LuxCS in Focus Series 3: International Codes of Best Practice

The voluntary carbon market is NOT a free-for-all!

One of the challenges of the voluntary carbon market is to deal with the lack of government regulation, which can generate public distrust and open the door to inconsistencies in projects to reduce and remove GHG emissions. However, this does not mean that the market does not have quality criteria or standards. On the contrary, the market regulates itself and adopts principles and behaviors that must be followed by all involved, from project developers to credit buyers.

There are international codes of best practice, which set strict requirements for the certification of carbon credits, ensuring that they represent real, measurable, additional and permanent benefits for the climate and society. These codes are in a constant process of improvement, seeking to incorporate the best scientific evidence and market demands.

There are organizations from various parts of the world that are dedicated to thinking, organizing, generating guidelines and supervising the voluntary carbon market. The work of these institutions is vital for confidence in the carbon market, as it ensures the quality, credibility and integrity of the credits issued and traded.

At LuxCS, we are committed to acting ethically, responsibly and sustainably in all our projects to reduce and remove greenhouse gas emissions. For this reason, we strictly follow these codes, which are globally recognized quality standards that guarantee the credibility, integrity and transparency of the carbon credits we generate and trade.

But what are these international codes of best practice and why are they so important to our work? In the third part of our LuxCS in Focus Series, we will present some of the main international codes of best practice that we have adopted at LuxCS and how they help us ensure the quality and reliability of our projects.

International codes of best practice are sets of standards and guidelines that guide the development, implementation and verification of projects to reduce and remove emissions in the voluntary carbon market. These codes seek to ensure that the carbon credits generated by the projects have credibility, integrity and transparency, in addition to contributing to the sustainable development of local communities and the conservation of biodiversity.

The International Organization of Securities Commissions (IOSCO), one of the leading international regulatory bodies, has recognized that these aspects are essential for building investor confidence, as carbon markets represent a remarkable emerging financial market aimed at combating climate change.

IOSCO has published a consultation proposing a set of 21 best practices aimed at promoting the integrity and orderly functioning of Voluntary Carbon Markets (CVMs). These practices involve four main themes:

1.       Regulatory framework: This refers to the practices and regulatory frameworks that govern the carbon credit market. These practices include: regulatory approach and scope; regulatory treatment; domestic and international consistency and cooperation; skill and competence of the participants.

2.      Emissions in the primary market: Refers to the issuance of carbon credits in the primary market. This involves standardization; transparency; disclosure; solidity and accuracy of records; due diligence[1].

3.     Secondary market trading: This refers to the trading of carbon credits in the secondary market. This includes access to the VCMs; integrity of the negotiation; public reporting; pre- and post-trade disclosure; derivatives standards; governance structure; risk management; conflict of interest rules; inspection actions; surveillance and monitoring of the trading market; trading venue resources.

4.     Use and disclosure of use of carbon credits by buyers: Refers to the use of carbon credits by buyers to offset their own emissions or contribute to climate change mitigation and the disclosure of such use.

International codes of best practice must be followed by all voluntary carbon market agents, within their spheres of action, as they ensure that carbon credits are recognized and accepted by buyers, intermediaries, and registration and trading platforms. In addition, international codes of best practice help to avoid duplication, overlap or double counting of carbon credits, as well as to prevent fraud, conflicts of interest or human rights violations.

The voluntary carbon market is based on integrity, credibility, and transparency. Any deviation in conduct can threaten market confidence.

As a certifier, the Lux Carbon Standard does not have the competence to act in the regulatory framework of the voluntary carbon market, as this is a function of national and international public authorities. Lux Carbon Standard also does not trade carbon credits, as this would compromise the integrity of the negotiations and could generate conflicts of interest with the projects it certifies. The role of the Lux Carbon Standard is to act in the issuance of carbon credits, verifying the compliance of projects with environmental, social and governance requirements, and ensuring that credits are registered and tracked on reliable platforms. In this way, the Lux Carbon Standard contributes to sustainable development and the transition to a low-carbon economy.

Lux Carbon Standard is committed to operating in accordance with the highest standards of integrity and transparency in the carbon credit market. We rely on a number of recognised international codes of best practice, including those established by the International Organisation of Securities Commissions (IOSCO), the Voluntary Carbon Markets Integrity Initiative (VCMI), the ICVCM and the ICROA.

In addition, we are attentive to the needs brought about by the IFRS-S2 standard and the European CSRD, and we are constantly updating our practices to comply with these important regulatory frameworks.

In addition, Lux Carbon Standard is committed to maintaining transparent and ethical relationships with all our stakeholders. This includes our customers, partners, investors, and society at large. We believe that transparency and integrity are key to building trust and promoting an effective and efficient carbon credit market.

We are currently conducting a specific study on regulatory frameworks that impact the Voluntary Carbon Market (VCM) and how this indicates potential futures of the market. This study will help us better understand the evolving regulatory landscape and adapt our practices accordingly.

At Lux Carbon Standard, we are proud to be at the forefront of the carbon credit market. We will continue to strive to maintain the highest standards of practice and work towards a more sustainable future.

[1] 'Due diligence' is a term used in finance and business to refer to an investigation or audit of a potential investment or product. It is a process of assessing risks and verifying information before making an investment or business decision. The goal is to ensure that all relevant information is considered and that risks are identified and managed appropriately.