Verra have proposed a new unit, the Projected Carbon Unit (PCU), to facilitate early-stage financing of crediting projects. Sylvera broadly supports this proposal, and recognise the many opportunities presented by PCUs. However, we identify some risks. PCUs reflect the number of VCUs projected to be issued by the project, but could be subject to material adjustment following validation and verification, introducing risks to buyers and to environmental integrity. This consultation asks for feedback on the design of this PCU framework to mitigate these risks and clarify uncertainties.
1. Will the proposed PCU design (Section 2) likely enable early project investment as well as support PCU buyers in reducing contracting and delivery risks and facilitate credible communication of progress toward net-zero targets or other climate commitments?
Yes. However we have some specific concerns and suggestions which we hope will help to optimise the impact of this innovation.
Among the most interesting features of the PCU proposal is the centrality of the ‘first-come, first-served’ principle. Section 2.10 rightly states that “it is important for potential PCU buyers to be able to know the order of available PCUs relative to already assigned PCUs for a given project”. However the way in which potential PCU buyers should make that determination is unclear. Section 2.10 suggests that “buyers can refer to PCU serial numbers and other relevant information on the Verra Registry to support such assessments”, however this would require the search criteria setting out the serial numbers (start and end numbers) in relation to the total permitted issuance for that vintage. The clearest way to provide this information would be to express the issuance numbers as a percentage of the total permitted - specifically a percentage range covering the start and end of the serial numbers. This percentage range should be included both in the PCU tab and in the search criteria.
Additionally, we understand that Verra intends to leave it to project proponents and PCU purchasers to determine the commercial terms for buying / selling PCUs (i.e., how to price in the uncertainty, what tranches are bought, whether there is any uplift paid once the PCU becomes a VRRs etc.). We expect that the scale of early-stage financing that PCUs generate for proponents will in large part be driven by how the market approaches these terms. To ensure that the goal of driving early project investment is achieved, Verra could consult with organisations such as IETA to ensure it understands and has accounted for likely market dynamics.
As to whether PCUs will help companies “facilitate credible communication of progress toward net-zero targets or other climate commitments”, we would caution against making strong claims regarding the impact of these investments. Companies should take a conservative approach, avoiding including PCUs in carbon neutrality statements or net-zero claims, in large part because quantities of projected credits will in some instances exceed those of issued VRRs. Rather than quoting a specific projected number of PCUs, buyers could instead be encouraged to communicate their investments towards climate action projects.
Early-stage projects carry less direct cost and PCUs may represent a financial incentive for developers to be more speculative in the registration of projects to access the early finance without a firm intention to proceed with the project, proposing projects that have the largest projected potential ERRs regardless of associated risk and uncertainty. This may result in some potential projects securing early finance through PCUs while never materialising.
The greater risk and uncertainty may result in a form of inadvertent greenwashing. Credit buyers and investors will be allowed to demonstrate that their project investments are expected to generate a specific quantity of ERRs to meet projected commitments without a clear understanding of the project’s chance of successfully producing ERRs. In this scenario buyers may accumulate large portfolios of PCUs with a low likelihood of producing ERRs, which may be considered a form of greenwashing by the market, one of the issues that PCUs.
To combat these issues a framework for the communication of risk and uncertainty could be considered such as the United Nations Framework Classification (UNFC). This would allow the quantitative communication of project risk and uncertainty to the investor.
2. Do you have any concerns about the ease of use or environmental integrity of the proposed PCU design (Section 2)? If so, what are your concerns and what adjustments should be considered to further strengthen the proposed PCU design?
Yes. Early-stage prospective projects carry more technical and commercial risk. They are also subject to a larger degree of measurement uncertainty as they occur before monitoring and verification. Projected values associated with pre-verification projects may be considered speculative and subject to material adjustment following verification. This may lead to significant ERR downgrades post monitoring and verification which may undermine investor confidence in the market.
