The Carbon Credit Market Confuses The Corporate World

Many of the carbon credits used to offset corporate emissions lack merit — a conclusion reached by investigative journalists. The target: Verra, which approves three of every four — voluntary — rainforest carbon projects. The research found that 94% of those voluntary credits are “worthless.”

This damning report signals the corporate world to re-evaluate what kind of carbon credits it purchases to reach net-zero goals. Other documents also question the credibility of voluntary carbon projects. At the same time, the demand for those instruments is stagnant while their market price is falling, causing companies to consider sovereign credits— ones issued by national governments and approved by the Paris climate agreement.

The Guardian, Die Zeit, and SourceMaterial say Verra overstates its impact. Organizations estimate how many trees they will save, all audited by Verra-approved third parties. But the threat of potential forest loss is exaggerated by 400%, which would show its carbon-approved credits are overperforming. Indeed, such conjecture is nearly impossible and is a function of public policy and economics. The research shows that a small number of Verra’s projects prevented trees from being cut down.

Separately, an Australian National University professor and former head of the government’s emissions reduction assurance committee said the market has “integrity issues.” Andrew Macintosh previously examined 119 rainforests and found that the credits had a negligible effect. For 59 of the projects, the size of the rainforest decreased — even though they received credits worth $100 million.

Overall, the demand for forestry-related carbon credits is down, add Trove Research and AlliedOffsets — from 380 million in 2021 to 359 million in 2022. As a result, carbon prices continue to drop, projected at $6.50 a ton this year.

“Our analysis of nearly 100 million carbon credits found that only a fraction of them resulted in real emissions reductions,” says SourceMaterial. “It raises questions for the organizations that many of the world’s biggest companies, and the consumers who buy their products, rely on to set the standard for effective carbon offsetting—in particular the biggest of them, Verra.”

A central criticism is that Verra gets 10% of every carbon credit sold to fund its efforts. Logically, the more credits it sells, the more it earns. Therefore, it is motivated to approve more and more deals. Its revenues have risen from $7 million in 2018 to $41 million in 2021.

Verra Punches Back

Chevron, Shell, BP, Gucci, BHP, Salesforce, and Samsung are among the companies buying Verra-approved carbon credits. Verra, which has issued a billion carbon credits since 2009 worth about $2 billion, says it enables carbon finance that saves trees and reduces atmospheric carbon, working with experts globally to create and refine its methodologies. The private sector generally provides 20% of the funding to support avoided deforestation.

Verra will require assessments every six years to improve its baseline scenarios, down from 10. To illustrate, it failed to predict the rise of Joir Bolsonaro, who was elected Brazil’s president in 2018. He let the loggers and farmers run roughshod over the country’s vast rainforests, increasing deforestation by 60% and greenhouse gases by 12% in 2021.

Verra “continually improves methodologies based on the best available science and technology,” it says. It mobilizes finance at scale because it certifies projects that avoid, reduce, or remove emissions. “An important part of methodologies is determining the baseline against which climate action should be measured – i.e., predicting what would have happened if a project was not implemented. Baselines are used to determine how many carbon credits a project can issue by comparing the rates of deforestation in a project area against the baseline.”

Critically, not all carbon credits are created equal, and there’s a difference between voluntary markets sold by brokers and sovereign credits issued by national governments. The former arranges for a company to buy credits from a developing nation to help them save rainforest areas. The company pays the broker, and then the landowners or project developers get a percentage of the money. The company treats the credit as an expense, and its customers ultimately pay it.

The Paris climate agreement has adopted the latter, and 192 nations have agreed to those standards. The aim is to make the trees worth more alive than dead — or used for farming or timbering. The developing countries fought to include the “sovereign” REDD+ mechanism in the final COP27 agreement. Under that plan, governments account for their forest lands and set targets to stop deforestation. The UN Framework Convention on Climate Change monitors their progress and issues carbon credits.

Will The Real REDD+ Step Forward

To confuse matters, both the voluntary and sovereign markets use the term REDD+. Unfortunately, ‘REDD+’ was never patented. Costa Rica and Papua New Guinea introduced the reference in 2004, linking nature-based solutions and national rainforests to emissions reductions. But the voluntary carbon market also coined the acronym, using proprietary standards outside the Paris agreement.

Voluntary markets need more clarity and oversight to ensure a fair distribution of monies. Rainforest nations may end up getting pennies on the dollar.

In contrast, sovereign credits protect the rainforests of entire nations. The rainforest countries are self-motivated to distribute the money to reduce emissions. If they do, countries and companies will continue buying the credits. Furthermore, satellites are flying overhead that make forest management public knowledge. The data is updated every couple of days, and it is accurate.

Generally, companies cannot achieve carbon neutrality by generating all of their electricity using renewable energy onsite or by increasing their energy efficiency strategies. They have to enter into power-purchase agreements. And they have to buy carbon credits — things that can offset their emissions. Sometimes, companies buy credits because it makes for good public relations. Other times, they do not understand the nuances of the market.

“The implications of this (Verra) analysis are huge,” said Barbara Haya, head of Cal Berkeley’s Carbon Trading Project, in the SourceMaterial story. “Companies are making false claims, and then they’re convincing customers that they can fly guilt-free or buy carbon-neutral products when they aren’t in any way carbon-neutral.”

With that, Deutsche Bank has called sovereign carbon credits “the one tool to allow capital to flow to where it is needed to protect countries against the worsening climate and continue reducing emissions.” Gabon, Belize, and Honduras are either selling or about to sell sovereign credits.

Indeed, the rainforest nations will use the proceeds to cut emissions and build infrastructure, allowing them to protect against floods and rising tides — credits that also remove atmospheric carbon and benefit the rest of the world.