the VCM. Moreover, much of the proposed disclosure requirements should not be onerous for developers or standards bodies to implement.
Evidence of additionality represents a key disclosure requirement. This is a fundamental criteria to assign a BeZero Carbon credit rating. However, we advocate this be adopted more widely in the VCM given it is the single most important component of value of a carbon credit.
2. The key building blocks of carbon credit issuance should be available to market participants.
The key building blocks of carbon credit issuance should be readily accessible, standardised and straightforward to interrogate for all VCM projects. Provision in spreadsheet format should become standard in the industry. In particular, if carbon credits are to be treated as a physical commodity, the underlying carbon accounts are essential to underpinning market integrity.
3. Foster greater standardisation and consistency of reporting and information disclosure across the global VCM.
In addition to raising levels of disclosure at the project level, better disclosure and higher quality data should lead to greater consistency. The industry should aim to achieve such consistency particularly between data reported in project documentation and data provided on registries.
4. Risk buffer pools need to be implemented and managed more effectively.
Risk buffers are designed to mitigate the risk of reversals in carbon projects. However, in our view, they fall short of providing adequate system-wide insurance of the risks posed.
We highlight three key factors where more work is required to provide broader insurance products to help scale the market: 1) Project-specific risk assessments vary considerably across registries, meaning buffer pool contributions may not always match the risk profile of the project. 2) How the risk buffer is practically used in the case of reversals varies across registries and is not always clear from public disclosures. 3) Market participants need more sophisticated tools that better model risks and match the payouts to the losses in case of any reversal events.
5. Nature based projects should disclose their location and boundaries in a geospatial file format.
BeZero recommends the inclusion of a requirement that shapefiles are provided by nature-based project developers, as this facilitates external earth observation interrogation of project assumptions. These should not be limited to the project area, but all associated regions such as the reference and leakage management areas.
6.Encourage a standardised definition of commitment periods be used and applied across standards bodies.
Considering how commitment periods vary from sector to sector, a key issue for assessing non-permanence risk in carbon projects is ensuring fungibility across credit types, i.e. allowing comparative assessments for different project types with different commitment periods. This can be achieved by making assessments of the likelihood that a project’s carbon benefits will remain for the duration of its commitment period, using both top-down and bottom-up analyses.
This is particularly relevant for nature-based and removals projects, where understanding the carbon storage dynamics is key to integrating credits into a broader carbon accounting framework.
7. Robust independent third-party validification and verification
BeZero advocates for more standardised frequency of reporting requirements across accreditors, as current approaches vary significantly.
We would also like to see more robust safeguards against conflicts of interest. Currently, project developers choose and pay for auditors, which could create incentives for auditors to validate and verify projects less scrupulously. One way to counteract this is to introduce greater transparency requirements on auditor performance, which would allow buyers to make more informed decisions. Best practices such as auditor rotation should be widely adopted (also common in compliance markets).
The full version of these comments are provided in the attached pdf document
