• 26 June 2023
  • Insights

The Carbon Market is Broken. Here’s Why

Chances are, in discussions of ways to cut carbon emissions, you’ve heard a lot about carbon credits and offsets. For the uninitiated, the theory goes that companies can ‘compensate’ for their emissions by buying carbon credits to pay projects that avoid or absorb emissions (carbon offsets) to remove the equivalent amount of their own emissions from the atmosphere (one credit equals one tonne of carbon). The number of carbon credits companies can buy from a project are calculated based on the difference between how much carbon it absorbs or avoids and how much would be emitted in its absence (its baseline emissions).

Being relatively cheap (each carbon credit costs less than US$ 4), carbon offsets and credits are widely seen as a cost-effective way for companies to fund the reduction of greenhouse gases in the atmosphere to make up for unavoidable emissions. This perception has led to a drastic increase in both the number and worth of carbon offsets. Billions have been issued in just the last decade and the voluntary carbon market alone could be worth over US$ 50 billion per year by 2030. Theoretically, with appropriate allocation of this capital, carbon markets could provide an unparalleled source of funding for nature-based climate solutions –which could contribute up to 30% of the climate mitigation needed by 2050 to meet the Paris Agreement’s objective.

Short-changing the Climate

However, this view has (not for the first time) been called into question, thanks to a recent scandal surrounding the US-based offset registry, Verra. In 2023, an investigation into Verra’s approved deforestation prevention offsetting projects found that 94% showed no evidence of deforestation reduction, as they were ‘protecting’ forests that weren’t under threat. Thus, the 94.9 million rainforest carbon credits sold by Verra failed to meaningfully increase carbon absorption, reducing only 5.5 million tonnes of emissions.

Verra’s story is far from unique. A 2023 study of almost 300 forestry offset projects found that all failed to meet basic sustainability criteria to ensure meaningful carbon absorption. Likewise, a recent Bloomberg investigation found that 40% of all renewable energy offsets failed to reduce emissions. Given this litany of failures, it’s easy to see why many decry carbon offsets and credits as little more than greenwashing.

So, why do so many carbon offsets fail to make an impact?

Why Carbon Offsets (usually) Fail

Lack of Regulation

Most carbon trading happens on a self-regulated voluntary market (instead of a government-regulated compliance market). However, this lack of external oversight means that companies don’t have to disclose exactly how offsets are being used to meet emissions reduction targets, allowing them to avoid reducing emissions whilst using offsetting as a way to claim otherwise. It also allows offset registries to set insufficiently stringent standards for approving offset projects to maximise the number of projects they have –and the carbon credits they can sell– regardless of effectiveness. And because of the dominance of the voluntary system, a significant percentage of offset projects on the global carbon market are low-quality ones.

Lack of Additionality

Ideally, carbon offsets should result in additional carbon reduction to what would occur in their absence (a difference known as additionality), through measures like protecting threatened forests, or financing renewable energy plants that would not be built otherwise. But instead, many offsets protect forests that aren’t threatened or support renewable energy projects that would have been built anyway, and thus have no additionality.

Furthermore, many offset projects are only short term and after they expire, there is no guarantee that their carbon reduction services will remain protected. For instance, a forest currently protected as part of an offset project could later be sold to a logging company once that project and its carbon credit income ceases.

A Tandem log truck departing the logging coupe having been loading with pine logs.

Artificially Inflated Impact

To ensure that money from carbon credits is spent efficiently, the number of carbon credits an offset project can sell should be proportional to the emissions it absorbs or avoids, which should be accurately reported. However, many developers have learned to exaggerate the impact of their projects to earn more carbon credits, without reducing emissions accordingly.

For instance, a company might overstate a project’s baseline emissions, then later compare them to the real ones as ‘proof’ that emissions were reduced in that time, when in fact they have stayed the same. Some may even deliberately increase their emissions so they can claim more carbon credits for later reducing them to lower, but still insufficient, levels. Similarly, forestry offset projects may exaggerate the risk of deforestation in an area to claim that more trees will be destroyed (and more carbon emitted) without them. As a result, money that could finance impactful climate mitigation is instead wasted on meaningless projects.

