The Misconception Surrounding Carbon Offset Credits
This article aims to discuss some of the key misconceptions and challenges within the current carbon offset market, taking a focus on issues such as additionality and over-optimism within offset credit issuance. With the voluntary carbon trading market expected to grow from $2bn in 2022 to $250bn by 2050 (Morgan Stanley), it is vital that the issuers and buyers in the credit market fund projects which actually make a difference.
A carbon offset is essentially a certificate which says for each ton of carbon that has been emitted into the atmosphere as a result of a process. There is a project countering emission through carbon removal or carbon avoidance. A carbon credit represents 1 ton of carbon dioxide removed from the atmosphere (removal) or prevented from being emitted (offset).
The intrinsic aim of carbon offsetting is to allow corporations to compensate for greenhouse gas (GHG) emissions. By allowing the emission-producing company to invest/fund ‘green projects’ which are expected to reduce or compensate the total carbon that would have been emitted, had the investment not been made. As such, it is a common misconception that carbon offsets have to directly take carbon out of the atmosphere (carbon-removal). In fact a research study by Carbon Brief concluded only 8% of carbon offset projects involved the actual removal of C02 from the atmosphere.
The reasoning behind this is straightforward. A Bloomberg study expects that a carbon removal only market would result in a 705% higher average market credit price by 2050, and so companies continue to fund projects with questionable impacts at low prices, while business continues as normal. Under a false impression of positive change to shareholders, customers, and markets. To put the current situation of carbon credit and offset markets into perspective, analysis by Corporate Accountability found, of the top 50 carbon emission offset projects, 78% (39) of the projects were categorised as likely junk. These projects have sold the most credits in the global market.
So why do companies such as Verra, the world’s leading carbon crediting program, verify carbon credits with questionable impacts? Just as Moody’s and S&P were paid by the very same institutions whose products they were rating during the financial crisis, the agencies which provide the verification of carbon offset projects are paid by the owners/developers of the project. Verra paid 10 cents per credit issued by project developers. To delve further into the carbon offset market it is important to understand what problems have been created by allowing opaque carbon credit investment products to continue unregulated.
Additionality
Additionality assesses whether a project or event provides extra impact compared to a baseline situation where no event took place. In carbon offsetting the problem of ‘non-additionality’ refers to situations where corporations are investing in green projects or buying the carbon-credits of projects that are not reducing the number of global emissions relative to if the project did not initially go ahead.
In fact, a research paper focussing on Verra, discovered over 90% of their rainforest offset credits are likely to not represent genuine carbon reductions, with further analysis suggesting 94% of the credits had no benefit to the climate. The implications of this non-additionality are a widespread sense of false confidence that significant carbon-emitters are meeting net-zero or carbon neutral goals, allowing the continuation of non-sustainable business models. With corporations such as Gucci, Shell and easyJet using the same credits to meet their GHG reduction goals.
Take investment into ‘protective’ climate measures. There are carbon offset products called REDD+ credits (Reducing Emissions from Deforestation and Forest Degradation in Developing Countries). A team of scientists analysed 26 REDD+ deforestation prevention sites on three continents and found 94% of the credits did not represent real reductions in carbon emissions. The intuition behind how this can happen is relatively simple. The agency projects a baseline based on previous deforestation rates in a given area, which is then compared to the actual amount of deforestation observed. The difference between the two figures is then packaged and sold as a carbon credit certificate. The flaw in the system is that there is no regulation in the Voluntary Carbon Market (VCM) and so verification agencies and project leaders can use more optimistic algorithms to say they have reduced deforestation by a higher rate than they actually have, allowing parties involved to issue and sell more credits.
The overestimation of the reduction effect has been exposed recently by researchers at the University of California Berkeley who found that, of 96 million ‘cookstove credits’ verified by organisations like the aforementioned Verra, 40% led to 9.2 less avoided emissions than claimed and 90% do not avoid the emissions claimed. With companies such as British Airways, easyJet and Shell using these credits over the last few years, we have to question to what extent is the VCM encouraging greenwashing?
The value of a cookstove credit is created by distributing less energy heavy cookstoves to communities using dirtier fuels.
South Pole Scandal - The Kariba REDD+ Project
South Pole is a Swiss carbon finance consultancy firm who source the majority of their revenue from emissions sales but do not present themselves as an emissions trading company.
In 2023 the company parted ways with the Kariba Forest carbon project which was developed by Carbon Green Investments. After widespread concerns by reporters that CGI was over issuing carbon credits from the project, led ratings organisation BeZero Carbon to downgrade and remove Kariba from coverage. However, since their involvement in 2010 the project has sold $100 million worth of credits and further investigation uncovered concerns that the profits which were meant to be redistributed to the community have gone to South Pole and CGI.
Voluntary Carbon Markets – “The Wild West”
The voluntary carbon market is one which buyers who do not need to reduce emissions but rather want to, due to shareholder pressure, net-zero claims, or consumer PR. Therefore, the motivation of firms involved in the market is their public image. Most recently, Apple came under scrutiny for using carbon neutrality claims from offsets to push an advertisement and PR campaign for Apple Watch ranges. This has led to an EU-wide ban on the use of misleading carbon neutral claims, to come in effect by 2026. Illustrating how the negative attention and press which has plagued the carbon offset industry as a result of somewhat ‘fraudulent’ projects has begun to change the outlook on ‘carbon neutrality’.
The main headwind facing the VCM is a lack of; regulation, standardisation, and transparency, all of which lead to distrust within the markets. The lack of transparency in the decentralised VCM’s means that large buyers of carbon credits are less confident that their credit reflects the ton value of carbon emitted as claimed. It is clear that some regulation could have a positive effect on VCM growth and usage as well as creating the real world change that the credit market is expected to boost. With the Voluntary Carbon Markets Integrity Initiative (VCMI) announced in June 2023 to provide a framework for carbon credits, and the VCMI’s presence at COP28 there are some efforts to reverse the damage done by essentially fraudulent projects.
The problem with carbon offset credits is two-fold. Overoptimistic claims regarding the amount of carbon offset, combined with the misrepresentation of what carbon offset is in the commercial and retail space. With over half of the world’s largest 2000 publicly listed companies boasting net-zero targets, how governments, certification agencies and regulators react to distrust in the voluntary credit market is a pressing issue.
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