Accelerating a Just Transition to 1.5ºC: Mobilizing Climate Finance through High-Integrity Carbon Markets
Q&A with Annette Nazareth
Annette L. Nazareth is Chair of the Integrity Council for the Voluntary Carbon Market (Integrity Council), an independent governance body for the voluntary carbon market. Annette has devoted significant attention to virtually all aspects of the body’s workstreams and has represented the Integrity Council in venues across the globe.
Annette has decades of experience in financial services regulation and corporate governance. She currently serves as Senior Counsel at the global law firm Davis Polk & Wardwell, having previously served as a Partner of the firm and the head of the Washington DC office. Annette also led the firm’s Trading and Markets practice within the Financial Institutions Group. She was a key player in U.S. financial services regulation for nearly a decade, most notably as a Commissioner of the U.S. Securities and Exchange Commission (SEC) and as the SEC’s Director of the Division of Trading and Markets.
Emily Chien: Annette, thank you for joining us to speak about your important work with the Integrity Council for the Voluntary Carbon Market (Integrity Council or ICVCM).
Annette Nazareth: Delighted to join you, Emily, and thank you for the opportunity.
Chien: You have been a recognized leader in U.S. financial regulation and capital markets for decades, and currently serve as Chair of the Integrity Council. How did you get into climate change?
Nazareth: Well, it's been an interesting journey. I spent my career on financial regulation. But, as I was preparing to retire, Mark Carney, the former Governor of the Bank of England, and also the former Governor of the Bank of Canada, called me. We discussed how carbon markets could really play a meaningful role in our efforts to achieve net zero – but not based on current market conditions. The market was very opaque, fragmented, and didn't always deliver on quality, the buyers’ expectations, or the rightful expectations of the planet. For this market to scale, we needed to focus on integrity and quality of the carbon credits. When he created The Task Force on Scaling Voluntary Carbon Markets (Task Force), which was comprised of 450+ individuals, from 250 organizations globally, he asked me to serve as “operating lead,” which is sort of “U.K. speak” for CEO. We had a lot of knowledgeable people on climate and environmental issues. But the missing piece was to marry that expertise with market expertise, and he knew that I had spent my entire career on market structure. When I ran the division of trading and markets at the U.S. SEC, we focused on the rules for the national market system and regulations ensuring that the U.S. had the most deep, efficient liquid markets in the world. I have enormous respect for Mark Carney based on our work in financial regulation, having served with him on the Financial Stability Forum, the predecessor to the Financial Stability Board (FSB). So, I said, “well, that sounds very interesting, I'll be happy to try it.”
Based on the Task Force’s work, Mark Carney, Bill Gates, Bill Winters from Standard Chartered Bank, and I rolled out our first blueprint at the January 2021 Davos World Economic Forum articulating what it would take to create a high integrity voluntary carbon market (VCM). We launched a new international, independent governance body called the Integrity Council for the Voluntary Carbon Market in September 2021, which I now Chair. The Integrity Council organization serves as a global standard-setter and is operationalizing the “Core Carbon Principles” (CCPs) the first version of which we had defined and agreed upon in the Task Force. These are the 10 principles on which a high integrity carbon market is being built. It also called for a governance structure that mirrored other regulatory organizations or self-regulatory organizations with supermajority.
Chien: Before exploring CCPs in more detail, let’s set some context on carbon markets. What should the role of a carbon credit be – is it to reduce CO2 emissions; remove the CO2 stock that has accumulated in the atmosphere since the Industrial Revolution; provide a reliable market-based mechanism for carbon pricing; or all of the above?
Nazareth: All of the above! The scale and urgency of the climate crisis demand that we fully utilize every available tool. Emissions reductions are the centerpiece of this. Corporates must prioritize their operations and supply chains decarbonization but unfortunately, we are not cutting emissions as fast as we need in order to achieve the 1.5ºC global warming limit goal set in the Paris Agreement. As UN Secretary Antonio Guterres has said, we need “everything, everywhere, all at once.” VCM can be an important solution, but only if it is rooted in high integrity. It holds the power to unlock urgently needed capital that would otherwise not be available for high-quality projects to remove or reduce greenhouse gas emissions and stock.
Chien: What’s the theory of change for the Integrity Council? What does scale look like?
Nazareth: Our theory of change is “build integrity and scale will follow.” To quantify the opportunity, the World Economic Forum estimates that VCM could remove 2.6 Gt of CO2e by 2030 and Morgan Stanley estimates carbon credits purchasing demand as high as $100 billion in volume by 2030.
