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S H E A R M A N & S T E R L I N G L L P | 3 9 for a DAC or CCUS project). However, some registries will only recognize a domestic offset project which curtails the pool of eligible projects for purchasers6. There is also considerable divergence in the cost of carbon offset credits. Afforestation offers credits at the more inexpensive end of the scale at approximately $4 per MTCO2e. In contrast, a recent DAC project in Iceland is issuing carbon offset credits at over $1,000 per MTCO2e. However, whilst DAC and CCUS projects currently offer more expensive credits, they have the draw of: (i) assured additionality, as the projects would clearly not be built but for the revenue from the carbon offset credits, and (ii) stronger permanence potential than nature-based projects, due to the reduced risk of leakage from a reservoir more than one kilometre beneath the earth's surface7. Issues around double counting of offsets and miscalculation of projected offsetting volumes have undermined investor confidence in offset projects, as have recent wildfires in the United States which destroyed forests used for a carbon offsetting project. The disparity in the standards applied by certification bodies and skepticism about the environmental attributes of certain projects has prompted calls for tighter regulation of the voluntary carbon credit markets and greater harmonization between the environmental standards applied by registries and certification bodies. Markets require certainty, predictability and integrity. A private sector taskforce has recently been established by the Institute of International Finance called the Taskforce on Scaling Voluntary Carbon Markets ("TSVCM"). This was spearheaded by the former governor of the Bank of England, Mark Carney, with the objective of attaining strong integrity for voluntary carbon markets to help meet the goals of the Paris Agreement. In the first phase of its review, published in January 2021, TSVCM concluded that: "offsetting can play an important complementary role [to emissions reduction] to accelerate climate action; and a liquid voluntary carbon credit market at scale could allow billions of dollars of capital to flow from those making net-zero commitments (but without the facility to effectuate these) into the hands of those with the ability to reduce and remove carbon, significantly contributing to the transition to net zero." TSVCM's next objective is to establish an independent governance body tasked with ensuring carbon credit quality (through a common set of "Core Carbon Principles") and standardization. 1. Including the United Kingdom, the European Union, Australia, South Korea and California. 2. For example, the Kyoto Protocol and the Paris Agreement made pursuant to the 1992 United Nations Framework Convention on Climate Change (UNFCCC). 3. Scope 3 monitors upstream emissions in the supply chain in generating a product (e.g., raw materials used) and downstream emissions from the on-sale or supply of a product (e.g., transportation costs). 4. CCUS is only recognized as a carbon offset project if the emissions producer does not claim a corresponding reduction in its Scope 1 emissions. 5. In jurisdictions like Australia and California, a permanence threshold of 100 years applies (with exceptions). 6. For example, in Korea the only international projects recognized are ones where a Korean developer has an equity interest or which provide a social benefit in a lesser developed country which Korea has funded (such as providing cooking stoves in Africa). 7. More advanced mandatory carbon markets will require offset project developers to contribute to buffer pools to safeguard against the reversibility risk. Iain Elder Partner London T +44 20 7655 5125 iain.elder@shearman.com Colm Ó hUiginn Counsel London T +44 20 7655 5683 colm.ohuiginn@shearman.com