Companies that create offset projects will be under pressure to provide both supply- and demand-side transparency.
The emerging trend of companies developing their own carbon credits to fulfil decarbonisation commitments risks further complicating voluntary carbon markets (VCMs), which are already beset by credibility challenges.
“Companies want to make sure that they are front of the line to access carbon credits, so they are developing their own,” Tristan Loffler, Head of Carbon Credit Integrity Analysis at specialist data, analysis and advisory firm Trove Research, told ESG Investor.
“But there’s not yet enough evidence on the integrity of these projects, and questions remain as to how companies will utilise the credits they develop.”
Pharmaceutical company GSK is investing in community-led projects to restore over 2,500 hectares of mangroves in Indonesia, which it expects to deliver between 120,000 and 240,000 tonnes of carbon removal credits annually from 2028-35.
Oil and gas major Shell houses a nature-based solutions team which is developing projects globally. Danish multinational power company Orsted is working to create its own carbon credits by upscaling bioenergy carbon capture and storage from its combined heat and power plants, with ambitions to capture 200,000 tonnes of CO2 from 2025.
“Will these companies sell the surplus of credits they aren’t using themselves on different marketplaces, or will they go direct to other companies? We don’t yet know how it’s going to play out,” said Loffler.
“However, one of the main concerns [for investors] will be around transparency, as the value chain is set to become more complicated, with companies becoming both buyers and suppliers.
“It’s important that these companies are practicing transparency across each role, and investors will want to see companies securing third-party validation that their projects and carbon credits are of high integrity,” he said.
VCM participants across the value chain have come under increasing pressure to improve transparency, due both to concerns over the social and environmental benefits they achieve and opacity over costs.
Project developers are being asked to demonstrate that their projects are of high integrity and consider the environmental and social risks and benefits. Companies buying credits to offset a percentage of their emissions are expected to outline plans to decarbonise the majority of their emissions first, only using credits to offset the remainder.
“The reputational risks involved [in VCMs] are getting more extreme,” said Loffler.
Third-party carbon credit verification firm Verra recently came under fire following an investigation which claimed only a “handful” of Verra-approved rainforest projects showed evidence of deforestation reductions, with 94% of the credits produced adding no benefit to the climate.
Last week, Verra published its updated draft methodology for carbon credits generated through reducing emissions from deforestation and forest degradation (REDD) projects. The update will replace the five separate methodologies it currently uses, such as Avoiding Unplanned Deforestation (AUD) activities.
Verra is in the process of finalising revisions to its risk mapping and allocation procedures.
Flexible standards
Trove Research has developed a new integrity assessment tool to provide investors with a “project-level view of integrity across a range of criteria”, according to Loffler.
The tool employs over 20 sub-criteria and 50 underlying metrics to conduct integrity assessments on the over 4,000 registered projects currently listed on VCMs. These metrics include risk mitigation and compensation, developer sentiment analysis, and project host country risk.
“People have different perspectives on what is meant by high integrity,” said Loffler.
“Our tool aims to provide flexibility for users to view or understand how they should view different VCM projects based on what matters to them.”
Trove’s tool builds on existing industry standards, such as the Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles (CCPs).
The ICVCM, which is focused on developing guidance on the supply side of carbon credit generation and the establishment of offsetting projects, will be releasing part two of its CCP Assessment Framework later in Q2.
The Voluntary Carbon Markets Integrity initiative (VCMI), which is focused on introducing demand-side rules for entities using carbon credits as part of their decarbonisation strategies, will also be publishing its revised Claims Code of Practice in Q2 this year.
