Vet, Screen, and Source Credits
Environmental Defense Fund
High-quality carbon credits can bring benefits to your company, but the process of vetting, screening, and sourcing them can be complex and time-consuming. It is critical to ensure that carbon credits meet key environmental and social quality criteria to ensure they are of the highest integrity, but the process of vetting, screening, and sourcing them can be complex and time-consuming. There are multiple approaches companies can take to maximize benefits and reduce risk in the credit procurement process.
Once your company has developed a carbon credit strategy that has internal support, the process of vetting, screening, and sourcing credits can begin. Companies have the option of either conducting this process internally or seeking external support. The current best practice is to undertake vetting and screening and then bring in a third-party expert to conduct detailed quality reviews.
It is important to understand and consider the benefits and costs of involving various external parties in this process, such as carbon brokers, consultancy firms, and third-party rating agencies.
Vet and Screen Projects and Programs
When reviewing identified projects or programs, your company needs to assess whether they meet the criteria for high-quality credits and other specific criteria aligned to your carbon credit procurement objectives. You will also want to ensure that the projects don’t take on unnecessary risk, such as geographical and political risks or a high likelihood of leakage.
Buyers with little time to assess the riskiness of a credit should take on the least risky types. Conversely, buyers that have more time to assess the quality of a credit can look for higher risk and higher reward projects but will want to be sure they are asking the right questions during this phase. The provides an assessment of projects and their risk level, as well as questions that buyers should ask to better understand the risk of their projects and on which projects might take on more risk.1
The Business Alliance to Scale Climate Solutions (BASCS) recognizes current best practice is to vet and screen projects and hire an external, third-party consultant or verifier to do detailed quality reviews. Companies can also do the vetting on their own. This process may look similar to an investment due diligence process, in which buyers rely on the information provided by sellers directly and can additionally request third-party opinions. Buyers may also wish to consult key forms of project documentation that have been submitted to project registries, including the original Project Design Document (PDD), validation reports, and verification reports. Buyers may also wish to consult third-party rating agencies. As a company, vetting projects independently can be labor intensive and requires niche, in-house technical expertise.
Request for Proposals (RFPs)
Procurement teams can solicit information through a request for information (RFI) and identify projects through a Request for Proposals (RFP) or intermediaries, like brokers or consultancies. RFPs allow companies to take a broad pulse of the market and negotiate contracts, removing the middleman and any associated premiums or fees.
Through RFIs and RFPs, companies can gain insight into project structure, pricing, and quality. Although RFPs give companies more ownership of the procurement process, collecting and reviewing responses and pursuing direct conversations with project developers is resource intensive and time consuming. To learn more about the structure of an RFP, Microsoft has a carbon dioxide removal program and offers guidance documents and a proposal cover letter for their procurement cycle.
While RFPs are good options for large procurement teams with greater capacity to run direct procurement and in-house due diligence, intermediaries such as carbon asset managers and credit retailers can be helpful in supporting smaller teams to achieve their carbon credit program objectives.
Intermediaries typically have existing contracts with specific, pre-vetted projects that they know and trust. Some retailers have a portfolio of credits sourced from projects they have developed internally. Given these long-standing partnerships, retailers typically have a variety of projects and credit types available, and often may have credits immediately available if delivery time is a constraint.
There are a few downsides to working with brokers. First, the incentive of retailers is to sell credits and earn a margin, so buyers must be careful to monitor, understand, and scrutinize the due diligence process that the broker employs to ensure the quality and integrity of the credits it is selling. Companies typically do not receive full information on the underlying project, nor the specifics of credits that may be supplied from a project.
Due to the value of the intermediaries’ sourcing, diligence, and marketing services, pricing is typically higher than direct procurement from project developers and can change quickly (i.e., quarterly). The availability of credits from projects may also change quickly. Finally, buyers may not always have full certainty of when credits will be issued from the underlying projects and transferred to the buyer. This can pose challenges for meeting annual internal corporate commitments.
Consultants can reach out to all stakeholders, including project developers, brokers, and retailers, on behalf of your company. But unlike brokers, consultants may not have pre-existing relationships with project developers, nor pools of credits that they can draw from, so may not have credits available immediately, and may provide less certainty around delivery timelines. However, using consultants to design and/or implement a procurement process can be beneficial for several reasons. Consultants often have deep carbon market expertise, can tailor offtake agreements across many dimensions (e.g., pricing, volume, purchase horizon, etc.), and can identify projects that are more aligned with companies’ unique purchasing criteria and goals. Once companies decide how they want to run the sourcing process, they will have to vet and screen the identified projects.