COMMENT: Voluntary carbon markets – broken more than breakthrough

Published 15:33 on June 17, 2021  /  Last updated at 12:45 on December 19, 2023  /  Africa, Americas, Asia Pacific, Aviation/CORSIA, Bavardage, China, Climate Talks, Contributed Content, EMEA, International, Kyoto Mechanisms, Mexico, Middle East, Nature-based, Other APAC, Other Content, Paris Article 6, South & Central, US, Voluntary

The voluntary carbon market is supposed to be saving the world. Instead many carbon credit retailers are lining their pockets, warns market veteran and Redshaw Advisors founder Louis Redshaw.

By Louis Redshaw

The voluntary carbon market is supposed to be saving the world. Instead many carbon credit retailers are lining their pockets.

The problem of slowing and even reversing climate change is growing ever more pressing. In my view, there is only one viable solution to this problem: putting a price on carbon (and other greenhouse gas) emissions.

The notion that humans can be collectively abstemious and forgo our modern, energy intensive way of life (not to mention the billions of people that have never been on a plane or been able to rely on something as basic as refrigeration) is wishful thinking.

If we are to fix the problem, it is my absolute belief that we need to harness the capitalist infrastructure and beliefs that have not only got us into this position, but that underlie most people’s view of what modern life is: the ability to make one’s own choices tempered by, amongst other things, the ability to pay.

Putting a price on carbon to reflect a truer external cost to consumption, whereby the polluter pays, can produce some encouraging results: consumption of GHG-producing raw materials, such as fossil fuels, is disincentivised and technologies that obviate their need are developed in response to a price incentive.

For example, thanks to subsidies and/or a direct price on carbon, there have been such large advances in the economics of wind and solar power that electricity production from such resources can now be cheaper than that produced from traditional fossil fuels, without requiring a carbon price. Other emerging technologies are also taking advantage of carbon pricing regimes around the world to make them economically viable.

I’m a huge advocate of carbon pricing. I’ve dedicated my career to championing the cause of environmental markets and finding the best solutions for clients within them. I have traded many, many millions of tonnes of carbon and gained experience of the good and bad parts of this emerging market. I’ve not been afraid to use that experience to expose the flaws.

A price for carbon can be an enormous force for good, if done in the right way. However, and to be fully transparent, I must regretfully dwell on the main reasons why I think that the voluntary carbon market is more broken than breakthrough. Hopefully by pointing out what is wrong, we (the collective industry of carbon markets) can make things right.

Despite carbon pricing’s obvious advantages, actually putting a price on carbon has proven to be a much more complex exercise than the simple underlying economic theory.

Politics has managed to get full-square in the way of progress, such that even the European Union’s ‘flagship’ emissions pricing regime, the EU Emissions Trading Scheme, only covers around 40% of Europe’s emissions.

But there is consumer demand to fill at least part of the missing 60% and so an alternative market has grown in response – the voluntary carbon market.

Voluntary carbon footprint offsetting standards can trace much of their origin to the United States. It did not ratify the Kyoto Protocol and thus could only turn to an unregulated, voluntarily implemented market to meet the need for some individuals and companies to be able to ‘do something about climate change’. Richard Sandor’s Chicago Climate Exchange created and ran a wholly voluntary market.

The Voluntary Carbon Standard (VCS), drafted by very well-meaning individuals and organisations, drew upon some of the rules implemented by the Kyoto Protocol’s Clean Development Mechanism (CDM) and proceeded to supplement some of them. The VCS paved the way for multiple standards, some of which have global reach thanks to their simplified procedures and lack of sunset date (that currently dissuades carbon reducing projects from registering with the CDM).

But herein lies the problem. There is no single standard for measuring the prevention of putting a tonne of CO2 (or its equivalent) into the atmosphere (or its removal from the atmosphere), and the issuance of a carbon credit to prove it.

In practical terms, this means that there isn’t a single, transparent price for what is essentially the same thing – a carbon credit. Without a single standard, there is a high probability of confusion about whether one standard is better than another.

But it gets worse.

Some routes to creating a carbon credit were not implemented justly (in particular Joint Implementation, another Kyoto Protocol ‘flexible mechanism’) and there exists variety within the standards too. Some projects simply reduce CO2 emissions, others, for example, also build schools, save rare parrots or bring employment to the local community. All laudable activities for which there can be demand, but that are generally unrelated to climate change.