But today, the quality of carbon credits being traded is inconsistent. Not all carbon crediting programs impose high quality standards, and this creates lack of confidence in the market, thereby limiting the VCM’s full potential to help battle climate change. We are committed to establishing a high-integrity VCM that can deliver real impact and scale. Our work addresses the lack of quality standards, since today carbon crediting programs each have their own methodologies and bespoke transactions which do not create an environment for liquidity and transparency, thereby resulting in challenging markets.
Chien: The Integrity Council has been running at a fast pace this year. What are some specific examples of progress that you are most proud of, Annette?
Nazareth: It’s been quite a ride! Here are a few examples. We have created a global benchmark for high-integrity carbon credits. The CCPs set out 10 principles based on the latest science and best practices. They set rigorous, but achievable requirements for three areas: governance, emissions impact, and sustainable development. The CCP’s are similar tolisting standards. They relate to a product – carbon credits – intermediaries – and the carbon crediting programs who issue them. This consistency will build trust, eliminate market fragmentation, and instill confidence in buyers that their investments are supporting projects that genuinely reduce emissions. The CCP label helps buyers easily identify high-integrity credits across all issuers regardless of where in the world it took place, and what type of activity generated them.
We published the detailed CCP Rulebook in July which sets new threshold standards for high-quality carbon credits, provides guidance on how to apply the CCPs, and defines which carbon-crediting programs and methodology types are CCP-eligible.
I’m delighted to say that the CCPs are making an impact even before CCP-labeled credits are in the market. For example, GFANZ (Glasgow Financial Alliance for Net Zero), the largest coalition of leading financial institutions committed to accelerating net-zero transition) is encouraging buyers and financiers of carbon credits to commit to purchasing CCP-labelled credits. As governments around the world recognize the potential of a high-integrity VCM they are setting up carbon market initiatives. The Africa Carbon Markets Initiative (which I am involved with as a member of the Steering Committee) have committed to adopting the CCPs. We’re in dialogue with initiatives in Brazil, the Middle East, Singapore, and ASEAN (The Association of Southeast Asian Nations).
Our goal is to complete our first assessments of programs and credit categories in time for CCP-labelled credits to be available to buyers in early 2024. We will not assess individual projects; we will assess programs and categories of credits for CCP-label eligibility against our CCPs. Programs will only be able to use the CCP label if they meet our rigorous criteria. Credits are generated by a wide range of activities which fall into different categories.
Looking forward, we hope that trading activity will start soon, with forward contract contingent CCP-labelled credits available at a specified future date. We know there is demand for high-integrity credits and we expect them to trade at a premium, thereby incenting project developers to come in line with the CCPs.
Chien: Earlier, you spearheaded transformational work in the U.S. derivative market. How has that informed your approach on building VCM trust, transparency, liquidity, and scale?
Nazareth: Well, considering my work on the implementation of the 2010 U.S. Dodd-Frank Act on derivative market regulation and also on market structure issues with the U.S. SEC, there are a number of time-honored principles for all well-regulated successful capital markets. The example you mentioned, the derivative market, went from a largely unregulated market, albeit a multi-trillion dollar one, to one that was pervasively regulated under the Dodd-Frank regime.
We had rules on regulation of the intermediaries, transparency, trade reporting, exchanges for products to be traded, and clearing houses. All of these were analogous to other markets, such as the future markets and the securities markets. And so, in the Integrity Council approach, we looked to and were guided by these time-honored principles as well as the processes around notice and comment.
We've had an open dialogue with regulators like IOSCO (the International Organization of Securities Commissions), the U.S. SEC, the U.S. CFTC (Commodity Futures Trading Commission) and other regulators across the globe because we believe the spot market for carbon credits is going to operate adjacently to what we think will be a more robust futures market, which will be very positive as it will give a purchasers of carbon credits better tools and an opportunity to hedge. And unlike the spot market, the futures market is pervasively regulated, and we expect robust trading of voluntary carbon credit futures as the market standardizes. So, we're looking to existing regulatory processes and cooperating with regulators in this space.
With the operationalization of CCP standardized criteria, we’ll start to build transparency and exchange-based trading which will help transition us from bilateral to a more efficient trading market and platform for buyers and sellers to engage in fair and transparent pricing. This will in turn bring greater market participation, liquidity, and scale. On the supply side, project developers will be better able to manage their pricing risk exposure and making it less risky to launch new carbon credit projects, particularly in the Global South.