For example, we have observed significant uncertainty around crediting for nature-based projects. We note that for many AFOLU projects there is a discrepancy between the number of projected credits (ex-ante) in Project Design Documents and the credits that are eventually issued. We have noted that for many ARR projects, projected emission reductions (e.g. ex-ante figures in PDDs) are greater than the quantity of verified and issued credits. For REDD+, the picture is mixed: we have observed that quantities of issued credits can be both greater or significantly fewer than projected.
Furthermore, changes in environmental policy are unpredictable and pose an additional risk. Two recent examples of such changes which are likely to hinder projects’ credit issuances are the moratorium on REDD+ projects in Papua New Guinea as well as the halt in issuances in Indonesia.
We therefore recommend that (in addition to the buffer pool contribution) up to 20% of PCUs should not be sold, to mitigate underperformance risk. Two additional benefits of this conservative approach are that it would (i) ensure at least an element of ‘results-based payment’ for project developers, and (ii) ensure that they can realise the full value of future credit issuances through the primary markets, ensuring ongoing financial flows which may be needed in order to keep project activities running throughout the project’s lifespan.
3. The proposed maximum PCU assignment period for NCS sequestration (removal) projects, including afforestation/reforestation projects, is 40 years. Do you agree with this timeframe for NCS removal projects? If not, do you think a longer timeframe (e.g., 60 years) or a shorter timeframe (e.g., 20 years) would be more appropriate? Kindly provide your rationale.
While we are open to alternative views on this topic, we see risk in allowing for such long maximum PCU assignment periods.
Given the complexity of the VCMs, the specificities of the underlying projects, and the long time-frames associated with these activities, there is a non-zero likelihood that some PCUs will not be converted into VRRs. The greater the volumes of PCUs sold, the greater the likely number of PCUs cancelled without converting to VRRs. Every cancelled PCU represents wasted climate finance, which achieved no environmental benefit, and displaces climate finance going to VRRs, which do represent environmental benefit. While we see the benefits of enabling the market to understand and manage the uncertainties in the market, there is a converse risk that the market, in aggregate, will not instantly strike the optimal balance.
For this reason, and in light of ever evolving emission reduction/removal methodologies, we would suggest that the proposed maximum PCU assignment period be limited in the first instance to a shorter period, e.g. 20 years, and that this should be reviewed - with a view to being gradually extended - every five years. In this way Verra and the wider market will be able to assess the impact of this innovation and gradually increase its temporal reach, if the evidence shows this to be beneficial to the overall environmental impact of the market.
4. This proposal includes a maximum PCU assignment period for non-NCS (e.g., technological) sequestration (removal) projects of 40 years, considering the significant upfront investment needed for these projects (e.g., Direct Air Carbon Capture & Storage) to be deployed. However, unlike NCS sequestration projects, these technological projects can immediately generate emission removals once operational. Do you agree with this timeframe for technological removal projects? If not, do you think a longer timeframe (e.g., 60 years) or a shorter timeframe (e.g., 20 years) would be more appropriate? Kindly provide your rationale.
See response to question 3, which applies equally to question 4.
5. The PCU assignment period is described as a static timeframe with a fixed start date and end date. Should project proponents have the option to extend a project’s PCU assignment period, contingent on re-validation of relevant project documents? For example, five years past the project’s start the proponent may be able to extend the PCU assignment period by five years into the future after re-validation of key parameters, including the project’s ERR projections.
We would be open to supporting this proposal should the early evidence of the impact of the introduction of PCUs suggest this would further the overall impact of the market. We would not endorse starting with this position, because it introduces additional complexity without clear and obvious benefit.
6. Are the updates for PCU implementation (Section 3) clear? Do you have suggestions to clarify or better define how PCUs will be implemented within the VCS Program?
The proposed updates appear logical.
7. Consider that PCUs will enable project proponents to assign and transfer carbon units earlier in the project development cycle than otherwise possible. To ensure PCUs are underlied by robust projections, should project proponents or VVBs provide any additional information not already prompted in the VCS project description and validation report templates (Section 3.5)?
We do not think any further information should be provided in the VCS project description and validation report templates.