Due to this complexity, when we at Redshaw Advisors describe the voluntary carbon markets to clients, we say that if there are 1,000 projects issuing carbon credits, there are at least 2,000 different prices for the credits.

Due to oversupply and under-demand, project developers not only seek to distinguish their own project from all of the others, but many carbon offset retailers also seek to distinguish new from old carbon credits (although most seem to hide vintage from their end-user customers), all in an attempt to boost prices for their carbon credits.

While this behaviour may be understandable, the perceived diversity of standards and project types creates some enormous problems for the voluntary carbon markets that can be summarised as follows:

1. Poor price transparency

Outside of the voluntary carbon market specialists, no-one knows what the true value of a voluntary carbon credit is. With so much choice of different project types, jurisdiction, vintage, sustainable development credentials and other factors, there simply isn’t enough competitive buying and selling interest for each unique type of carbon credit for a bid and offer market to be sustained.

While there are a few platforms that act like bulletin boards for carbon credits to be bought and sold, the reality is that while offer prices are available, there are few bids. The cost of dealing on these platforms is so high that even if there was a so-called two-way market (i.e. with bids and offers) traders and market-makers are not interested in providing secondary liquidity.

Incredibly, even when these markets do trade, usually no price data is made publicly available. In fact, the only sizeable source of price data is Ecosystem Marketplace’s annual State of the Voluntary Carbon Market reports.

But even this annual (and backward looking) pricing source suffers from often statistically insignificant datasets and to make up the numbers, it mixes retail prices with wholesale prices, which can cause the value of any given carbon credit type to range by up to 2,000%.

2. Generating and perpetuating distrust of voluntary carbon markets

A market cannot exist without demand.

The voluntary carbon market is characterised by massive oversupply. This means that to succeed in the long term, and for there to be a meaningful price, demand needs to grow.

However, with such a wide variety of projects trading at sometimes wildly differing prices, and prices being hard to come by save for reports (such as the State of the Voluntary Carbon Market) that can come more than one year after transactions take place, it is hard for buyers to make sense of it all.

Buyers are not typically specialists in the VER markets. For the market to take off, they shouldn’t need to be.

So, when faced with a seemingly endless choice of types of carbon credit to buy and with no reliable price benchmark to determine whether or not a given purchase represents value for money, it is no surprise that buyers shy away from this market.

Instead of working to address this distrust, which would help voluntary carbon offsetting demand to grow, it is our experience that some offset retailers feed the distrust. They do this by extolling the virtues of their portfolio of carbon credits or project at the expense of the others or they simply lie about the market.

They might have done this in the past just to survive the downtrend in prices caused by oversupply, but the cost is a market that is not winning over the average consumer.

3. Profiteering

As if the voluntary carbon market’s difficulties were not bad enough, there are offset retailers that set out to exploit the confusion in order to make a fast buck. Unfortunately, as far as we can tell, that seems to be more than a few of them.

Examples range from customers that have been sold a story about a retailer’s credentials but that don’t have the first clue what carbon offsets have been bought and retired on their behalf, to obscenely marked-up carbon credits that are put up for sale on websites to consumers who trust the slick marketing of the offset retailers.

We have easily found mark-ups of, by our calculations, up to 1,500%, possibly more.

Personally, I am disturbed by such practices; if a company or individual is prepared to make what essentially amounts to a charitable contribution to try to save the planet by buying carbon offsets, then their contribution should, in the majority, accrue to the project or project investor.

I doubt they would buy carbon credits in the knowledge that 90% or more of their money is headed for the back pocket of their supplier. If the right price signal isn’t being received by enterprises that can cause emissions reductions to take place, how will more emissions reductions be encouraged?

Some of the offending retailers market themselves as B-Corporations, i.e. they commit to putting planet before profit. This doesn’t stack up, but so long as voluntary carbon credit prices remain so opaque, not even the B-Corp certifiers are likely to be able to call them out.

Another insidious practice stems from the fact that the voluntary carbon markets are not regulated, nor is the use of the term ‘carbon neutral’ and ‘net-zero’. This means that any carbon credit can be, and seemingly is, used by companies claiming to be carbon neutral, including those that are widely recognised to not be valid CO2 reducing carbon credits at all.

If a customer doesn’t know what kind of carbon credit they are buying or if they don’t know its full provenance, they must rely on their service provider to be honourable.