Faulty Forecasting

Even without doctored data, buying carbon credits may still not result in meaningful emissions reductions. In many cases, how much carbon a project claims to reduce is based on forecasts of how much its actions will absorb or avoid in the future. I.e., protecting X number of trees will absorb X amount of carbon over X number of decades.

Unfortunately, carbon sequestration is very difficult to calculate accurately, and the methodologies used to make these forecasts are typically insufficiently robust. They also don’t take into account unforeseen events that could derail projects, like wildfires burning down offset forests (an increasingly common occurrence thanks to climate change), making it all but impossible to tell if a project will actually reduce emissions as much as it says it will.

Community Conflicts

Indigenous people manage around 22% of tropical and subtropical carbon stocks, and areas where they have legally recognised land rights have lower deforestation rates and faster reforestation rates. Therefore, co-operating with and respecting the rights of indigenous people is integral to successful emissions reduction.  Unfortunately, on land earmarked for offsetting projects, indigenous people have been known to be forcibly evicted from their homes and excluded from partaking in or benefitting from projects. Similarly, in developed countries, rural communities may be priced out of their land by corporations and financiers looking to buy it for offset projects.

A Better Trade?

Clearly, the current carbon market is deeply flawed and largely ineffective, with only 4% of all offsets having a net positive impact. However, neither is carbon offsetting completely worthless, having successfully financed the protection of indigenous-owned forests in Tanzania and the construction of new solar energy projects in the USA, among other examples. And with its value having grown five-fold (and counting) since 2018, the carbon market is here to stay as a climate mitigation mechanism, whatever its flaws.

So, what needs to change to make impactful carbon offsets the norm, not the exception?

One of the key shifts is for companies to start treating offsetting carbon as a supplement, not an alternative, to actively reducing their emissions. To achieve this, carbon credit prices must be raised so that companies don’t view them as a cheap alternative to more substantial emissions reductions. In addition, governments should establish regulations that encourage actively reducing emissions over offsetting them, along with the disclosure of companies’ emissions reduction plans, and how (and what type of) offsets fit into these. This will allow for independent monitoring of how much companies are reducing emissions versus simply offsetting them, as well as greater transparency about the quality and additionality of offset projects.

On that note, more stringent criteria for offset project approval need to be agreed upon and implemented to increase the proportion of high-quality ones on the carbon market. The Integrity Council for the Voluntary Carbon Market has identified 10 credible, rigorous criteria for companies to meet to ensure maximum offset impact, including:

  1. Effective governance that allows for transparency, accountability and continual improvement.
  2. Tracking and recording offsetting activities and the flow of carbon credits via the use of an offset registry.
  3. Providing transparent, comprehensive, publicly available information on all offset projects for external review.
  4. Third party verification and approval of offset projects.
  5. Proven additionality.
  6. Permanent carbon absorption and measures to reduce risks to this (e.g. forest fires) if necessary.
  7. Scientifically robust measurements of carbon absorption or avoidance.
  8. No double counting of reduced emissions for extra carbon credits.
  9. Clear guidance, tools and procedures that both ensure practices in line with established industry best practices on social and environmental safeguards and deliver positive sustainable development impacts.
  10. Avoidance of practices, technologies and emission levels incompatible with reaching net-zero emissions by the mid-century.

As the recent Verra scandal makes clear, the carbon market is, at best, unreliable as a climate solution right now. And even if the aforementioned changes are implemented, it can only ever be a supplement to more rigorous mitigation efforts. But the fact that it has sometimes had genuine benefits proves that it can, under certain circumstances at least, be made to work. And with the furore around Verra and other offset related scandals bringing carbon markets under greater scrutiny, perhaps this can catalyse the long overdue and much needed reforms that could finally make that happen.

Author: Thomas Gomersall, Seneca Impact Advisors

For more information, please contact info@senecaimpact.earth