Are carbon credits a good thing?

Are carbon credits a good thing?

Carbon credits have a chequered history but look set to have a landmark year in 2021. No path to a 1.5-degree world is possible without some means of CO2 removal, but since their inception, carbon credits have been beset with accusations of facilitating greenwashing and overlooking emission reductions. Despite this, carbon credits sales have tripled over the past year to cover 100 CO2 megatons, whilst studies have forecast this to grow up to 2 gigatons per year by 2030. So, what is a carbon credit, and why are they topical now?

What are carbon credits?

A carbon credit is essentially a promise to reduce CO2 by one tonne. To achieve this, each credit is backed up by an offset project that either reduces new emissions or removes atmospheric CO2. In the voluntary carbon market, these credits are traded until purchased by a company that wants to balance their emissions, which they do by ‘retiring’ the credit from the market permanently.[1] The credit effectively acts as a carbon price and therefore has two benefits: it increases the cost of CO2 emissions for companies with net-zero targets, and it provides income for developers creating offset projects.

These offset projects vary widely in type, including:

Nature-based solutions, which utilise nature’s ability to sequester carbon by:

• Protecting existing tropical or coastal mangroves forests from deforestation
• Planting new trees in reforestation or afforestation projects

Industrial projects, which use technology to reduce carbon by:

• Investing in new renewable energy generation
• Ambitious high-tech efforts to directly capture carbon from the air (DACC)

Social projects, which reduce community emissions by:

• Replacing high-carbon cooking methods with cleaner cook-stoves
• Improving the energy efficiency of buildings

Already it may be clear that not all offset projects are created equal. Projects differ greatly in terms of their ability and costs for reducing carbon. Even within deforestation projects, it’s unclear which areas are best at storing carbon or which developers prevent logging effectively.

What’s wrong with carbon credit markets?

There are two main criticisms leveled against carbon credits. The first is that offsets can discourage firms from cutting their own carbon emissions. This is a valid criticism; offsets should only be used as a short to medium-term solution for the most stubborn emissions. The second issue, as Greta Thunberg has raised, is that credits can be used to ‘greenwash’ companies’ dirty activities. This comes about when naïve or dishonest buyers purchase low-quality carbon credits and make dubious claims of meeting sustainability goals. Quality of offset projects is therefore crucial, and is driven by two main things:

• Additionality = how much carbon is reduced that would not have occurred without the offset project
• Co-benefits = all the further benefits of a project, such as biodiversity, soil quality, or skills in the local community

Companies want to buy credits with a verified quality, but up until recently, the carbon credit market has been awash with older low-quality offsets that have kept prices low.

What’s changing now?

There are several recent shifts that are unlocking the carbon credit market on both the demand and supply sides. There’s been a large uptick in companies taking on voluntary net zero commitments, a recent study by Trove research has identified 543 companies with a goal consistent with 1.5°C as verified by the Science-Based Targeting Initiative (SBTi).  National governments should boost this demand if COP26 resolves Article 6 in the Paris agreement. This point aims to fix an issue whereby a single offset could be claimed by two countries: the purchaser and the home of the offset project. Until now, credit demand has been limited to the private sector, so with Article 6 finalised, demand from companies and the government is set to rise.

On the supply side, more trust is being brought to the quality of the market by three main groups:

• Voluntary Carbon Markets Integrity Initiative – this is a new governance body that brings together industry and experts to provide oversight to the carbon market.
• Standards – organisations such as Verra and Gold, who certify the quality of offset projects. Verra has recently held a consultation to add more recent scientific research and transparency to their additionality methodology.
• Tech start-ups – players bringing high-tech solutions to market. This includes Vlinder who are using block-chain to authenticate trades and Sylvera who use geospatial scanning and machine learning to rate project quality.

This rise in demand and quality of carbon offsets is exciting as this effectively introduces the high carbon price needed to incentivise emission reductions. Equally, this drives investment into the highest quality projects, nature-based solutions with verified additionally, and many co-benefits, as developers become confident in high credit prices.

Offsets aren’t perfect, but it’s increasingly looking like they fit as a piece of the climate change puzzle.

[1] This differs from the larger compliance markets where regulators create carbon permits that allow companies to emit a certain amount, any excess may then be traded.