Roughly 1-in-4 carbon credits retired in 2024 were used toward a compliance carbon pricing obligation. The California/Québec cap-and-trade system is the largest compliance-driven source of demand for carbon credits from independent standards.
While third-party ratings are growing in popularity as a tool to help guide buyers through the complexity of the voluntary carbon market, the continued growth of carbon credit retirements toward compliance schemes raises an interesting question:
Do we need carbon project ratings in compliance carbon pricing schemes?
If these policies do a good job of laying out the criteria for credits that meet the program requirements, then why differentiate projects further with ratings?
I’ve heard two views on this:
1. Clear regulations should make project ratings superfluous.
A compliance carbon pricing scheme should treat eligibility as a binary determination––either a credit counts toward the scheme or it doesn’t.
This reduces complexity for buyers by making the definition of an eligible carbon credit very clear. And this confidence in the rules (and therefore in future demand) will unlock speed and scale in finance.
2. Even with clear rules, there will still be a range of quality in carbon projects and buyers will want insight into this.
Ratings will function something like bond market ratings, giving buyers insight into the likelihood of a carbon project’s effectiveness. In addition, buyers may want to stand out from their competitors by paying a premium for quality.
BeZero data shows a wide variety of ratings for carbon projects that are CORSIA-eligible. It’s not so different from the ratings spread of projects across the VCM, with 65% of eligible credits rated B or lower on the BeZero scale.
I am partial to the first view. Reducing complexity in carbon markets will help unlock climate finance, so, I’d rather focus on getting the policy rules right, with the aim of eliminating the need of additional project ratings.