Quantum Commodity Intelligence – The voluntary carbon market (VCM) had received strong support under the previous US president Joe Biden, with his administration backing several initiatives aimed at the sector.
These included releasing last May a code of principles that companies should deploy to allay longstanding integrity concerns in VCMs and unlock investment in domestic schemes and international projects. Then in September the US Commodity Futures Trading Commission approved its final guidance regarding the listing for trading of voluntary carbon credit derivative contracts.
Reference to the code of principles has now vanished from the White House website, while earlier this month Senator John Kennedy, a Republican lawmaker from Louisiana, introduced a joint resolution under the Congressional Review Act to overturn the CFTC’s final guidance. In addition, links to carbon initiatives on the US Department of Agriculture website now just feedback to the site’s ‘about us’ page.
These moves, while not surprising given the anti-climate rhetoric of the Trump administration, raise wider questions as to the new US government’s impact on the VCM.
“The Trump administration’s decision to withdraw from the Paris Agreement and its general dissatisfaction with ESG and climate disclosure initiatives may undermine confidence in the VCM by reducing the impetus for corporate and national net-zero commitments,” said lawyers from global energy law firm Bracewell in an update looking at the potential impacts on the VCM.
“Without the federal endorsement of climate goals, corporate strategies might shift away from investing in carbon offsets, diminishing demand for carbon credits,” they said. “Furthermore, uncertainty surrounding federal support could delay or derail the development of new VCM projects that depend on long-term revenue from carbon credit sales. If federal support for the VCM is lacking, the private sector may follow suit,” they added.
Federal support
Federal support, particularly through the US development agency USAID, has been suspended for at least 90 days and seems likely to be extended beyond that deadline and is already impacting some projects (see pages 3-5). However, the Bracewell update was not all doom and gloom. It touched on lessons that could be learned regarding the VCM from Trump’s first term in office from 2017 to 2021.
“It should be emphasised that President Trump’s first withdrawal from the Paris Climate Accord did not significantly hinder the VCM. In fact, the market grew during that period, with robust private-sector demand for offsets driving progress,” the lawyers said.
They also highlighted the global nature of the VCM and the likelihood of growth through international trading particularly given the successes at COP29 in Baku last year on the UN’s Article 6 carbon market mechanisms. All this could further insulate the VCM from “shortfalls in federal support”.
In addition, the update argued that as the VCM is largely unregulated. “In this context, a lack of government support could incentivise corporations to independently bolster the market, particularly as international competition for climate leadership intensifies,” it said.
However, they cautioned that other executive orders issued by Trump could have an impact on project developers decision making. These orders, albeit now challenged in courts, include the pausing of federal funding under existing laws and additional finance through the Inflation Reduction Act and the Infrastructure Investment and Jobs Act.
“Preliminary court challenges have resulted in some setbacks for the new administration on this front. However, it is anticipated that the administration will continue to press its agenda calling into question new governmental expenditures for certain disfavoured technologies or projects,” the update said.
This “may reduce developer appetite (and if the actions are fully realised, federal funding) for projects that could play a role in generating credits for the VCM, and that may in turn reduce its liquidity and viability,” it added.
But, “due in part to the differences in how voluntary carbon offsets are generated as compared with federal tax credits, not all transactions and projects involved in the creation or trading of offset in the VCM are impacted by these actions, and the administration’s pursuit of new infrastructure and energy production may ultimately benefit such projects,” the lawyers concluded.