Some simply aren’t. The recognised voluntary carbon market trade body, the International Carbon Reduction and Offset Alliance (ICROA, funded by offset retailers), has a code of best practice that doesn’t stop members from retailing all manner of low quality offsets.[1]

We’re not members of ICROA, because its code of best practice is simply not sufficiently aligned with our view of how the voluntary carbon market should operate.

4. Boiler-room tactics

They have been used to sell what were essentially worthless types of Verified Emission Reductions (VERs) to pensioners and other vulnerable individuals at inflated prices. You can read all about these sorts of cases on Carbon Pulse, as well as on the REDD Monitor website, where Chris Lang has done a sterling job since 2012 of shining a light on these bad practices.[2]

In the last few years, I have been asked to assist the prosecution as an expert witness in a number of criminal cases related to the mis-selling of carbon credits as investments.

The experience and process of preparing to explain the opaque world of the voluntary carbon markets to a jury has given me a unique perspective on what value VERs actually have, and why.

I learned how the voluntary carbon market’s opacity has been exploited by carbon offset re-sellers to inflate the price of what they sold so that they could line their pockets with excess profits.

There are parallels to be drawn with how carbon offset retailers operate. The fact that the defence teams used prices and screenshots from the websites of most of the well-known carbon offset retailers, that showed sometimes non-descript carbon credits on sale for inflated prices, to me says it all.

So where do we go from here? Transparency, transparency, and more transparency.

The widely publicised Mark Carney Taskforce for Scaling the Voluntary Carbon Markets has done a good job of highlighting many of the issues that plague the voluntary carbon markets, some of which, such as additionality, I haven’t managed to touch upon in this article.

The trouble with the taskforce is that it doesn’t have the right people in the room. The main thing that is missing in the voluntary carbon markets is demand, so the taskforce should be full to the brim with buyers, guided by facilitators that know the current state of the market.

It isn’t.

It almost certainly shouldn’t have as members companies that have a vested interest in the continued opacity of the voluntary carbon markets.

It does.

The taskforce hasn’t yet provided a solution, I suspect, because it has been handicapped by too many interests pulling in opposite directions and because the more reasoned voices are in the minority.

The solution to bad market practices is simple: voluntary offsetting must be underpinned by transparency. If a company claims to have offset a significant number of tonnes of emissions, showing where the carbon credit retirements have taken place so that they can be scrutinised is surely a minimum requirement.

A cleansing light can be shone on profiteering practices by wholesale transaction prices being published. We often hear the complaint from project developers that retailers are bad actors because they buy for X and sell for 2X.

Profiteering retailers won’t want these prices to be known, but there’s nothing to stop carbon credit producers publishing their transaction prices.

If most market participants can do these two simple things, the result will be to start to fully legitimise carbon offsetting and to grow the demand that is needed to bring meaningful prices to deserving project activities.

Only when the existing market practices are cleaned up, we can turn our full attention to improving standards and debating the relative contribution of avoidance and removal carbon credits.

In the meantime, the only way that we as a company have got comfortable with providing VERs to our clients for carbon footprint offsetting purposes is to set our own minimum quality constraints and to transparently price them.

To this end, we have committed to charging no more than 15% above our cost of the voluntary market carbon credits concerned. Our prices are auditable by a third party if requested and, wherever possible, our carbon credits are sourced direct from projects.

We’ve since heard this approach described as a “Seller’s Pledge” by Dee and Richard Lawrence who run the non-profit Cool Effect, that sells VERs at around 9.87% over their cost.[3]

There are a handful of other companies doing similar things if you look hard enough for them, but most don’t disclose their mark-ups and they shun transparency.

There are willing customers out there that want to spend their hard-earned money to help save the world from climate change. They are willing and able to provide the demand to the voluntary carbon market that it needs.

But many will only want to do so if the voluntary carbon market can offer them a transparent, fair and future-proof solution.

That being said, we are not alone in recognising the deep-seated problems within the voluntary carbon market and there are organisations around the world building platforms that will bake in good governance and transparency.

For example, AirCarbon Exchange, a global carbon credit trading venue, among others, show an optimistic vision for what the future can hold for the voluntary carbon market – but without widespread adoption of transparency, standardisation, governance and accountability across the industry, this future may be a distant one.

Louis Redshaw is founder and CEO of London-based Redshaw Advisors, an award-winning carbon risk management and procurement firm.



[3] 9.87% is Cool Effect’s calculated operating cost. “We want every buyer to trust that their donation is going to make a difference.”