Carbon Credits at a Crossroads

Buyers and sellers in the voluntary market are in hot pursuit of “integrity” after stumbles and scandals

In its conception, the carbon credit is an elegant tool — a way to drive much-needed investment to projects that reduce or remove greenhouse gasses from the air, while allowing the companies who buy them to supplement their other efforts to reach carbon- reduction targets and sustainability goals.

In practice, it can be messy. In the wake of punishing headlines on failures and fumbles, the voluntary carbon credit market has suffered brutal fallout. Perhaps the most crushing blow came from investigative reporting on a project that sold nearly $100 million in carbon credits to avert deforestation in an impoverished area of Zimbabwe. “The Great Cash-For-Carbon Hustle” in The New Yorker chronicled the Kariba project’s poor oversight, financial opacity, and failure to deliver as promised. The harshest critics likened the purchase of carbon credits to buying indulgences to atone for emissions instead of making honest efforts. For companies that bought Kariba credits — Volkswagen, Gucci, Nestle, Porsche, and others — it was a reputational bloody nose.

Amid reports highlighting problems around transparency and credibility, companies have pulled back from purchasing carbon credits (aka offsets) for fear of getting it wrong in the unregulated market, reports Carbon Direct. At the same time, carbon credit issuance has also fallen off dramatically. 

This nascent market generated some $2 billion for projects in 2022. Morgan Stanley projected the market would grow to nearly $100 billion by 2030 and $250 billion by 2050. But that would depend, it would seem, on restoring confidence that the credits represent consistently high-quality projects. 

It is “an inflection point,” according to a report from the World Economic Forum. “Urgent interventions, market reforms and corporate commitments to ensure credible participation in the carbon market are urgently needed. These are preconditions to growing market scale.”

The urgency was palpable at a recent gathering of company sustainability professionals. “The C-Suite is freaking out,” one member of the audience told a panel of carbon market experts at the Greenbiz24 conference in Phoenix. “What’s changed that we weren’t doing two or three years ago? How can we trust things are better now?”

The market is being reassessed and changed on pretty much every front — including types of projects, technology for measuring and monitoring them

The answer is that the market is being reassessed and changed on pretty much every front — including types of projects, technology for measuring and monitoring them, how payments are handled, and increasing oversight. “A lot of the legacy projects that have given rise to the press coverage have been healthy,” says Rob Lee, Chief Carbon Officer with Catona Climate who sat on the carbon credit panel. He argues that the shakeout has focused attention on getting it right. “Media coverage has uncovered some areas of risk.”

Watchdogs and carbon cowboys

Without doubt, the bad press has broadly heightened awareness, which could help avert the errors that tarred past forestry carbon credit projects. The government of Papua New Guinea, home to world’s third-largest rainforest, hit the brakes on the country’s voluntary carbon credit market in 2022 after the nonprofit watchdog Carbon Market Watch warned that the massive proposed Oro project raised “significant red flags” while local activists decried the “carbon cowboys” run amok. The moratorium on new carbon credit projects would allow time for the government to put in place a legal framework. Thus, the Oro was halted upfront, unlike the Kariba project in Zimbabwe, which chugged along under the radar for more than a decade. 

PNG hasn’t yet issued its regulations for voluntary carbon credits, but in December it signed a deal with the government of Singapore to sell carbon credits against new projects that meet that country’s strict oversight and legally binding criteria. 

Scaling Confidence

Sustained confidence — enough to scale the market to its potential — will rely on ensuring that projects have integrity. That means avoiding what’s called “leakage” — making sure that, for instance, protecting a plot of trees in one area doesn’t just drive deforestation next door. It means ensuring “additionality” — that carbon credits fund a way of avoiding or sequestering greenhouse gasses that wouldn’t have taken place without this income; an example might be replacing diesel generators in a poor village with renewable energy from wind or solar. But it wouldn’t necessarily include preserving a park that is already under government stewardship. Carbon credit projects need to offer “permanence” of the impact and not cause other problems in the community. And at their best, they should have co-benefits like providing employment or health benefits. In short, it’s complicated.

Sustained confidence — enough to scale the market to its potential — will rely on ensuring that projects have integrity.

Working feverishly to codify what constitutes a valid carbon credit project is the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent governing body for the industry launched in 2022 to set and enforce global standards. Their framework launched last March provides a set of rules for evaluating project verifiers (like Verra, which was involved in Kariba) and the systems they use to assess projects. They say this will unlock the flow of investment. 

