After reviewing the case for using carbon offsets on the path to net-zero in June’s blog, this month we dive into the details of the voluntary carbon markets to demystify carbon credits, and answer the question that Mic Patterson of the Façade Tectonics Institute recently posed: “Are they are a valid strategy or just a comforting mythology?”
Challenges of the voluntary carbon markets
Research has identified several issues relative to the voluntary carbon credit market (some of which are also present for the government regulated markets):
- Underestimation and leakage: Quantifying the amount of carbon sequestered or emissions prevented by offset projects is challenging. Several studies have shown that projects significantly underestimate the emissions they purportedly offset. For example, California’s forest carbon offset program was found to have substantially overstated its emissions reductions, equivalent to “one third of the total expected effect of California’s cap-and-trade program during 2021 to 2023.”
“Leakage” is the term used where reductions due to the offset project are simply transferred to emissions increases elsewhere. For example, if logging was stopped in one forest where the offset was provided, but this caused increased logging elsewhere to meet the market demand. The benefit of the offset project was therefore not delivered.
- Double counting: Who counts the credits – the producer or the purchaser? In the consumer-business context, consider the case of airline credits. Does the airline or the passenger buying the credit count the offset? If they both count it, then clearly this is double counting. In the global context, does the country in which the offsetting carbon reduction is created take the credit or the other country who buys or “invests” in the project?
New rules agreed at the United Nation’s COP26 state that the country generating the carbon reduction credit can decide to either sell it or use it against its own Nationally Determined Contributions (NDCs) to reducing carbon emissions. The NDCs are emissions reduction targets which countries agreed to achieve as part of their commitments to the Paris climate agreement.
- Additionality and permanence: Paying someone to not cut down a forest, when it wouldn’t have necessarily been cut down anyway, and claiming it as a carbon offset is a false savings. A carbon offset should always fund something that would not have happened otherwise (additionality). The offsets offered by the project must also be permanent. For example, wildfires have obsoleted many reforestation-related carbon sequestration projects.
- Removal versus reduction: According to a recent report by Carbon Direct, pure carbon removal projects made up only 3% of all projects issuing credits over 2021 to May 2022. Those that included a mix of both removal of carbon and reductions in (or avoidance of) carbon emissions represented just 13%. They stated that “no credits were issued for durable removals, the only type of offset that can effectively cancel the impacts of carbon dioxide released into the atmosphere in a functional reversal of emitting carbon dioxide.”
Planting trees (assuming they are protected from natural disasters and deforestation) may be the cheapest form of carbon capture, but according to the World Economic Forum its storage capacity is limited by available land, has risks due to deforestation and will store carbon for hundreds rather than the thousands of years needed. Planting trees also doesn’t necessarily result in increased carbon storage, according to a study by the James Hutton Institute. A recent article dug into the validity of corporations using tree planting as a climate mitigation strategy, stating “the timelines over which carbon removal needs to occur are fundamentally inconsistent with the planning horizons of private companies today.” The 40-year contract signed by corporations to protect tree plantings is incompatible with the thousands of years of permanent carbon storage needed.
Carbon Direct also concluded, “the voluntary carbon market largely consists of projects of questionable quality with few [carbon] removal options available.”
- Lack of transparency, uniformity and regulation: While it is expected that voluntary carbon credits are validated against certain standards to be legitimate, there is little transparency or uniformity. This results in a lack of clarity for those trying to make purchase decisions, making it hard to know which programs deliver the offsets they promise. Businesses are left relying on ad-hoc third-party analyses and recommendations, such as a recent review of credit programs by sustainability website Treehugger.
To address this issue, rules for a global carbon credit market were established in November 2021 at COP26, which will create an international market for carbon credits. The credits (or Internationally Transferred Mitigation Outcomes – ITMOs) must be “real, verified and additional” and must be adjusted and reported. This new agreement is expected to drive better standardization for credit validation and trading rules, creating more transparency and less fragmentation for the private sector. It is also forecasted that this will lead to more standardization of pricing.
- Pricing: According to a recent article in the Economist, the carbon market is not working well because the price of a carbon offset is much too low. The publication argues, for example, that there is much more financial gain in deforestation to develop land than there is to leave it in place. It reports that “the only agricultural activity that is less profitable than preserving forests is harvesting rubber in West Africa.” The article’s authors reason that, since offsets are typically voluntary, pricing is determined by the laws of supply and demand. And that demand is currently limited to a small segment of the market – “firms and individuals wanting to offset for ethical or public relations imperatives.” It concludes that the high quantity of low-quality older credits is also depressing prices.
The World Bank recently issued a report on the status of carbon pricing. While record carbon prices have been seen in many areas of the globe recently (including in California), they note that prices need to rise much more to meet the Paris climate goals. This is because less than 4% of global emissions are covered by a direct carbon price high enough to meet that required by 2030. They assert that increasing carbon prices can provide the means to “close the gap between pledges and policy,” and that “there is a clear need to ensure that policies are fair, effective and embedded within integrated climate and social policies,” especially in the light of rising inflation and energy prices.
Carbon credit standards and certification programs
Currently, there are some nationally recognized standards such as the Verified Carbon Standard (by VERRA) or Climate Action Reserve for carbon offset projects to be quantified and validated against. Although, there seems to be some controversy about methodology, underscoring perhaps the early stage of market development.
There are several third-party certification organizations (called “registries”) which validate and issue credits:
- American Carbon Registry
- Climate Action Reserve
- Climate, and Community & Biodiversity Alliance
- Gold Standard
- Plan Vivo
- Verified Carbon Standard
Note that some organizations develop standards, validate and issue credits, while others validate and issue credits. Yet others provide programs through which verified credits can be purchased, such as those recommended by Treehugger:
- NativeEnergy (best overall program)
- Sustainable Travel International (best for travel)
- 3Degrees (best for corporations)
- TerraPass (best for events)
- myclimate (best for home)
Guidance for offset purchasing
To manage the potential pitfalls when purchasing carbon credits, it is important to source them from an offset program provider which has had their projects verified and validated by accredited third parties (like the registries listed above) to ensure they are:
- effectively quantified
- permanent
- additional
- not prone to leakage
The conclusion
The climate crisis can’t be solved by continuing business-as-usual emissions and purchasing carbon credits. There just aren’t enough carbon reduction mechanisms to offset the current rate of emissions. We need to reduce emissions, period.
However, validated high-quality carbon credits seem to have their place as a bridging strategy to net-zero, but should not be used as an excuse to keep on emitting.
Recall the assertion of Christopher Drew from Adrian Smith + Gordon Gill Architects that “there should be a significant, quantifiable effort made to reduce emissions first, with what cannot be reduced then being offset.” Offsets should therefore be the last option or a bridging strategy to be used while a purchaser takes action to reduce their own operational emissions.
Where offsets are warranted, care should be taken in choice of credit supplier, validation and verification methods. Because of the issues with credit quality, buying more credits than technically needed may address the potential of underestimation. Purchasing credits that deliver permanent carbon reductions should be prioritized over avoided emissions.
Given the growth of the carbon credit markets, carbon offsets are likely to become better regulated, higher quality and in higher demand. And they will become (and appropriately so) an increasingly expensive bridging strategy. This will be necessary to drive broader and more impactful actions on carbon reduction.