Cop26 Perspectives

The ESG Interview: Crunch Time for Carbon Credits

Sylvera CEO Allister Furey says buyers need more transparency and standardisation for the voluntary carbon offset market to reach its potential.

When BP bought US$100 million of carbon offsets from the Colville project, there was little chance it could have imagined watching that investment literally go up in smoke during the US forest fires in August this year.

Microsoft was another organisation that watched its hopes for carbon offsetting turn to ashes as the Bootleg Fire devastated the Klamath East project in Oregon.

Rather than make a meaningful contribution to plans to reach net zero by 2050, the projects inadvertently made the problem worse.

Spot the difference

The forest fires this year acted as a clear reminder to buyers that the voluntary carbon offset market is opaque; a challenge carbon offset ratings agency Sylvera is trying to tackle.

Allister Furey, CEO at Sylvera, says: “You have a world where there are real differences in quality between carbon offset projects, but that difference is not observable. No one can see what a good project is and what isn’t.”

And the challenges with voluntary carbon offsetting do not end there.

The market is fragmented and offers little in the way of standardisation for either buyers or sellers. This is because voluntary carbon credits suffer from what McKinsey calls variation in accounting and verification methodologies, and because credits’ co-benefits – such as community economic development and biodiversity protection – are “seldom well defined”.

Furey says all these shortcomings result in good carbon offsetting projects becoming tarred with the same brush as those that are failing.

“Reporting is not perfect; audit mechanisms aren’t perfect, and the data hasn’t been perfect. Any issue that occurs on a given project is going to taint the whole market because nobody can tell what is in the poor end. But one scare story should not represent the market as a whole,” he says.

Rocketing prices

These are significant obstacles to overcome if, as the Taskforce on Scaling Voluntary Carbon Markets (TSCVM) predicts, demand for carbon credits increases by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050.

Overall, the market for carbon credits could be worth north of US$50 billion in 2030, and as buyers see their offsetting spends escalate, they need to be able to identify projects that genuinely help them achieve their net zero goals.

A recent research report from Sylvera, ‘The Carbon Credit Crunch’, says some companies such as fossil fuel producers are reliant on carbon offsetting to reach net zero since reducing their own emissions in time to reach the Paris agreement deadlines is nigh on impossible. It is these businesses that are hardest hit by escalating carbon offsetting prices and as such need to be able to justify the multi-million dollar hit to the balance sheet.

Furey says: “What used to be a six-figure spend is now an eight-figure spend, which gets the CFO’s interest. Companies can spend US$20 million, a year but they need assurance that if they spend this money, it must be worthwhile. They can’t spend shareholders’ money on something that’s not real.”

And those assurances, Furey says, comes from Sylvera’s carbon offset rating.

“Once the quality projects are visible, everyone wants buy at the good end which creates a mechanism to remove the failed projects. Buyers will put more and more money with the best developers, which pushes the bad ones out and creates a virtuous circle,” he says.

No get out of jail free card

Furey argues that the increasing cost of good quality projects will force companies to start reducing their emissions rather than passing responsibility to the offsetting market.

“Offsets should not be a get out of jail free card for companies on their route to net zero and with prices going up, I think they will be more of a penalty than a bypass,” Furey says.

The debate on the role of offsets in firms’ net-zero pathways is a lively one, to say the least, with many seeing offsets as a complementary measure to decarbonisation rather than an alternative.

Fury refutes allegations that offsetting is akin to cheating; at least not among the organisations interested in Sylvera’s services.

“Some make the case that [offsetting] creates a moral hazard because organisations could buy their way out, but we don’t really see it [happening]. Certainly not with our customers because these are the traders and buyers who care about quality, and they don’t see this as cheating.” he says.

Sylvera certainly does not scrimp on the science and technology. The company uses satellite imagery to map the impact of nature offset projects over time to determine whether sellers delivered on their offsetting promises.

Furey says: “If you’ve sold a million tonnes that relates to protecting or restoring forests, we ask did that happen in reality?”

Sylvera also explores the permanence and additionality of offsetting projects.

“Permanence is about looking at the lasting impact. For example, the seller might have a grown tree, but did it eventually get chopped down,” Furey explains.

“Additionality asks would that tree have grown anyway, or would it have been cut down at all; were they protecting a forest that wasn’t really under threat?”

Sylvera uses all the data – along with ratings on the socioeconomic impacts – and rates the project against the sellers’ claims, eventually deciding a quality score based. These scores provide the data needed to plug the existing auditing gaps in the offsetting markets.

A united front

All this should be music to the ears of those on the TSCVM which is looking to harmonise and standardise the voluntary carbon offsetting market; an impossible objective without quality, independent data.

As Cynthia Cummis, who sits on the TSCVM and is director of Private Sector Climate Mitigation for World Resource Initiative, says: “Today, demand in the voluntary carbon market is held back by a lack of a high-quality standard for credits. Corporate buyers are concerned about the environmental and reputational risks connected with the purchase of credits.”

Sylvera will also prove a useful tool for the likely rush on net zero plans from corporates ahead of COP26.

Furey says: “COP26 will mean more net zero announcements because companies want to show they are on board. Corporate A will say they are net zero but what investors need is reports to evaluate that. If businesses are using offsets, then they should report that basket of offsets based on quality data, which investors can assess.”

Without voluntary carbon offsetting there is scant chance of achieving global net zero ambitions but in its current form the market lacks a transparent and reliable framework.

Sylvera’s service and the work of the TSCVM could change all that, but decision makers at this year’s COP26 will need to provide solid support.

 

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