By Louis Redshaw

Voluntary carbon markets have come under fire in recent weeks with questions raised of the merits of a range of projects across the world. While the headlines are of course disappointing and knock confidence in the sector as a whole, the greater scrutiny is welcomed to ensure carbon credits deliver the climate impact they are designed to offer and to provide sufficient return on capital to carbon-reducing projects to stimulate more such projects.

I have been closely involved in carbon markets for 20 years now and while I have certainly come across some bad actors, the majority of those working in the sector are in it for the right reasons. It is important, therefore, that we take this latest learning opportunity to refine and improve how carbon credits and voluntary markets operate and ensure we bring the corporate community, at whom the bulk of the credits are targeted, along with us on this climate journey.

There are three main points to take from this piece. First is the crucial importance of projects that remove carbon from the atmosphere rather than those that simply avoid emissions. Secondly, the corporate sector, with its access to vast amounts of capital, must be kept onside to deliver the huge amount of investment in carbon removal technologies required if we are to keep global temperatures below the levels at which irreparable climate damage is wrought. And finally, a well-functioning and efficient market is needed and is the best way to stimulate the investment required to deliver more projects.

While voluntary carbon markets are far from perfect, they are the best option we have given the general lack of carbon-capping legislation and the time available. Every moment of inaction is another step towards climate disaster. It is worth stating that the very need for carbon credits is already an imperfect state to be in as these should only be for those emissions still left after a company or government has first avoided and then reduced its emissions by as much as possible.

So What Are The Problems?

Frustratingly, a lot of the issues I outlined in my critique back in June 2021 remain as much of a problem now as they did then. But rather than rehashing old arguments, let’s deal with the most pressing ones.

Avoidance projects will always have problems effectively demonstrating the true amount of emissions that have been avoided as a consequence of that project. Much of the recent controversy hitting the sector has centred around how to measure the baseline for how much a forest or other similar ecosphere would have been destroyed if the status quo had been maintained. Avoided deforestation’s inability to prove permanence is the other elephant in the room.

The original UN Clean Development Mechanism (CDM) struggled with it and only issued temporary Certified Emission Reductions (tCERs) to the sector while the EU banned such projects from being used in its Emission Trading Scheme (EU ETS) and there is no prospect of them ever being allowed in. As such, I’ve never been the biggest fan of avoided deforestation but there’s no doubt some land use based avoidance projects do an amazing job and provide, for example, a clear financial incentive for impoverished communities to not cut down trees for short-term gain. There is a lot of room for improvement. Fortunately, the way that the standards are organised means that improvement will ultimately happen.

The headache for renewable energy credits is proving that a new project is truly additional and would only have been achieved thanks to investment from the sale of carbon credits. As solar and wind technology become ever cheaper, further boosted by a supportive legislative and tax environment, the sector is enjoying massive growth globally making the additionality argument ever harder to win. And that case is made harder still while the price of credits for renewables projects is so low. The tweak by Verra and Gold Standard to only register new renewables projects in Least Developed Countries (LDCs) was a way to partially solve these problems.

For removals, additionality is much easier to prove but the problem remains permanence. While the concept of removing a tonne of carbon from the atmosphere by tree-planting is simple enough, if that newly planted forest absorbing all that carbon dioxide is felled in 30 years’ time or worse, burns down, the climate benefit is lost. And for more permanent removal technologies, such as Direct Air Capture with geological storage, the cost is too high for most companies to volunteer to pay. So far, such technologies represent a small fraction (0.0002Gt of CO2 a year to be precise, according to The State of the Carbon Dioxide Removal report) of a removals sector still dominated by reforestation and land management policies.

The sheer number of different types of projects available, all singing the praises of their unique qualities to justify the vast array of prices, remains a stumbling block for corporates keen to enter the market but bewildered by the options.

Newcomers are reliant on “expert” help, which opens the door for those looking to cash in on the huge growth that carbon markets have experienced.

Corporate offsetters just want to know that what they are buying is of good quality, is competitively priced and won’t come back to haunt them. Ratings companies can have a positive role to play but only if they can be relied upon and accountable for the quality of their work. However, in a well-functioning market, in which the carbon benefit of all projects is properly verified, ratings should become largely redundant. It is worth reminding readers at this point that standards agencies, such as Verra, are not-for-profit companies so in theory they have more to lose (i.e. their reputation and livelihoods) than to gain from falsely verifying the carbon quality of a particular project. Unfortunately, the same can’t be said of every project proponent and retailer.

Rating agencies and initiatives such as the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles would better serve the market by working within the likes of Verra and Gold Standard Foundation, rather than adding an additional layer of cost and complexity. Corporate offsetters want simplicity, so layers of complexity ultimately hold back market growth. Let’s not forget that the standards agencies publish everything they do precisely to enable the public to scrutinise, comment on and criticise (hopefully constructively) their methods. I don’t think there would be many objectors to increasing the cost of registering a carbon project in order to pay for this additional expertise and process if the outcome is greater confidence in the market.

