In a still nascent and evolving carbon market, ‘carbon credit quality’ remains a term without universal agreement. While there is general consensus on the core “Carbon Technical” attributes that are necessary for a project to deliver a meaningful reduction or removal of carbon emissions over time, our experience indicates that each carbon credit project-type faces unique risks specific to its project context.
CIX develops our own project risk assessment frameworks based on traditional risk management approaches. Our frameworks are moulded by standard project finance and capital markets risk management approaches, and are based on 4 Pillars of Quality which are four general “risk buckets” that apply to every project (Figure 2):
We first review a project’s carbon sequestration potential, which is one of the most critical components of any carbon credit quality judgement. This includes assessing the integrity of its underlying carbon credit creation requirements: whether carbon finance is necessary for the project, whether the project is eligible for carbon finance, whether the baseline to demonstrate pre-project activities under business as usual (BAU) scenario is robust, the duration of carbon sequestration, whether emissions are displaced elsewhere, and how emission reductions are calculated.
We also recognise the importance of ensuring that carbon finance projects do no harm and create positive environmental and social co-benefits to the extent possible. Our assessments therefore go beyond core carbon technical attributes to also consider a project’s Environmental and Social Safeguards and co-benefits. These are evaluated in accordance with the World Bank Environmental and Social Standards (ESS) Safeguards framework, which is a globally recognised best practices benchmark, the United Nations 17 Sustainable Development Goals (SDGs), and the 2030 Development Agenda country-based focus on achieving SDGs). We also assess related technical parameters specific to a project activity or process, operations, legal, policy, country, sustainability, and any other risks which may apply that fall under general project risk management. Carbon credits and estimated volumes of issuance are only created if the underlying project is both successfully implemented and carbon technical requirements for creating a carbon asset are met.
While the 4 Pillars of Quality are applicable across all carbon finance projects, their application, impact on carbon credits, and the key drivers of risk may vary by project type, activity and country.
Consequently, we further developed individual project type-specific quality assessment frameworks nested within the broader framework approach for each carbon credit type we decide to list on CIX Marketplace and CIX Auctions. These project type frameworks are established by our dedicated in-house quality assessment team and draw from decades of deep field operations experience in the carbon markets, recognised industry benchmarks by project type, established science, consultations with project type industry experts, literature reviews, and in consultation with CIX’s International Advisory Council. They are also calibrated against the carbon credit ratings approaches and lessons learned from the World Bank’s carbon finance funds since the inception of carbon markets.
Carbon project assessments against both the general framework and project type frameworks involve a comprehensive review of publicly available project documentation, independent searches for information, and other resources provided by project developers and suppliers to offer a clear understanding of a project’s attributes, material issues, risks and co-benefits. A risk profile and narrative for each project is developed as part of the assessment, upon which the listing decision on CIX Marketplace and CIX Auctions is based.
Certain topics of relevance are currently being debated in the carbon markets, for example, permanence for Natural Climate Solutions (please refer to our detailed paper on carbon credit quality and integrity). In addition to our carbon credit project assessment approach, CIX provides additional guidance and thought leadership on areas which we believe are important.
In particular, our paper on CIX’s approach to carbon credit quality and integrity articulates our stance on key market issues concerning VCM carbon credit quality and integrity, including the following:
Our assessment frameworks will continue to evolve in line with the latest guidance from regulators, relevant bodies and lessons learned. Through our steadfast commitment to building trust and transparency, CIX aims to elevate the level and understanding of carbon credit quality in carbon markets, thereby accelerating financing flows for critical climate change mitigation, adaptation, and climate resilience efforts.
You can download CIX’s position paper here.
April 11, 2024