In this article, we will dive deeper into the current shortfalls of voluntary carbon markets. We will outline the need for demand- and supply-side integrity, high-quality carbon credits, and other measures to ensure the proper functioning of voluntary carbon markets and explore what role start-ups and private sector initiatives play.
With the increasing effects of the climate crisis and rising public awareness, countries and companies increasingly declare net zero pledges to counteract this development. As outlined in last week’s article, voluntary carbon markets (VCM) and carbon credits have become integral to the discussion around net-zero strategies. Unfortunately, due to a lack of transparency, integrity, and high-quality carbon credits, voluntary carbon markets are not yet where they need to be up to the task.
Over-reliance on offsetting and lacking integrity: the issue of corporate ‘greenwashing’
In a recent report, the UK Committee on Climate Change (CCC) highlighted the “real risk” of companies doing more harm than good by using low-quality credits and displacing direct emission reductions through offsets (1).
This linkage becomes staggeringly evident when looking at the numbers: a third of FTSE350 companies overly rely on carbon offsetting to reduce their scope 1 and 2 emissions (1). Moreover, a separate analysis of 25 major global companies conducted by the New Climate Institute found that > 50% of companies use offsets with insufficient permanence (i.e., a high risk of reversal) to claim their carbon neutrality (2). In other words, some of the world’s largest companies purchase low-quality credits to avoid spending on necessary and feasible emissions abatement. What companies should be doing, however, is purchasing high-quality carbon credits for hard-to-abate (or “residual”) emissions and actively working on reducing abatable emissions (1).
Private-sector initiatives and start-ups are working towards creating more transparency and integrity to tackle the overuse of low-quality offsets. In particular, initiatives such as the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), the Voluntary Carbon Markets Integrity Initiative (VCMI), and the Science Based Targets initiative (SBTi) are tackling demand-side issues. They establish guidelines and frameworks on when and how companies should be able to use carbon credits to meet net-zero commitments credibly. All three initiatives revolve around the following action steps aiming to establish coherent principles in using offsets (3,4,5):
- Reduce: Drive science-aligned emission reductions across a company’s operations and value chain. This process involves publicly setting and committing to achieving interim and long-term net zero emission reduction targets for companies. Such reduction targets could be set in line and validated with SBTi’s criteria.
- Report: Measure and report scope 1, 2, and 3 GHG emissions annually using accepted third-party standards for corporate GHG accounting & reporting. The accounting and reporting process will likely happen according to accounting standards, such as the Greenhouse Gas Protocol, and popular reporting frameworks, such as CDP, TCFD, GRI, and climate-related IFRS disclosures. In the future, companies should also specifically report on how using carbon credits contributes to achieving emission reduction targets.
- Offset: Compensate the share of emissions that emission reductions cannot capture by retiring high-quality carbon credits. Demand-side initiatives such as those three mentioned above often refer to supply-side initiatives such as the Integrity Council for the Voluntary Carbon Market (ICVCM) to set out the definitive criteria that make a credit high-quality.
There are multiple ways start-ups contribute to bringing these principles to life: for example, companies such as Normative.io, Watershed, and Plan A help companies calculate, manage, and reduce their GHG emissions and enable straightforward carbon reporting and accounting. Figure 1 outlines the voluntary carbon market landscape and maps start-ups and companies to the VCM value chain. For companies, carbon management and accounting automation can provide significant reputational, financial, and compliance benefits.
Looking beyond the reporting and accounting scope and towards the challenge of supplying high-quality credits, specialist players such as start-ups and private-sector initiatives also play an essential role in driving the markets’ integrity.
Scarcity of ‘high-quality’ credits on the voluntary carbon market
Before diving deeper into the role of start-ups in creating a supply of high-quality credits, let’s take a step back and look at what’s really at issue: some of the credits that are currently on the market lack quality and thus make for cheap and – at times – unsubstantiated net zero claims. But what does ‘quality’ mean in the context of carbon credits? Figure 2 outlines the five aspects that define a carbon credit’s quality. In short, five of the most critical aspects of credit quality are as follows: additionality, permanence, exclusivity, accurate estimation (no overestimation and addressal of leakage), and no collateral harm to ecosystems or communities (1, 6, 7).
