The carbon credit industry attempts a comeback

BY: BILL SPINDLE

Read?this article and more of the latest on climate & tech at?ciphernews.com .

Leaner and humbled, the carbon credits industry is attempting a comeback.

Over the last two years, the industry has faced a barrage of news stories,?academic studies and lawsuits describing the carbon credits bought, sold and traded as all but synonymous with greenwashing.

But in recent weeks carbon credits — which allow greenhouse gas emitters to avoid cutting some of their emissions by paying for reductions by others — have received some big boosts.

In Washington, the Biden administration staged a high-profile promotion for “high quality” carbon credits, which are also sometimes referred to as carbon “offsets.” A key standards-setting organization for companies pursuing “net zero” emissions reductions said it may embrace far greater use of those credits. And governments from California to Singapore to Australia are incorporating the voluntary credits into mandated carbon tax mechanisms and other efforts to promote decarbonization and renewable energy, especially in poor- and middle-income countries.

The moves have raised hopes that reformed and chastened voluntary markets, where companies and governments voluntarily buy and sell these credits, could still make good on their promise to channel tens of billions of dollars into projects to protect ecosystems and reduce the amount of greenhouse gases in the atmosphere.

“Voluntary carbon markets can help unlock the power of private markets to reduce emissions,” said United States Secretary of the Treasury Janet L. Yellen in a May briefing , before quickly adding, “that can only happen if we address significant existing challenges.”

Last year, the carbon credit industry found itself at a crossroads. Cipher covered the challenges that led to this year’s reforms here .

The reforms and new rules

The renewed push for carbon markets this year comes as a collection of industry standards-setting groups roll out reforms and new rules intended to bolster confidence that carbon credits actually represent the greenhouse gas emissions they claim to and are used in ways that bolster rather than avoid real reductions in greenhouse gas emissions.

The changes lay out clearer guidelines to try to ensure credits represent the emissions reductions touted by the project developers selling them, as well as the claims of companies buying them for their decarbonization plans.

On the supply side of the market — the wide range of projects from replenishing mangrove wetlands in Africa to removing carbon dioxide directly from the air in Iceland — an industry body called The Integrity Council for the Voluntary Carbon Market (ICVCM) has issued a new set of what it calls Core Carbon Principles that high quality projects must follow to get its stamp of approval.

The principles include ensuring projects issuing credits are effectively tracked by a third party and transparent with their data, that those projects wouldn’t have happened otherwise and represent permanent reductions in emissions.

On the demand side — the companies and individuals that purchase credits instead of reducing their own emissions — a complementary effort by another industry group, the Voluntary Carbon Markets Integrity Initiative, has issued guidelines for how companies can utilize the offsets to underscore different levels of ambition in their plans to reach net zero emissions.

These guidelines set criteria for decarbonization programs with silver, gold and platinum tiers depending on the share of emissions being offset, providing clear requirements and guidance as to how to credibly use carbon credits. The aim is to prevent greenwashing, where companies have wildly exaggerated the impact of the offsets in their decarbonization plans.

In 2023, the carbon credit market shrunk more than 60% to $723 million after growing rapidly to a peak of more than $2 billion in 2021, according to Ecosystem Marketplace , a carbon markets analyst and marketplace.

Recent reforms have helped push demand for credits back onto a record-setting trajectory through the first months of this year, according to Bloomberg New Energy Finance. The market could grow to tens of billions of dollars by 2030 and reach $1.1 trillion by 2050 with more reforms and corporate incentives, predicts BloombergNEF.

The supporters and the skeptics

Supporters of using carbon credits, which include influential climate advocacy groups such as the Bezos Earth Fund, the Rockefeller Foundation and multinational banks tasked with financing economic development, say the two-year long effort to improve standards can make these credits a key source of desperately needed funds for decarbonization efforts in Africa, Latin America and South and Southeast Asia.

All are regions with few other sources of investment.

Advocates believe concerns about voluntary offsets can be addressed with a more vigorous approach to verifying credits while increasingly including them in tax and trading regimes overseen by governments or the United Nations.

“For industrial transformation, for difficult sectors to decarbonize there are ways to offset some of the emissions that are unavoidable, and perhaps claw back some of the accumulated emissions that we have in the atmosphere,” said Tim Gould, chief energy economist for the International Energy Agency. “There’s a role here for high quality carbon credits.”

The push for reform and positive predictions still leave many skeptics unconvinced.

Skeptics worry voluntary participation and self-regulation will always leave the market vulnerable to abuse, undercutting global efforts to reduce greenhouse gas emissions. Many worry there’s ultimately no reliable way to measure or predict the amount of carbon dioxide emissions the credits represent compared to what might simply have happened without them — referred to in industry terms as “additionality.”

“Voluntary carbon markets are inevitably going to be plagued by the additionality problem,” said Robert Stavins, an energy economist at Harvard University who has long questioned the effectiveness of voluntary carbon markets, especially compared to mandated carbon taxes or ‘cap-and-trade’ tax schemes regulated by governments.

Drama unfolds

The recent industry standard-setting efforts have been closely coordinated with what’s known as the Science Based Targets Initiative (SBTi), which advises companies and validates their net zero plans against what its science-based methodology determines is aligned with global climate goals. More than 5,000 companies currently participate in the initiative.

Yet the SBTi itself became embroiled in controversy in April after its board announced the group would allow companies to use carbon credits to offset some of the emissions of their suppliers and customers. These so-called ‘scope 3 emissions’ are the hardest for most companies to track and control, but for some, such as oil and gas companies, account for most of their total emissions.

Allowing even some offsetting of this category of emissions could massively boost demand for carbon credits. But as soon as the announcement was released, key employees at the SBTi complained publicly that the decision hadn’t been endorsed by the group’s professional and scientific staff, many of whom said they opposed the decision.

The board partially backtracked and said details of the plan were still being studied and will be released next month.