We are creating an ecosystem where the value of true emissions reductions can be appropriately recognized and rewarded. We think this will unlock investment capital, drive innovation, and catalyze development of impactful climate solutions.
Chien: In addition to this proactive activity with the regulators, how important has your stakeholder engagement been and how have they informed the progress of the Integrity Council?
Nazareth: We bring all stakeholders and all interested parties under the tent from across the ecosystem – market participants, NGOs, regulators, scientists, indigenous communities, and the like. We structured our independent board thoughtfully so, while we're a supermajority and independent with 21 board members, we also wanted other voices in the room. Three board members are from the markets side (from an oil & gas company, a carbon crediting program, and a carbon trader with a bank). We also have three members from indigenous communities because they are really at the forefront of many of the potential solutions in the Global South, managing and protecting 40% of the planet’s ecologically intact landscape. We access an expert panel group of climate scientists as well as 11 subject matter experts for a specific question on carbon credits categories and methodologies, in addition to our Distinguished Advisory Group which is comprised of around 30 world-renowned leaders from across the voluntary carbon market value chain who provide strategic insight and advice to the Board.
We've worked very, very hard to have a very robust, high-quality governance structure because we're requiring that of others, including the programs. So, we have to be beyond reproach ourselves. This is a challenging process, but we are reaping the benefits as we see widespread support for our CCP framework.
Chien: Going back to the CCPs, those related to emissions impact have attracted more attention and debate. What is the controversy, and why are the CCPs so important especially around additionality, permanence, and measurement robustness? These are very difficult things scientifically, let alone from a policy standpoint, to really nail down.
Nazareth: They're challenging but we don't shy away from challenge! We try to meet them head on by really looking to the advice and assistance of leaders across the VCM, including from the members of our own Expert Panel. But we know there is no 100% right or wrong in this area. There's always a debate even among very learned people, right? So, we take all that in account, and to be honest it has been important to have consulted widely. Obviously, the CCPs are our North Star. And so, through our assessment process, we really have to be thorough to ensure the carbon categories and programs we assess meet the standards set out in the CCP Rulebook.
Time is so much of the essence. We adopted an Assessment Framework that we believe represents the latest science and best practices that exist today. But that is not enough, and we have committed to continually raising the bar and have made it clear when we will come back and do another review and issue our next version of the CCP Rulebook, within 2 to 3 years maximum. We've also signaled to the market where we think there will be more stringent standards in the next round to show our true commitment to higher ambition and to hold ourselves accountable.
We want the whole ecosystem to be part of our journey, so that once we raise the bar, people have already anticipated it. That level of transparency will also shorten the amount of time that it will take to improve on these processes.
Chien: The CCPs place a particular emphasis on Sustainable Development. Why is this important for integrity?
Nazareth: A key thing to understand is that the CCPs make sustainable development a central part of the mitigation activity, not just a co-benefit. Indigenous Peoples and Local Communities (IPs & LCs) are critical stewards of forests and nature ecosystems that can be carbon sinks, and yet they are often among the most marginalized segments of our population. Our collective ability to achieve our global climate goals depends on insuring IPs & LCs continue to have agencies managing vital ecosystem services at the local level. Our CCPs break new ground by requiring programs to ensure that high integrity credits come from projects with robust social and environmental safeguards that also deliver positive sustainable development impacts. Programs must also assess the risks of any negative environmental and social impacts and report on measures to mitigate these risks, including impacts on IPs & LCs, human rights, and land acquisition.
Credits must support the transition to net zero and not lock in fossil fuel emissions or technologies, so we specifically rule out activities that are incompatible with this, such as enhanced oil recovery using carbon capture, usage, and storage (CCUS).
Chien: Looking ahead, what's on the horizon? What are you most excited about, Annette?
Nazareth: In the near term, what we call our Category Working Group is reviewing all of the major carbon credit categories for eligibility and determining how to classify them for further review.
Some credit categories will be assessed by what we are calling a “Fast Track” approach. This doesn't mean they don't get a full assessment, but it refers to a determination that the ICVCM’s Executive Secretariat can assess the category without outside advice before making recommendations to our Board’s Standards Oversight Committee, which in turn, then makes final recommendations to the Board.
