Carbon credits: the integrity challenge

Regulators are increasingly turning their attention to corporate climate action and particularly the use of carbon credits. Agreena’s Claudia Herrmann, Head of Regulatory & Standards Affairs and Frederik Aagaard, Chief Commercial Officer, review recent regulatory updates and assess their likely impact.

Are you keeping up? Corporates are operating in an increasingly complex regulatory landscape and we’ve seen a recent uptick in regulatory activity focused on corporate climate action, and the use of carbon credits especially. 

It’s not surprising that regulators are paying greater attention to carbon credits and the voluntary carbon market. Demand for carbon credits continues to grow – a record 164 million credits were purchased and retired in 2023, up by 6% from 2022 (BloombergNEF). Demand is also likely to keep climbing in line with the growing consensus that carbon credits are a vital component of efforts to combat climate change.

So what are the key regulations you need to be aware of if you’re buying, or considering buying, carbon credits? We’ve put together a list of notable recent regulations and what they might mean for your business:

EU: Corporate Sustainability Reporting Directive (CSRD)

By 2027, over 50,000 companies will need to comply with the EU’s Corporate Sustainability Reporting Directive (CSRD) framework.

The new rules update the 2014 Non-Financial Reporting Directive (NFRD), and bring sustainability reporting in line with financial reporting. Companies previously reporting through NFRD are required to report under CSRD, along with listed and non-listed organisations fulfilling two of the three following criteria: those with 250+ employees; an annual revenue of more than €40 million; and companies with over €20 million on the balance sheet. The rules also apply to non-EU companies with a turnover exceeding €150 million in the EU.

What this means for companies: 

As part of CSRD, companies will need to report in line with new European Sustainability Reporting Standards (ESRS) on a ‘double materiality’ basis. This considers a company’s impact on both people and the environment and encompasses the resulting financial risks and opportunities. 

There are 12 areas to report on, such as climate, pollution, and biodiversity and ecosystems. 

Annual disclosures will show Scope 1, 2 and 3 emissions, as well as any carbon credits purchased. They will need to disclose information about the quality of these credits, for example, the source and methodology followed. Importantly, emission reductions, removals and carbon credits will need to be disclosed separately, and carbon credits are not permitted to be counted towards a company's emission reduction/removal target.

By choosing to work with reputable partners that offer high-integrity credits and comprehensive data on Scope 3 emissions, companies can ensure they meet CSRD requirements.

EU: Green Claims Directive

Awaiting approval is a new EU law – the Green Claims Directive – that is set to tackle greenwashing by regulating the environmental claims companies can make about their products and services.

What this means for companies:

Under the proposal, claims will need to be substantiated with widely recognised scientific evidence and follow strict rules about how they are communicated. Claims will apply on a ‘life-cycle’ approach, from raw materials to end-of-life, and will need to be independently verified.

The Directive also covers claims related to carbon offsets and carbon credits, and terms such as ‘carbon neutral’, ‘climate neutral’, ‘climate positive’ and ‘net zero’. The proposal stipulates that ‘companies should focus on reducing emissions in their own organisation or value chain’ but unavoidable emissions can be addressed using carbon credits. A company would then have to transparently communicate how credits are being used – for example, as a QR code on product packaging that explains the quality of the credits.  

Recent criticisms of the voluntary carbon market have meant several companies have resorted to greenhushing (keeping quiet about their credit purchases) or taking no action. This regulation, while pushing for transparency, also lays out how companies can be confident in their ability to create a positive impact by opting for high-quality options that are certified under reputable standards.

US: Climate Corporate Data Accountability Act (SB 253) and Voluntary Carbon Market Disclosures Act (AB 1035)

The State of California has recently signed into law climate bills that have similarities with the EU’s CSRD and Green Claims Directive. The new legislation is designed to compel companies to develop a transparent and measurable decarbonisation plan and reduce the amount of greenwashing.

SB 253, the first of its kind in the US, requires companies doing business in the state of California with total annual revenues above $1 billion to report on their Scope 1 and Scope 2 GHG emissions from 2026, and Scope 3 GHG emissions by 2027 (and every year after that date). Meanwhile, AB 1035 requires businesses selling voluntary carbon credits to disclose specific details on their website. Companies buying voluntary carbon offsets must also provide information, such as the source of the offsets and details backing up any claims such as ‘carbon neutral’ and ‘net zero emissions’.

What this means for companies:

While California’s Climate Corporate Data Accountability Act will undoubtedly have an impact, many large companies doing business in the US, as well as operating in Europe, are already complying with similar regulations. SB 253 will largely put pressure on smaller businesses to calculate and develop plans for their Scope 3 emissions.

With greater scrutiny on companies covered within the scope of AB 1035 in regards to selling and buying carbon credits, organisations will need to focus on high-integrity carbon credits purchased from reputable sources.

US: Enhancement and Standardisation of Climate-Related Disclosures for Investors (currently on hold)

Intended to take effect starting in  2025 (although currently paused), the Securities and Exchange Commission (SEC) has adopted mandatory rules that will require large public companies to disclose short- and long-term physical climate risks to their assets, and any spending related to their climate goals, such as purchases of carbon credits or renewable energy credits. From 2026, they will also need to disclose their Scope 1 and Scope 2 emissions if they are considered ‘material’, or as having a significant financial impact on a company.

What this means for companies (if implemented):

Action by the SEC is a clear indication of times to come and how companies need to adapt to the new reality of grappling with climate change in a very transparent manner. While the non-inclusion of Scope 3 emissions is notable, it is still a positive development (assuming implementation). It paves the way for the mainstreaming of corporate climate action and brings it into every board room.

The fast-developing landscape of rules, regulations and guidance make the need for transparency, due diligence and robust data indispensable for companies seeking to use carbon credits to deliver on their ESG goals. 

At the very least, companies need to be confident that the credit they’ve purchased represents the removal of one tonne of carbon dioxide from the atmosphere and durably sequestered – and they’ll need to demonstrate this to the satisfaction of regulators and the public. 

As we’ve seen, companies will have to disclose where they buy their carbon credits, their methodology and the standards they are held to. Whether it’s on a website, in a report or on the side of a product, this will need to be shared publicly. As disclosures become the norm, so the risks associated with poor-quality credits and demand for high-integrity nature-based credits will grow. 

Research by Ecosystem Marketplace confirms this, buyers increasingly want ‘high-integrity, high-quality carbon credits that have holistic co-benefits beyond the mitigation of greenhouse gas emissions’. Our own discussions with credit purchasers also support this.

So what should companies look out for when considering a credit purchase? We recommend focusing on the following:

– Robust Measurement, Reporting and Verification (MRV) capabilities, along with rigorous methodology and in-depth knowledge of regulations and standards

– Nature-based projects, such as those supporting farmers’ transition to regenerative agriculture, that deliver a wider array of co-benefits for people and the planet

– Projects removing carbon dioxide at scale from the atmosphere right now – rather than delaying action and waiting for new technologies to be developed.

Carbon credits help companies achieve their sustainability goals alongside other mitigations, but to comply with regulations and optimise the investment impact, companies must be prepared to disclose more information than ever about their credit purchases and to demonstrate the integrity of these credits beyond any doubt.

Agreena is a leading developer of high-integrity carbon credits generated through nature-based solutions. We work directly with farmers to implement regenerative agricultural practices that capture carbon dioxide from the atmosphere, as well as providing potential additional benefits including improved soil health, increased biodiversity, and greater resilience to climate impacts. 

If you are interested in learning more about how Agreena can help your company achieve its sustainability goals, please contact us at carbonmarkets@agreena.com.