November 19 – Ten years ago, when governments signed the Paris Agreement, they were clear that limiting damage from climate change depended on more than just reducing emissions. World leaders recognised the need to avoid future emissions by preserving carbon sinks. And they pledged to use various means, from tree-planting to developing advanced technologies, to remove some of the carbon already released into the atmosphere.
The idea of a market to compensate organisations that reduce or remove emissions sounds simple enough. But making the concept work in practice has proven anything but.
A series of scandals around carbon credit schemes, particularly in 2022 and 2023, severely undermined confidence in the carbon markets. Although most of the reputational disasters affected specific types of projects, the market as a whole suffered from guilt by association.
The obvious retort to such findings is that while projects developed in the early days of the carbon markets did indeed suffer from severe methodological flaws, lessons have been learned. Carbon industry associations and standard setters have responded with a flurry of initiatives designed to strengthen standards and repair confidence.
Rich Gilmore, CEO at Carbon Growth Partners, a carbon markets investment firm, says two big reforms have been “very successful”. The Integrity Council for the Voluntary Carbon Market has been established to provide independent oversight of how carbon projects are audited.
And new methodologies – the technical guidelines that determine how projects report carbon reductions or removals – have been created that “provide tighter guardrails and less ability for projects to exercise judgement on how the methodology should be applied”.
“Those two things taken together, I think, are going to prove to be very important reforms,” he says.
Yet some project developers are concerned about what new methodologies mean for the financial viability of carbon projects.
There is a “tendency towards extreme conservativeness in the way that the rules are being developed,” says Marshall, who is also chairman of the Project Developer Forum, a body representing carbon project developers.
He notes that several new methodologies have been developed for cookstove projects. These offer carbon credits on the basis that improving cooking methods in developing countries will reduce deforestation from people collecting firewood and then avoid emissions from that biomass being burned.
Many older cookstove methodologies were heavily criticised for “over-crediting” – or overstating the carbon benefits. However, he says the Paris Agreement Crediting Mechanism (PACM), a central registry set up by the United Nations Framework Convention on Climate Change to track credit trading between countries under Article 6 of the Paris Agreement, applies “a whole level of other discounts to those (existing) methodologies, which really over-emphasises conservativeness versus accuracy. ”
He worries that “this will have the net effect of basically making a lot of projects unviable”.
In the Brazilian Amazon, another carbon project developer, GreenMusk, is also facing methodology headaches. It plans to be the first to issue credits under a new methodology developed by standard-setting body Verra, known as VM0048, for a project that aims to reduce deforestation.
Issuing carbon credits for “avoidance” projects have been particularly controversial, due to high-profile cases of over-crediting. Verra’s response with VM0048 is to require credit issuers to be much more cautious in their assumptions about how much their actions will reduce deforestation and avoid emissions.
Pieter van Vegchel, co-founder at GreenMusk, says it now plans to issue 0.8 credits per hectare – around 90% less than has been commonplace in other projects that seek to avoid deforestation. The figure is “even lower than we expected, due to certain choices from Verra”.
Bart-Willem ten Cate, his co-founder, says tighter rules on carbon accounting are a “good thing”. But he worries that many projects will not be viable with such a low number of credits per hectare. “The risk is that quite a lot of projects that have started to develop will not get to the end.”
Yet from the perspective of actually achieving the goals of the Paris Agreement, it makes little sense for the market to make conserving the world’s great carbon sinks a secondary priority to other forms of carbon capture.
“If the forest is gone, it will not come back,” says van Vegchel. “It will take at least 1,000 years to reach the original pristine forest level. So, protecting it is an essential part of storing carbon and saving the world.”
The low number of credits issued per hectare on these kinds of projects might not be such a problem for developers if the price per credit was high. Yet across the voluntary markets, “carbon is comically mispriced”, says Gilmore.
And while Gilmore welcomes reforms to improve integrity, he concedes that their impact on the market remains uncertain. “They haven’t led to an uptick in demand yet, because improving integrity, real and perceived, doesn’t introduce a ‘why’ to corporate decision-making. It just partially reduces a ‘why not’.”
That “why” may not be easily answered while carbon markets remain largely voluntary, with companies having few incentives to purchase credits.
After last year’s deal at COP29 to bring Article 6 of the Paris Agreement into operation, many experts say the logical next step is to create greater international convergence in how regulated carbon markets operate.
“In, say, the European Union, we are spending upwards of 80 euros a tonne for emitting a tonne of carbon,” says Tim Dobermann, research director at the International Growth Centre at the London School of Economics. He says policymakers need to consider opportunities for what could be a “very advantageous trade” for all parties.“ Could you come up with some kind of market that allows you to perhaps get that, at a high-quality level, for a cost of 25 euros through a really monitored and verified forestry project in Ghana?”
Rohini Pande, an economics professor at Yale, is part of a group of academics proposing a pathway towards an international carbon market. Speaking at an event in London in September, Pande said that such a system would help secure higher and more standardised prices for carbon projects in developing countries. It would depend, she said, on having a centralised institution to oversee measurement, accounting, risk mitigation and verification to provide confidence to purchasers.
If the system worked, it would make the market more efficient for both buyers and sellers, said Pande.
“A key feature that I think is central to what we argue needs to happen if you’re going to bring nature-based projects into a market where industrial emissions are being considered is that you need to have a standardisation and you need to have identically priced emissions being traded.”
It is an idea that COP30 host nation Brazil had embraced in the runup to the climate summit. Finding ways to promote integration of the carbon markets, beginning with Brazil, the European Union and China, with a focus on industrial emissions, is one of the agenda items being discussed in Belem.
If an internationalised carbon market works as intended, it should scale-up demand for credits. Yet one possible drawback is that it would be difficult to give a price premium to carbon projects that produce environmental or social co-benefits.
Marshall says TASC provides nature and community co-benefits with its own projects – but he acknowledges credits will be priced, over the long-term, on their ability to offer carbon reductions. “The fundamental business case is around emissions reductions. There’s nothing else out there that you can, as a project development business, monetise in the way that you can with emissions reduction.”
With only 25 years to go until 2050, we are running out of time to fix carbon markets so they can fulfil their potential to help in the fight against climate change.
“If you add up every single carbon credit in existence that has ever been issued and not retired, you could offset emissions for one week,” says Gilmore of Carbon Growth Partners. “And so, if the market died today, nobody would miss it, but what they would miss is its potential.”
“It’s necessarily going to have to scale if we have any hope at all of staying below two degrees.”
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Ethical Corporation Magazine, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.