These aspects are also reflected in the work of supply-side quality initiatives such as the Integrity Council for the Voluntary Carbon Market (ICVCM). Currently, the ICVCM is developing core carbon principles (CCP) that will bring more transparency to the VCM by setting independent thresholds for what a high-quality carbon credit is and what crediting programs are “CCP-eligible”. This criterion will be a guide for market participants to comprehend whether the crediting program that issued the respective credit adheres to the CCP. The ICVCM will thus help alleviate information asymmetry between sellers and buyers of carbon credits with regard to the overarching quality standards of crediting programs (7).
Despite not changing the underlying demand-side dynamics of the VCM by which buyers still – to some degree – purchase cheap and less-effective credits, such a label might increase the pressure on crediting programs to implement more stringent methodologies (8). This has become particularly important since the move by more established registries (such as Verra and Gold Standard) to limit the accreditation of renewable energy generation due to its often-missing additionality has spurred several new crediting programs aiming to fill this void (9). Flooding the VCM with low-quality carbon credits from renewable energy generation can hurt the market’s integrity in the long run. Focusing on a more stringent methodology can increase the credibility of crediting programs to outside buyers. The ICVCM incentivizes just that.
The push for creating a consensus around what defines a high-quality carbon credit is accompanied by start-ups striving to create transparency around the different quality aspects of specific offsetting projects. For example, companies such as Sylvera, Calyx Global, CarbonPlan, and BeZero Carbon provide independent ratings and insights that give buyers of credits an indication of how projects compare to one another with respect to the different quality dimensions. Such rating providers also help alleviate information asymmetry associated with carbon credits, allowing buyers to make informed choices and incentivizing project developers to bring high-quality credits to market.
What to expect for 2023 and beyond?
To avoid harming VCM’s credibility, it will become crucial to develop a mutual understanding of how the different methods of carbon dioxide removal (CDR) and emissions avoidance compare in terms of quality. Similar to how the use of renewable energy credits came under heavy scrutiny in the past months, other emissions avoidance methods, such as avoided deforestation and degradation (REDD+), can be prone to the same line of arguments regarding the projects’ additionality (as seen in John Oliver’s HBO piece on carbon offsets).
In an ideal scenario, both supply- and demand-side actors will provide sufficient guidance, regulation, and tools to create efficient markets with information symmetry regarding different quality aspects. As such, transparency is one of the biggest ongoing trends for voluntary carbon markets in 2023 that can ultimately bring the market closer to maturity. Tackling integrity and transparency will be key to reinvigorating trust in the voluntary carbon market, spurring investment into the more effective yet more capital-intensive CDR space, and necessitating companies to make good on their net zero pledges by reducing abatable emissions outright.
In the next part of this ongoing series, we will highlight the need to scale investment into the CDR space by looking at the potential depletion of major carbon registries and promising removal technologies brought forward by start-ups. Stay tuned!
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- Climate Change Committee (2022). Voluntary Carbon Markets and Offsetting. Link to source.
- Thomas Day, Silke Mooldijk, Sybrig Smit, et al. (2022). Corporate Climate Responsibility Monitor 2022. New Climate Insitute. Link to source.
- Voluntary Cabron Markets Integrity Initiative (2022). Provisional Claims Code of Practice. Link to source.
- Taskforce on Scaling Voluntary Carbon Markets (2021). Phase II Report. Link to source.
- Taskforce on Scaling Voluntary Carbon Markets (2021). Final Report. Link to source.
- Sophie Purdom, Kim Zou (2022). Giving (carbon) credit where it’s due. CTVC. Link to source.
- Integrity Council for the Voluntary Carbon Market (2022). The Core Carbon Principles. Link to source.
- Akshat Rathi, Natasha White, Demetrios Pogkas (2022). Junk Carbon Offsets Are What Makes These Companies’ Carbon Neutral’. Bloomberg Green. Link to source.
- Kanchan Yadav (2022). Reckoning with renewables: As carbon certifiers tighten rules, renewable energy may re-evaluate options. S&P Global Commodity Insights. Link to source.