How Carbon Credits Become Credible: A Conversation with Basak Odemis

More and more private companies?are coming up with net-zero pledges. But because getting to zero can be very challenging, many of them use #carboncredits to offset the #emissions that persist – also known as "residual” emissions.

Demand for carbon credits is skyrocketing as a result. One recent study estimates it could increase by a factor of 15 or more by 2030, bringing the total market to more than $50 billion. To demystify carbon credits and their role on the path to net zero, we sat down with one of IFC’s carbon markets experts, Basak Odemis

What are carbon credits?

A carbon credit is a kind of certificate that represents 1 ton of carbon dioxide reduced, avoided or removed from the atmosphere. #Carbonmarkets are vital because they help companies and consumers put a price on their emissions, incentivizing those that do good.

There are two types of carbon markets. Compliance markets are marketplaces through which regulated companies obtain and surrender emissions allowances. Voluntary carbon markets are not legally mandated – as their name indicates - and allow private companies and individuals to step forward and buy verified emissions reductions to help meet their #netzero targets.

What purpose do voluntary carbon markets serve for private companies?

By voluntarily purchasing carbon credits from projects that reduce, remove, or avoid emissions in another part of the world, private companies can offset emissions that would otherwise be too expensive to eliminate. The projects they fund typically include cookstoves, reforestation, agroforestry, nature conservation or restoration of tidal wetlands, as detailed in a recent IFC report .

Effective carbon markets can be a powerful way to help make climate projects bankable and channel finance at scale to developing countries, where the cost of capital can be high. These projects can have multiple benefits, such as protecting biodiversity, preventing carbon pollution, promoting new technologies, and generating jobs.

Does this mean that high emitters can simply buy their way out of decarbonizing their own operations?

Not at all, and voluntary carbon credits are not designed to do that. They are an additional tool to advance climate mitigation and – if well-structured - are a legitimate element of any strategy to reduce greenhouse gas emissions. However, carbon offsets should only be used where all other viable decarbonization solutions have been exhausted, or as an interim solution.

How can the buyers of carbon credits feel confident that their purchases represent true reductions in carbon emissions?

One of the main challenges of voluntary carbon markets is ensuring their credibility. Buyers need to be confident that the carbon credits they purchase represent real, additional reductions in carbon emissions beyond what would have occurred in a “business-as-usual” scenario. On the demand side, the voluntary use of carbon credits must augment rather than substitute corporates’ decarbonization efforts.

A company can purchase credits from the best project in the world but if it uses credits for greenwashing, it is not good. The credibility of the “offsetting claim” is as important as the credibility of the “carbon credit”. This requires transparent reporting and tracking mechanisms, as well as robust governance structures to prevent fraud and make sure every actor in the market is accountable.

How is the price for voluntary carbon credits set?

They are determined by supply and demand, just like in any other market. Prices can vary by type, location, vintage, certification, and co-benefits. The important part is that pricing must be transparent and reflect the cost of emissions with accuracy.

Are there any international regulatory authorities for carbon credit markets?

While voluntary carbon markets are self-regulated, several initiatives exist to enhance the credibility of both carbon credits offered for sale, and the claims of emissions offsets these credits are bought to mitigate.?In the carbon credit market, that’s called a demand- and supply-side environmental integrity.

For example, VCMI (the Voluntary Carbon Market Integrity Initiative) aims to design a credible mechanism for corporate climate action claims to keep companies from purchasing carbon credits without making meaningful efforts to reduce their GHG emissions. Others, such as the The Integrity Council for the Voluntary Carbon Market (ICVCM) , focus on supply-side integrity to ensure high quality of carbon credits. Creating these quality standards is important to bring buyers and sellers on the same page.

What is IFC doing in the voluntary carbon space?

IFC has a long history in this area. During the #KyotoProtocol period, we invested in carbon credits and deployed financial products involving carbon credits. ?IFC managed two carbon facilities on behalf of the Dutch government, developed a risk management product called Carbon Delivery Guarantee, and has lent to companies against the future cashflow of carbon credit sales.

?In 2016, IFC issued its inaugural $152 million, 5-year Forest Bond to support a forest conservation project in Kenya – a sector with very little commercial investment at the time. More recently, in August 2022, IFC invested in a US$10 million fund – termed Carbon Opportunities Fund - that will source, tokenize, and sell high-quality carbon credits, raising money for nature-based projects. We now see an opportunity to expand our investor base and use carbon markets to add value to our clients as we support the goals of the #ParisAgreement .

How did you first get involved with carbon credits?

In 2002, I was tasked with developing a strategy to help all of TotalEnergies ' entities to comply with the new European Emissions Trading Scheme. Over the years, I worked with multiple teams to build the company's capabilities, supporting its long-term decarbonization strategies, involvement with carbon markets, and emissions reduction projects across the world. It was my passion for international development that drew me to IFC.

I firmly believe that businesses, governments, and international organizations should work together to drive systemic change and channel capital flows to achieve a low carbon future. We need to do everything, everywhere, all at once and this includes massive increase in climate finance and supporting all high-quality carbon reduction, avoidance, and removal projects. ?The best solutions are backed by concerted efforts by the private sector, international organizations, and the public sector.

IFC is a critical development institution placed right at this triangle. It may not sound very professional but working on this effort within the IFC Climate Business team gives me butterflies!

What skills would someone need to be in your post?

Over the years, climate change has evolved from a scientific problem to one of capital allocation.?But the financial sector is still lagging far behind. Financial institutions need to learn how to calculate their carbon and deforestation footprint. I would advise any young person with an interest in this topic to focus on helping these institutions find new ways to deliver environmental, social, and financial success and assess progress beyond a simple financial break-even point.

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