Enough of the Problems, Give Me Solutions

Compliance markets have been a success story for both generating an effective price for carbon and the environment. Easy to follow, cap-and-trade systems, where the number of available allowances reduces over time, have had a material impact on the amount of carbon companies are willing to emit.

In Europe, the EU ETS has in effect driven the cost of emitting a tonne of carbon to about €90, on current prices. This compares with credits trading for around $3 a tonne in the voluntary sector. There is just one type of EU Allowance, meaning it can be easily traded with one, highly-liquid and transparent price and carries no reputational risk.

Corporate offsetters, who will be under growing pressure to back up their carbon neutral claims with verifiable carbon credits, want an easy-to-understand product with minimal reputational risk. If the voluntary market is to scale to the levels required to have a meaningful impact on climate change, it needs the corporate sector to invest heavily in it. Therefore, the voluntary sector needs to create products that appeal to corporate need, rather than personal greed.

Consumers don’t want to spend countless hours scrutinising the individual merits of a specific project and equally don’t necessarily want to invest all in one sector. Instead, just like an investor’s personal portfolio, they would rather spread their investment over a range of projects, and avoid having all their eggs in one basket.

For as long as the sector remains voluntary, consumers and corporates are unlikely to be willing to pay as much as companies pay for the right to emit carbon in the EU ETS, especially against the backdrop of a challenging economic environment and with peers not taking action. This will therefore favour non-removals projects at a time when the science points to the urgent need for carbon to be removed from the atmosphere and locked away.

While there is so much criticism of greenwashing flying around the voluntary sector, it will be difficult to attract more companies to create the demand needed for new projects to get off the ground. A voluntary sector that mirrors the simplicity of compliance markets is therefore the solution.

Exchange-traded transparency is the key to taming the Wild West of retail pricing of carbon credits. Regulated exchanges publish their prices. Free and fair competition to supply a product, for which exchanges are designed, defeats the conflict of interest inherent in vertically integrated project developer/retailers.

On the corporate side, companies should be forced to back up their carbon neutral claims and demonstrate not just their emission footprint but also exactly what credits they’ve used to offset those unabated emissions. The current loophole where corporates are not bound by either the ICVCM or Voluntary Carbon Market Integrity Initiative (VCMI) guidelines on offsetting claims needs closing. Trust works both ways and while the voluntary carbon market needs to up its game, the corporate sector also needs to play its role.

Taking all this into account led us at Net Zero Markets to create the Global Emission Reduction (GER), which launched in June last year and is currently available to trade on a spot basis on AirCarbon Exchange and as a futures contract on Nodal Exchange. In time, we expect the GER to become the global benchmark for carbon offsetters.

The GER comprises a basket of four contracts, one covering the renewables sector, another forestry, one for those projects offering additional benefits that meet three or more of the UN’s Sustainable Development Goals and crucially a contract for removals projects.

Rather than tell consumers what they should want, the GER reflects what people are actually doing with the weighting of the underlying contracts that make up the GER based on which credits were retired in the previous year.

The GER gives corporate offsetters exposure and therefore diversification across all four sectors, without having to buy into each one or into individual projects. It also rebalances to remain in step with where the current trend for purchasing credits lies. Therefore, as retirement of carbon offsets from renewables projects likely becomes less popular over the coming years, the GER will re-weight to reflect a lower proportion of the renewables contract in its basket. Similarly, if the Core Carbon Principles that are decided upon by the ICVCM gain in popularity, the GER has a mechanism to reflect that change in trend.

The GER is exchange and trading platform agnostic. Rather than every platform out there selfishly trying to corner the market based on their unique contract design, adding further complexity to a market struggling to grow, the GER fosters competition between platforms on the standard transaction fees that they charge – thus driving costs down.

Removals are a key inclusion in the GER and essential to net zero. The GER starts inclusion small and grows it. That is what the Science Based Targets Initiative (SBTi), the UN and the various emission trading schemes all advise. So why should carbon neutral claims be different? And on the same basis, we can conclude that cheap carbon credits will be in demand for a while, particularly as long as the sector remains voluntary.

The GER will reach 100% removals by 2050, in line with the legal requirements of a number of governments that will require all credits to be removal-based, rather than avoidance, by mid-century.

This small but growing proportion of the contract dedicated to removals is designed to help generate the necessary investment in the sector while keeping the overall cost of the GER down so that it is price competitive against other non-removal-based offerings. It also provides corporate offsetters with a pathway to net zero and project developers with a marketplace for removals that prices high enough to incentivise investment.

The voluntary carbon sector has had a difficult start to 2023 with the criticism part of the growing pains a still-developing market is likely to experience. However, if the outcome is a greater focus on high-quality projects and carbon removals, then the pain will be worth it.

For more information on the GER and the thinking behind it, go to Net Zero Markets at: https://netzeromarkets.co/

Louis Redshaw is CEO and founder of Net Zero Markets and consultancy Redshaw Advisors. Both companies are committed to facilitating environmental markets to ensure that every tonne of carbon is efficiently priced in a net-zero world.

Any opinions published in this commentary reflect the views of the author and not of Carbon Pulse.