“The Core Carbon Principles (CCP)… will reduce confusion, overcome market fragmentation, and give buyers confidence that they are funding projects making a genuine impact on emissions.”

A parallel initiative is underway to reward buyers who are using quality carbon credits in good faith and as a part of a credible emissions reduction strategy

On the demand side, a parallel initiative is underway to reward buyers who are using quality carbon credits in good faith and as a part of a credible emissions reduction strategy (and distinguish them from companies that are merely posturing). Working with the nonprofit Voluntary Carbon Market Integrity Initiative (VCMI) and meeting stringent standards, buyers can make a Carbon Integrity Claim, which “provides confidence and communicates climate leadership,” according to VCMI’s Raffaella Infanti, also on the panel in Phoenix.

New types, new tech

The reporting that rocked confidence in carbon markets centered largely around rainforest protection projects called REDD+ (reducing emissions from deforestation and forest degradation in developing countries), which make up the vast majority of existing carbon credit projects. The underlying flaw was how they set their baseline, resulting in over crediting — vastly overstating the benefits of the project.

Better technology along with the improved standards should make it easier to separate wheat from chaff. The use of satellite imagery is being employed to monitor large, far-flung forest projects. AI may also have an important role to play. Kanop, a company based in France, is deploying what it describes as “cutting edge satellite imagery with advanced AI” for detailed monitoring of project size and biodiversity, with the express goal of supporting the voluntary carbon market.

New types of projects in the pipeline may also bolster confidence and scale of the carbon market. One wide-open sector is agriculture, which generates some 10–12% of global greenhouse gas emissions as currently practiced, according to the International Panel on Climate Change. Transforming agricultural practices is critical to preventing the worst effects of climate change, IPCC says.

Agoro Carbon Alliance is among the companies pursuing the great potential for soil to sequester carbon — and generate carbon credits — through the practice of regenerative agriculture. The company has started working with farmers and ranchers across the U.S. to transition to regenerative operations — using practices like no-till cultivation, ground cover, adding species and rotational grazing. So far, they have enrolled 2 million acres in their program, which they estimate will sequester about 7 million tons of CO2.

Agoro makes a compelling case that this is fertile ground for carbon credits. “We are not just sequestering carbon from the atmosphere, but we are improving water conservation and soil health, making operations more resilient to climate change and increasing biodiversity,” says Dylan Lubbe, the company’s commercial director. “These are all co-benefits that come with reducing carbon. So that’s a very unique value proposition.”

Another novel and expanding program in the U.S. generates carbon credits by planting trees in small towns and underserved neighborhoods where governments don’t have the budget to plant and maintain them. As co-benefits, the program cites providing shade and cooling as temperatures hit new records, improving water retention and adding youth jobs in planting and maintaining trees. 

Adjusting expectations, accepting risk

Carbon market professionals are working on regulating an unruly market, and that will take time.

Carbon market professionals are working on regulating an unruly market, and that will take time. 

In the meantime, for companies hoping to use carbon credits to demonstrate commitment to climate goals, the experts in Phoenix had some suggestions. 

First, don’t be over reliant on carbon credits. They are intended to cover emissions that can’t immediately be mitigated by actions that actually reduce emissions – like policies to limit business travel, changing to renewable energy sources and building efficiency.

Second, consider going through the Claims process with VCMI. Their program vets your overall emissions reductions approach so you can confidently communicate your climate efforts. That way you can avoid the reputational risk of greenwashing accusations as well as understating your efforts ie. “green-hushing,” says Infanti.

Third, don’t be a passive buyer. Get familiar with the project if you buy carbon credits and be familiar with co-benefits. And if something goes sideways in the project, be transparent. 

“What you’re paying for is not CO2,” says Yuhau Lin, a panelist from Morgan Stanley specialized in environmental commodities. “You’re paying for an action…to provide incentive for a tribe, for instance, to be a steward of forest. Or incentivize a recycler or collector of refrigerant gasses… There is no greenwashing when you simply describe what you have done.”

Finally, don’t despair. 

“There have been hiccups along the way, but I think people need to understand this market has actually done a lot of good,” says Lubbe of Agoro. “It’s going through a transition right now but this is a transition that is needed and ultimately good for all the stakeholders involved.”

Kari Huus is an independent journalist focused on the business of the climate transition. She pivoted to this beat in 2019 after a 25-year career that included stints covering China, international business and foreign policy for Newsweek, The Far Eastern Economic Review, and MSNBC. She lives in Seattle and works with a team of journalists located around the globe to publish the nonprofit news site Climate & Capital Media.