A second group of categories are those which require broader assessment which involves a deep and broad assessment by what we call Multi-Stakeholder Working Groups whose members really understand the particular category or methodology and help us to more fully ascertain whether those categories meet the CCP Rulebook. Finally, there is a third category for those credits that we just don't really think are likely to get approved at this time.
We're excited that the Category Working Groups are already making excellent progress. And shortly we will begin “Fast Track” and our Multi-Stakeholder Working Group assessments. The great news is that carbon crediting programs that issue 92% of credits in the market have now applied for assessment.
Chien: Congratulations on this momentum. Looking ahead, what are some of your priorities to tackle?
Nazareth: We have signaled areas to the market, including how to further strengthen our sustainable development criteria; whether all carbon credit projects should make a contribution toward climate adaptation; and developing universal data standards for digital and remote sensing technologies that can verify, monitor, and report on projects, such as satellite imagery and machine learning.
We have several additional working groups looking to the future, answering complex questions including those related to the Paris Agreement Article 6 and benefit sharing. We want to see if one by one we can put together groups that can tackle them and work to agree a way forward on how these things should be treated.
So, it's definitely an ongoing “work in progress” as our work streams look to drive continuous improvements. The release of CCP Rulebook, the commencement of assessing programs and categories is just the beginning.
Chien: That's all very timely, especially as we look to COP 28 in Dubai. Annette, what closing thoughts can you share with us?
Nazareth: I think one of the challenges to be addressed is that despite the progress, there is much more to be done and so there's disappointment about both what is yet to be done and what in some cases was done. And here I mean that we recognize the mistakes and failings related to past projects. That is why at the ICVCM, we will continue to work to raise the bar and to ensure the development and growth of a high integrity VCM that delivers on its promise. We continue to believe if we build integrity, scale will follow.
We have a tremendous opportunity. While I acknowledge the challenges, I am an optimist and a doer! We have the window to make a meaningful difference in our net zero progress. We need to use every tool available – of course by that we mean high integrity tools and well thought out plans! I do believe that the voluntary carbon market has changed in meaningfully ways through the work of the Integrity Council on the supply side and colleagues acting through and with organizations like the Voluntary Carbon Markets Integrity Initiative (VCMI) on the demand side. These are making a real difference in our ability to reach our net zero goals. While always striving to raise the bar, we don’t believe in letting perfect become the enemy of good. In my SEC experience, if something didn't work well, we had the ability to go back and amend the rule. And so, this is very similar. While very few things in life are perfect, that does not mean there aren’t a lot of us who are prepared to work to make them better over time.
My closing thought is I think – like driving – it's dangerous to only look in the rear-view mirror. We really need to be forward-looking – the media and narrative around carbon credits needs to be more than only backward looking. To use another analogy, informed by my time as a regulator, if in 1934 the decision-makers had looked only at the aftermath of the 1929 failure of the stock market, you'd have said, well, we're never going to have securities. We shouldn't have them, because look at how terrible it was after the crash. I don't think that's the alternative, nor should it be. If we consider the U.S. Securities Acts of 1933 and 1934 which were established after the stock market crash of 1929, and we think of what we have achieved ultimately, this became a tremendous effort that created the deepest, most liquid securities markets in the world.
Similarly, the work we are doing at the Integrity Council will build trust in the market and enable it to scale. We aim to help create a high-integrity scalable VCM that can access capital by applying familiar principles from regulated capital markets. We are doing this to unlock private climate and carbon finance that would not otherwise be deployed to maximize the potential of the voluntary carbon market to finance climate solutions, channeling much needed investment to the Global South.
About the Author:
Emily A. Chien is a Fellow at Harvard University, specializing in climate finance, the net zero transition and climate tech commercialization. Emily served as Global Climate Offerings and Partnerships Leader at IBM and co-chairs the 100 Women in Finance ESG C-Suite Peer Advisory Group which she co-founded. Emily led AI-empowered transformations for IBM clients in banking, investments and insurance and was appointed a World Economic Forum AI/ML Fellow in 2021.
Throughout her financial career spanning JP Morgan, Fidelity Investments, Prudential Financial and American Express, Emily has built, scaled, and run industry-leading solutions, platforms and businesses working at the intersection of business, technology, and partnerships. Emily holds a patent for digital network capabilities now used by Amazon.com, she is a former CPA, and is a member of the Economic Club of New York, CHIEF Women’s Leadership Network, and 100 Women in Finance (Global Angel). In 2023 she was a chair of the 100 Women in Finance Impact Investing Symposium.
This Q&A has been edited for length and clarity.