In recent years, the voluntary carbon market (VCM) has come under fire in the media on the basis that some projects may not have reduced greenhouse gases to the extent claimed by their participants, undermining the environmental integrity of the carbon credits they generate.
Critics say much of the market is made up of these ‘junk’ credits, while supporters have been up in arms over these negative press reports, saying they undermine the good work being done by thousands of carbon market professionals to cut real emissions, improve living standards for people in developing countries and promote biodiversity, among other benefits.
One of the challenges facing the VCM is that it has been very difficult for investors and other participants to assess independently whether a particular project methodology is 100% reliable, whether it has been fully applied on the ground, or whether the independent verification by third parties has been carried out properly.
Some projects have been accused of using inflated baselines against which to measure emissions reductions or avoidances, calling into question the so-called ‘additionality’ of the project – whether it delivers reductions compared to what would have happened in the absence of the project.
Carbon reduction and avoidance projects often use business-as-usual baselines to measure the impact of their projects: estimating what emissions would have been in the absence of the project, in order to calculate how many tonnes of CO2 have been avoided or reduced.
As a result, much of the underlying workings of carbon projects has been taken on faith – faith in the standards setters, project developers, verifiers, and other stakeholders, in what is still an unregulated market. Other aspects that have been called into question include the permanence of emissions reductions in forestry projects, for example.
Partly as a result of these critical press reports, buyers and investors began taking a more cautious approach to carbon credits in 2022 and 2023, prompting a general trend toward lower prices – to the frustration of those wanting to expand the VCM to allow it to play a meaningful role in achieving net zero emissions by 2050.
‘Greenwashing’ claims don’t stack up
A general accusation sometimes thrown at the VCM is that the entire system is little more than a ‘greenwashing’ tool – allowing corporate emitters to continue on a business-as-usual trajectory while paying for questionable carbon projects in developing countries to give the impression of being good corporate citizens.
This is far from a fair summary of the VCM. In the vast majority of cases, projects have been developed in close alignment with detailed and publicly available methodologies and are subject to rigorous and independent verification by professional quality assurance companies.
Moreover, a study released in October 2023 by information provider Ecosystem Marketplace found that the vast majority of companies buying carbon credits are much more likely to have reduced real emissions than those who are not.
The study concludes that, far from being a greenwashing exercise, in most cases these are companies making genuine efforts to reduce emissions, and turning to carbon credits in good faith, in an attempt to compensate for any remaining emissions that are too difficult or expensive to reduce.
None of this completely eradicates the possibility that some projects may have questionable environmental integrity. But what it does demonstrate is that companies buying carbon credits tend to be making outsized efforts to cut their emissions compared with those who are not.
The need for governance
Groups like the Compensate Foundation have warned that the VCM is “riddled with a lack of transparency and quality standards, which are imperative for fostering high integrity and trust – the fundamental requisites for the market to expand.”
“The voluntary carbon market is at a crossroads. It has evolved, until recently, under very little regulation and public scrutiny. Suddenly, many of its flaws are being exposed to market players, regulators, and the wider public, sending shockwaves to the whole industry,” the Compensate Foundation said in a report in 2023.
Recognising the need for better trust and confidence in order for the market to scale, participants came together to bring in professionals from the carbon markets as well as financial regulators to develop two groups – the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Market Integrity Initiative.
These two independent governance bodies have undertaken several detailed stakeholder consultations in a bid to understand the underlying problems in the VCM and to develop guidelines for best practice.
The ICVCM has focused on environmental integrity in the supply side of the market, by developing a set of Core Carbon Principles which set minimum quality thresholds for projects and the methodologies that govern them.
Meanwhile the VCMI has focused on the demand side, by developing a Claims Code of Practice – effectively a set of guidelines setting out best practice on how corporate emitters can use carbon credits and what they can legitimately claim as a result.
In addition, the carbon standards-setting groups have made strenuous efforts to show that their methodologies are transparent and publicly available for scrutiny, and have undertaken continuous improvement processes to re-assess methodologies whenever needed.
Due diligence, independent ratings
It should also be pointed out that several options exist to enable potential end users or investors to assess the environmental integrity of any given carbon project. For example, private sector ratings agencies have emerged that provide science-driven analysis of carbon projects, including independent analysis involving satellite data, for example.
These include Calyx Global, Sylvera and BeZero. In some cases, these carbon ratings agencies have assigned low ratings for projects where they believe there is a low likelihood that a project genuinely reduced, avoided or removed emissions, allowing investors to better understand their risk exposure.
Despite this multifaceted sweep of work being done to address perceptions of poor environmental integrity in the VCM, the cautious ‘wait-and-see’ mood among buyers and investors has prevailed through 2023, as participants await concrete steps by the governance groups that may ultimately help to reduce risk and boost confidence in the market.
Everything to play for
At stake is the ability of the VCM to play a significant role in helping the world reach net zero emissions by the second half of this century. If the ICVCM and VCMI’s work succeeds in rooting out bad or faulty practices in the market, there is every chance that larger volumes of capital will flow into the VCM, lifting the price of carbon credits and helping the market to make a major contribution in the goal to avoid dangerous climate change.
If their work fails, or is only partially successful, the negative press reports are likely to continue well into the future, potentially curbing interest in the VCM and stunting its growth.
One possible outcome from such a scenario is this: if the issues around environmental integrity cannot be solved on the supply side, then the market may be forced to find solutions on the buy side.
One trend that has begun to emerge is that buyers and investors have shown some interest in investing directly in carbon projects as a way to avoid uncertainties around carbon credits whose environmental integrity is not easy to assess.
A further possible demand-side trend is a ‘flight to quality’ whereby buyers shift their interest toward credits from projects whose additionality is not in question, for example Direct Air Carbon Capture and Storage projects, or other types of carbon removal that do not need to rely on baselines at all.
Either way, the VCM is poised for significant growth as the urgency of reducing the atmospheric CO2 concentration intensifies. But its scale and future direction are now uncertain and depend partly on whether the supply side issues can be resolved, or whether buyers take a more assertive role in determining which project types scale up.
A further factor helping shape future direction will be decisions in 2024 by the United Nations Article 6.4 Supervisory Board, which is expected to refine the eligibility rules on carbon credits that will be accepted under the Article 6.4 market – a system for voluntary credits under the Paris Agreement that aims to replace the UN’s Clean Development Mechanism.
Project types that gain the UN stamp of approval may see a surge in interest, while those left out may see demand dry up, creating a possible two-tier market for carbon credits.
