![image](https://images.ctfassets.net/4k0nglrkuako/6RlQcEQXwpSNhxXXFmvI2W/19602ad228372069d0a0211f616b46fb/30_carbon_credits_final.jpg?w=1440&h=810&fl=progressive&q=100&fm=jpg)
June 25, 2024
Carbon Credit Risks: A Call for Transparency
Despite concerns about the voluntary carbon market's credibility, carbon offsets are essential for companies striving to meet net-zero goals in hard-to-abate sectors where decarbonization technology is still developing. Although demand for carbon credits is rising, the widening gap between "high quality" and "junk" carbon offsets undermines the potential and credibility of all projects.
Recently, the carbon market has shifted due to increased criticism of greenwashing and the collapse of carbon offset credibility. This has led to legal actions and government interference, such as the Brazilian Federal Police's Operation Greenwashing investigation into fraudulent credits. Consequently, many companies have become hesitant to purchase carbon offsets, with some eliminating their use entirely, resulting in a nearly 51% drop in demand compared to 2023.
Part of the gap comes from the use of credits to perfectly balance out emissions. However, scientific methodologies used to calculate carbon accounting and offset projects are inherently approximate in nature.
To enhance the credibility of the voluntary carbon market, third-party verifiers must make their complex methodologies accessible, enabling buyers to conduct their own due diligence and fully understand the risks behind offset projects.
How does this affect you?
Corporations need to prioritize cutting emissions before purchasing carbon offsets to claim net-zero, minimizing their exposure to potentially risky credits.
Third-party verifiers need to more clearly articulate the risks of projects as public accountability and regulatory oversight tighten.
Carbon offset developers and organizations need to collaborate with expert scientists to make the scientific underpinning of their projects accessible to buyers
Policymakers need to push for greater transparency in scientific methodology. Additionally, they should establish a governing body to ensure a fair and transparent financial market.
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When compared to larger financial systems such as the stock market, the carbon market presents complexities as it involves not just financial decisions but also behavioral changes, purpose-driven decisions, and scientific methodologies. To simplify the complexity of forestry offsets, let's use an analogy involving a health insurance company — we'll refer to it as "Green Health"— which incentivizes gym-goers.
ELIGIBILITY. Green Health announced that they will reduce insurance costs for individuals who go to the gym, effective today.
Eligible forestry projects involve preserving at-risk land from deforestation and enhancing carbon sequestration through tree planting on degraded land. In the same way that in our Green Health analogy, individuals who started going to the gym prior to the announcement may not qualify for the new insurance benefits, farms that have already invested in tree planting or soil revitalization are often ineligible to participate in the voluntary carbon market. This framework shifts benefits away from rewarding organizations committed to sustainable transformation and toward corporations buying emissions reductions.
CRITERIA. New gym-goers must also engage in healthy eating and other activities that promote a positive lifestyle.
Green Health might select candidates who meet specific criteria, such as committing to the program's duration or avoiding unhealthy activities. Similarly, the criteria for qualifying forestry projects include nuances that leave room for loopholes:
Permanence. Deforestation and afforestation are often seen as permanent strategies to combat climate change. However, forestry projects face heightened risks from external factors such as wildfires and drought, which are mitigated by buffer pools that act as insurance against these risks. As a result, buyers will selectively choose a framework and ‘insurance’ package that aligns with their business interests instead of prioritizing environmental benefits backed by science.
Leakage. Leakage addresses carbon emissions being displaced to other activities as a result of a project's investment; for instance, afforestation efforts may lead to increased logging elsewhere in your supply chain. However, there is no universal protocol that accounts for the diverse factors affecting leakage rates. Although economic and scientific models have established a standard market leakage rate, the deductions and monitoring criteria vary widely, underscoring the value of carbon offsets best aligned with the buyer's financial interests.
Additionality. Forestry carbon offsets are only eligible if the stored carbon emissions would not have occurred without the project's investment. However, the additionality factor can be manipulated to favor a carbon offset program, depending on the baseline scenario discussed below. This creates a conflict of interest as organizations write both the framework and sell the credit.
BASELINE SCENARIO. Cost reductions will be calculated relative to health improvements compared to “X” years ago.
Even among eligible gym-goers, variables like age and health history can affect future health improvements based on the baseline year. For instance, one candidate might have had unhealthy habits 10 years ago while another never did, or the baseline may be set to 20 years ago at their healthiest, setting a high bar for future improvements.
Similarly, the calculation of baseline rates varies by framework and protocol, impacting the rate at which projects are evaluated for future results. Research shows significant discrepancies in baseline rates for identical projects, with differences up to 190% in extreme cases. These calculations depend on factors such as soil samples, reference regions, and historical or population rates. Moreover, baselines are often forecasts rather than strictly historical data, and higher baseline rates allow projects to claim larger offsets. For buyers to make better decisions, baseline scenarios should be transparent, not just modeled scientifically behind the scenes, for key stakeholders to perform their own due diligence.
The complexity of the voluntary carbon market is driven by detail and a variety of scientific methodologies, which nonetheless is crucial. However, this undermines the purpose of the intent of frameworks like REDD+, designed to help developing countries protect their forests and attract investment opportunities. Ultimately, while frameworks can be highly detailed, discerning intentionality and demonstrating real transformation set carbon offset projects apart.
Investment in decarbonization projects paired with verifiable carbon offsets will ensure successful and long-term sustainable transformation. Carbon offsets should not be seen as ways to perfectly balance the outcome of a carbon accounting exercise, given the inherent errors in both. For the carbon market to succeed, we need to take a step back and build a system where every player can fully understand the risks of what they’re selling and buying— and that always requires clarity and communication.
Until next time,
Actual
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