By Sebastien Cross, BeZero Carbon

Rarely a day goes by without a new claim of carbon neutrality or commitment to net zero. This is bringing an influx of buyers and sellers to the market for voluntary offsetting.

A key focus for all participants should be ensuring growth translates into actual climate impact. In order to achieve this, we need to overcome the idea that every credit provides the same carbon return.

This is why we developed the BeZero Carbon Rating, a top-down assessment of carbon efficacy for the voluntary offset market. The ratings draw on a significant database of evidence to judge the probability that a credit issued by a project achieves a full tonne of CO2e.

While there are many other metrics on which to judge accredited offset projects, we believe carbon returns should form the foundation.

Fifty shades of additionality, not two

Additionality is a constant question for the offset market to grapple with; what is the likelihood that a credit purchased and retired leads to a tonne of CO2e being avoided or sequestered that would not have otherwise happened?

Most accreditors test additionality as a binary pass or fail, depending on whether a project is the first of its kind or could go ahead without selling carbon credits.

We view additionality as a scale, with our model gauging the strength of a project’s claims. This filters down from a sector level assessment, where the financial dynamics play an important role, to country considerations, such as the policy or regulatory backdrop, to project specific factors.

There is significant focus on the use of satellite imagery analysis for increasing measurement and accountability of nature-based projects. However, this provides an incomplete picture of the past and can be applied to only a fraction of the total offset market.

Take renewable energy carbon credits for example. Most projects pass accreditors’ additionality tests but earn the majority of their revenue from selling electricity. Under the BeZero Rating, these credits score as less additional than a project where carbon finance is the only form of funding available.

Standardisation risks a race to the bottom

The offset market is steadily adopting the market infrastructure that is standard to other asset classes, with exchanges bringing greater transparency on price and liquidity. The work of the Taskforce on Scaling Voluntary Carbon Markets is quickening this, aiming to bring the market together under core carbon principles.

While this financialisation is key to the market’s growth, it must be implemented in a way that does not incentivise a race to the bottom. Futures contracts are useful to ease frictions, pool liquidity and create benchmarks, but they naturally coalesce around the security cheapest-to-deliver in the eligible basket.

In order to avoid fungibility becoming a race to the bottom, the market needs tools that recognise the variation in carbon returns and enables the creation of products that capture this variation.

Carbon is everyone’s and no one’s

The nature of carbon offsets as an asset creates a key barrier to applying traditional financial markets tools and analyses. You cannot take delivery of carbon as you would other commodities.

In regulated carbon markets, companies must abide by the strict limits emissions trading schemes impose, making instruments like EUAs enforceable by law.

Voluntary carbon offsets occupy a more obscure space, reliant on a mix of cross-border regimes and commercial contracts and agreements.

Asset and liability management

Ultimately the clue is in the name for carbon offsets; they should be assets bought to match a liability. The seriousness of the climate crisis demands this asset and liability management be done to the highest of standards.

This is why we have designed the BeZero Carbon Rating as an assessment of the process followed and commitments made by a verified project. We use the ratings to construct high quality offset baskets aiming to match our clients’ carbon liabilities.

Carbon credit assessments are inherently subjective, given our inability to observe or capture much of the data. While there may be no definitive right answer, we must start by asking the right questions of the offset market to ensure it drives climate action.