Economics 101 – A First Win For Climate in a Long Time

VCMI Claims Code of Practice Gets It (Almost) Right

The CO2eco team has been very patient while financial markets and global climate proto-regulation continue their existential battle between the forces of internalised capitalism and the drive for a just economic transition.  At stake? Only the survival of the human race and much other life on Earth.

But this week came a major step forward when the climate market’s alphabet soup got a new poster child: the VCMI Claims Code of Practice.  Within the techie detail there are really significant investment demand drivers and supply-side flexibilities which boost confidence in climate finance. A silver-gold-platinum incentive scheme for corporates. The linkage with Science-based Targets Initiative for near term target-setting. The marriage with the Integrity Council (ICVCM) project quality standards. The inclusion of avoidance as well as removals – and better still, acknowledgement of beyond value chain offsets.

And the promise of more to come, including an “on-ramp” for companies who haven’t yet worked through all the data and supply chain complexity.

CO2eco applauds the clarity and transparency of the Foundational Criteria and the developmental, incremental approach which recognises that perfection is the enemy of urgent and massive climate transition investment. It promotes investment right now. It avoids the bear-trap of building duplicating rule-sets by working with the grain of the Core Carbon Principles, GHG Protocol, SBTI and others.

There is more work to do, much of it acknowledged by VCMI.  CO2eco would like to see GFANZ and its various member bodies in the financial sector throw their full support behind the Claims Code of Practice – this will galvanise contractual commitment to investment and start meaningful progress towards the $trillions AUM that will eventually be needed to turn the tide of climate and nature recovery. And to back up this commitment, we believe two issues need to be addressed.

Firstly, we want to see VCMI and ICVCM working with the accounting and legal professions and UNFCCC to quickly clarify carbon accounting rules.  It’s not only the Article 6 international transfers (ITMOs) that need to rapidly be put to bed but also the rigour of corporate carbon accounting treatments – we need to see the matching principle applied to carbon as it does for financial assets & liabilities and income/expenditure.  What does this matter?  For science-based net zero claims and targets to mean anything, residual emissions in a given accounting period should only be offset with removals that match that vintage, otherwise all sorts of silly games can be played – as they are at the moment when current year emissions are offset with historic REDD+ purchases in the secondary market.  If carbon is to become an authentic commodity – insurable, rateable, tradeable (spot/forward/derivative) – it needs to have credibility with mainstream financial reporting and auditing cycles. The matching principle in financial accounting must be applied to emissions and offsets.

Secondly, CO2eco wants to see corporate net zero claims being honestly and transparently supported by contractual commitment, whereby a forecast to deliver net zero must be supported by reporting of the proportion of the plan that has been legally committed to.  Foundational Criteria 3 should require the percentage of future reductions and removals targets that have been contracted for (capex and opex). Only this level of commitment demonstrates that the transition plan is credible.  And it has the benefit of driving early investment in mitigation projects. 

The various organisations* on the carbon market field of play need to hold hands and work as a team to solve these loose ends as soon as humanly possible, because capital needs to flow in its $trillions to mitigate and adapt to the climate and nature crises.  

*alphabet soup time…. team members include (but not limited to): VCMI, ICVCM, HLEG, SBTI, GRI, SASB, FRC & ISSB, GFANZ and all its constituents, CDP, ICROA and its members, IETA, TCFD, TNFD, and Article 6 negotiators in the run-up to COP28.