Do Voluntary Carbon Markets Help or Hinder Climate Action?  

As media investigations reignite the debate on the viability of carbon offsets, academics argue for wider stakeholder engagement and changes to carbon accounting approaches to build robustness.  

It’s not been a good start to the year for the voluntary carbon markets (VCMs), with two major press investigations alleging that forest-based offset projects are misleading in their carbon emissions reduction claims and at worse ineffective. Social media was scathing with criticisms in reaction. Greta Thunberg said it showed “the ugly truth of carbon offsetting”.  

It’s the latest chapter in a long-running and fierce debate on the viability of offsets to reduce the carbon emissions of people, businesses and investors.

REDD+ offsets, the subject of the press articles, have been under particular scrutiny, with leading verifier of these offsets – Washington-based Verra and offset provider Zurich-based South Pole – coming under fire for overstating carbon emission reduction claims.

Both firms have strongly rebutted the claims – here, here and here. Steve Zwick, Managing Editor, Media Relations at Verra, tells ESG Investor that the scientific approach to independently verify the organisation’s carbon reduction emission claims did not consider locality and instead used “synthetic modelling” which would lead to incorrect findings. 

Uncertainty of claims  

REDD+ [Reducing Emissions from Deforestation and Degradation] helps fund projects to prevent deforestation in areas at risk of such activity. Proponents say it is a vital way to pay local communities, lacking basic needs and economic opportunities, to stop logging or burning down forests for money or land. In the context of the climate mitigation and adaptation finance needs highlighted at COP27, offsets could be a crucial funding channel from businesses and investors in developed countries to the Global South. 

The projects forecast how much deforestation they will stop, with the claims assessed and verified by the likes of Verra. If claims are accepted, they can be used to generate carbon credits, using an approved formula to convert it into saved CO2. Companies or individuals can buy and use these credits to offset their own carbon emissions.  

This hypothetical and scenario-based element of REDD+ means there will always be a degree of uncertainty to the claims. Zwick from Verra says for this reason “uncertainty values” are factored into carbon reduction claims.  

However, in reaction to the latest criticisms, academics from the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (LSE GRI) now say ‘uncertain credits’ shouldn’t be used in accounting systems that treat each tonne of carbon reduced or removed as a certainty, because doing so distorts accounting and may weaken incentives to decarbonise. We’ll return to this later.   

Moreover, there doesn’t appear to be strong scientific consensus on the effectiveness of REDD+ or even VCMs in general. Rob Macquarie, Policy Analyst and Research Advisor to Professor Nicholas Stern at the LSE GRI, blames this on a lack of candid dialogue between those involved in the VCM industry and those who seek to research and scrutinise it, saying there is a need to “transcend the methodological finger pointing and endless debates”.  

Although ongoing science-based exploration of the underpinnings of the VCMs is vital, businesses are making decisions on their role in net zero transition strategies today. With the VCM market reaching US$2 billion last year, and around 500 million carbon credits traded, it is already important to investors scrutinising how their investee companies are reducing their carbon emissions through the use of carbon offsets. 

There are clearly serious global consequences if the emission reduction claims tagged to these offsets aren’t happening in the real world, despite the good work in protecting nature an associated project may do. 

Lack of engagement 

Dr. Gillian Marcelle, CEO of Resilience Capital Ventures and an academic originally from the Caribbean, who has a track record of attracting investments to the Global South, says it is important to acknowledge that carbon credits like REDD+ deal with two very different issues with two very different objectives. Firstly, scaling up finance to the developing world to protect nature, and secondly, tackling global accumulated carbon emissions, predominately created by the developed world.  

The massive US$5.2 trillion sustainable development financing gap means VCMs need to play a role, says Marcelle. REDD+ is especially vital as forests are a major carbon sink, notes Macquarie. “We know that land use can conceivably provide up to around a third of emission savings needed to get us on a pathway to limit warming to 1.5 degrees.” 

But while Marcelle criticises the press for “gotcha journalism” which provide no solutions for the Global South, she admits that there is still a large gap between those running VCM projects and people on the ground implementing the work, in a market that is highly competitive with closed boundaries.  

Many running these projects say they do engage local communities and include them in decision-making processes. However, Marcelle says that the nature-based financing community have not been particularly embracing of the critique from development professionals such as herself and do not engage.  

“They appear to be very unaware of the different approaches to tackling global problems. They are not used to broad engagement. They didn’t take on the progressives because that’s not the way they typically work.”  

Macquarie also stresses the importance of frontline communities being at the table in VCM deals and project developers obtaining their genuinely free, prior and informed consent, asserting also that there needs to be a change in how claims for some VCM credits are accounted for. He and colleagues have authored a blog saying that only credits with effects that can be measured with certainty should be used to substitute for emissions that could have been avoided with equal certainty, like taking a train rather than flying.

So-called uncertain credits, where risks can’t be measured easily, should be used by companies to make claims about contributions to overall mitigation goals.  Macquarie declined to comment on whether uncertain credits could include all REDD+. 

Guidelines and standards  

A key issue underpinning this debate and the VCM market in general is a lack of regulation, notes Mark Kenber, Executive Director, Voluntary Carbon Markets Initiative (VCMI), which alongside sister initiative the Integrity Council for the Voluntary Carbon Market (ICVCM) are developing guidelines and consensus on the use and issuance of carbon credits.  

VCMI is looking to provide guidelines for business on the responsible and effective use of carbon credits. The ICVCM is focused on setting new threshold standards for high-quality carbon credits, ensuring they represent genuine carbon reductions or removals and deliver real value to communities in which they operate. Both bodies have representatives from indigenous communities on their boards.  

Commenting on the recent press exposes, Kenber tells ESG Investor via email: “It is undeniable that some carbon finance projects across the globe lack the rigour required to deliver a meaningful impact on limiting global warming. This is an unfortunate reality of a relatively nascent market.” 

But he says when used correctly, carbon credits can play a key role in global decarbonisation by directing finance to restore natural carbon sinks in the Global South that would otherwise remain unfunded.   

The VCMI is working on developing the ‘Claims Code of Practice’, which he says will establish trust and transparency in the market alongside the ICVCM’s planned ‘Core Carbon Principle’.

Kenber also says that in an ideal world, carbon offsets wouldn’t be needed at all but 30 years of failed climate negotiations between governments makes VCMs necessary for the private sector to contribute to climate mitigation efforts.  

Governments are still to decide how carbon credits may be used to meet Paris Agreement obligations and how voluntary and UN carbon markets will interact. The talks have been deferred from COP27 to this year’s COP28 in Abu Dhabi. Along with the work of VCMI and ICVCM, it makes 2023, potentially, a very important year for the robustness and future of carbon markets.  



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