Nature-based carbon and biodiversity markets should only sell credits after their impact has been scientifically proven in a bid to make them credible and scale investments, a new study has said.

The analysis, published in the journal Nature Sustainability and led by Tom Swinfield from the Centre for Carbon Credits at Cambridge University, stressed that carbon credit markets have so far faced severe credibility issues due to problems with proving additionality, with the nascent biodiversity markets risking inheriting similar shortcomings.

“The requirement for ex-ante forecasts comes from the need to attract upfront investment,” the study said.

“But as demonstrated, this creates huge risks for market integrity once ex-post evaluations demonstrate incoherence and bias in additionality claims.”

The key is to sell credits only after they have been proven demonstrably additional using new technologies and robust statistical techniques for impact evaluation, Sophus zu Ermgassen, an ecological economist at the University of Oxford and an author of the study, said in a summary posted on LinkedIn.

“[In this way] we know each credit represents real, additional gains,” he said.

“Imagine how an investment might upscale if investors were truly confident that every ‘unit’ of carbon was on average real.”

Project impact can be demonstrated using primary observations – including satellite remote sensing – and statistical counterfactual analysis that allows near real-time additionality tracking, the study said.

EX-POST

According to Swinfield, there shouldn’t be a need for projects to be proven additional before the fact.

“It’s like a factory owner promising to produce bikes before the factory is built. Ultimately, we only care once the bikes are produced,” he told Carbon Pulse.

“Of course, we have to make predictions about credit production to locate projects in the right places. But these predictions should not be sold as a ‘fait accomplis’.”

Yet, there are some strong leading indicators to help understand if the project will have a real positive impact, including if it is in a place that is likely to experience deforestation or, on average, how much the proposed interventions reduce deforestation.

Furthermore, it would be crucial to note if organisations involved have a track record of success, “or at least a good plan”, Swinfield said.

CREDIT ISSUES

One of the main challenges behind this approach is that it could lead to huge reductions in credit generation, with concerns that taking leakage into consideration could increase the impact further, the researchers noted.

“This raises fundamental questions about how to encourage markets to adopt scientifically credible methodologies when they produce fewer credits and what should be done with the large and growing quantity of existing credits,” the study said.

“However, as ex-post evaluations confirm that these credits genuinely correspond to real gains, this should have positive effects on market integrity.”

According to the study, adopting scientifically credible methodologies would become more financially appealing if the resulting credits have higher prices.

“Current nature-based carbon credits command lower prices because they are lower quality than credits with near-guaranteed additionality and permanence,” the study said, referring to direct air capture credits.

Recently, a trade involving direct air capture credits was valued at $2,055 per tonne, marking a significant increase in cost compared to REDD+ and ARR credits, as emphasised by the study, though a large part of that premium is due to project costs.

“Nature-based credits that genuinely slow habitat loss, or more ambitiously create new habitat, without leakage, that persist, and that properly compensate local people for opportunity costs, however, are just as innovative as direct air capture.”

Ultimately, addressing integrity issues alone will not drive a solid rise in prices in a market that remains voluntary, the researchers said.

“Investor confidence will only materialise at scale when there are clear, long-term demand signals, underpinned by regulation, as with regulated carbon markets such as the European Union emissions trading scheme.”

BIODIVERSITY CHALLENGES

Additionality represents a major challenge in the emerging biodiversity market, as measuring improvements in nature is more complex than in carbon.

Since biodiversity is ‘local’, methodologies designed to be broadly applicable – rather than focusing on a specific habitat or species – face significant challenges when tested on heterogeneous sites.

“Biodiversity offsets face the particular challenge of defining equivalence between biodiversity losses and biodiversity gains,” the study said.

“For biodiversity credits, gains can be produced in very different ecological contexts, and different methods are being developed for operationalising equivalence.”

As several experts recently noted in a separate study, existing biodiversity credit methodologies largely fail to address uncertainty in measuring changes – an issue which could result in misleading assessments of nature conservation and restoration projects.

“These uncertainties are important because we do not want credits to be issued for biodiversity outcomes that are no more than random fluctuation,” Richard Field, professor of biodiversity science at the University of Nottingham, told Carbon Pulse last week.

According to Cambridge and Oxford researchers, outcomes can be assessed by using satellite imagery and complementary data from ground surveys or remotely deployed sensors.

However, as proof of additionality will be required upfront, some groups could face significant financial challenges, including Indigenous peoples and local communities who rely on external funds to carry out monitoring activities on the ground.

That’s why, according to zu Ermgassen, Indigenous peoples and local communities shouldn’t have to generate biodiversity or carbon commodities to receive financial support. For a whole host of ethical and economic reasons, funding IPs and LCs should be the top priority for philanthropy and unconditional aid.

“Funding IPs and LCs to continue managing land in a way that protects and enhances biodiversity is in my view the most important activity that conservation should be doing around the world right now,” zu Ermgassen told Carbon Pulse.

“Saying that, our proposed model should also favour IPs and LCs by increasing the robustness of nature-based credits, making them a much more reliable source of long-term revenue for communities than the current market, which is subject to torrid integrity issues leading to price and demand volatility.”

By Giada Ferraglioni – giada@carbon-pulse.com

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