The Carbon Credit Market Confuses The Corporate World

Many of the carbon credits used to offset corporate emissions have no merit, a conclusion reached by investigative journalists. The target: Verra, which approves three out of four — voluntary — rainforest carbon projects. The study found that 94% of these voluntary loans were “worthless”.

This damning report signals the corporate world to reassess what kind of carbon credits it buys to meet net zero goals. Other documents also question the reliability of voluntary carbon projects. At the same time, demand for these instruments has stagnated while their market price has fallen, prompting companies to consider sovereign credits – those issued by national governments and endorsed by the Paris climate agreement.

The Guardian, Die Zeit and SourceMaterial say Verra is exaggerating his impact. Organizations calculate how many trees they will save, all audited by Verra-approved third parties. But the threat of potential forest loss is overstated by 400%, which would suggest that carbon credits are better. In fact, such an assumption is almost impossible and is a function of public policy and economics. The research shows that a small number of Verra projects have prevented the felling of trees.

Separately, an Australian National University professor and former head of the government’s emissions assurance committee said the market had “integrity issues”. Andrew Mackintosh previously studied 119 tropical forests and found that the credits had little effect. For 59 of the projects, the amount of rainforest has decreased – even though they received $100 million worth of credits.

Overall, demand for forestry-related carbon credits has declined, Trove Research and AlliedOffsets add — from 380 million in 2021 to 359 million in 2022. As a result, carbon prices continue to fall, forecast for 6 .5 dollars per ton this year.

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

A major criticism is that Verra receives 10% of each carbon credit sold to fund its efforts. Logically, the more credits he sells, the more he earns. Therefore, he is motivated to approve more and more transactions. Its revenue has grown from $7 million in 2018 to $41 million in 2021.

Vera punches back

Chevron, Shell, BP, Gucci, BHP, Salesforce and Samsung are among the companies buying Verra-approved carbon credits. Verra, which has issued one billion carbon credits since 2009 worth about $2 billion, says it enables carbon finance that saves trees and reduces atmospheric carbon by working with experts worldwide to create and refine its methodologies. The private sector typically 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 Jóir Bolsonaro, who was elected president of Brazil in 2018. He allowed loggers and farmers to run roughshod over the country’s vast rainforest, increasing deforestation by 60% and greenhouse gases by 12% by 2021.

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

Critically, not all carbon credits are created equal and there is a difference between voluntary markets sold by brokers and government credits issued by national governments. The first 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 end up paying for it.

The Paris Climate Agreement adopted the latter, and 192 nations have agreed to these standards. The goal is for trees to be worth more alive than dead — or used for agriculture or lumber. Developing countries fought to include the “sovereign” REDD+ mechanism in the final COP27 agreement. Under this plan, governments account for their forest lands and set goals to stop deforestation. The United Nations Framework Convention on Climate Change monitors their progress and issues carbon credits.

Will The Real REDD+ take a step forward

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

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

In contrast, government credits protect the rainforests of entire nations. Countries with tropical forests are motivated to allocate money to reduce emissions. If they do, countries and companies will continue to buy the credits. In addition, satellites fly overhead, making forest management public knowledge. The data is updated every few days and is accurate.

In general, companies cannot achieve carbon neutrality by generating all their electricity, using renewable energy on site, or by increasing their energy efficiency strategies. They must enter into power purchase agreements. And they have to buy carbon credits – things that can offset their emissions. Sometimes companies buy credits because it creates good public relations. Other times they don’t 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 make false claims and then convince customers that they can fly guilt-free or buy carbon-neutral products when they are in no way carbon-neutral.”

With that, Deutsche Bank called government carbon credits “the only tool that allows capital to flow where it’s needed to protect countries from a worsening climate and continue to reduce emissions.” Gabon, Belize and Honduras have either sold or are about to sell sovereign debt.

In effect, rainforest nations will use the revenue to reduce emissions and build infrastructure that allows them to protect themselves from flooding and rising tides—credits that also remove atmospheric carbon and benefit the rest of the world.


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