Will the voluntary carbon market survive mistrust and regulation?

Delegates attend the voluntary auction of carbon credits, with projects in Kenya, Rwanda, Egypt and South Africa, at the auction in Nairobi, Kenya June 14, 2023. REUTERS/Thomas Mukoya

Delegates attend the voluntary auction of carbon credits, with projects in Kenya, Rwanda, Egypt and South Africa, at the auction in Nairobi, Kenya June 14, 2023. REUTERS/Thomas Mukoya

What’s the context?

As more companies eye carbon credits to meet net-zero pledges, scrutiny is growing over the future of the voluntary offsets market

  • Credibility crisis poses threat to voluntary carbon market
  • International institution proposes ending 'offset' claims
  • Market is largely expected to be absorbed by regulation

RIO DE JANEIRO - In late May, Delta Air Lines became the target of a proposed class action lawsuit in the U.S. after advertising itself as "the world's first carbon-neutral airline".

Filed on behalf of a California-based client of the U.S. carrier, the complaint said the claim was "false and misleading" as it hinged on buying carbon offsets that are largely worthless - and led customers to believe the airline had not been responsible for releasing additional carbon into the atmosphere.

A Delta spokesperson said the lawsuit was "without legal merit", and that "it was adopting industry-leading climate goals as we work towards achieving net-zero carbon emissions by 2050".

The global $2 billion voluntary carbon offset market - where companies buy credits in pollution-reducing projects like solar panel systems or tree planting to offset their own emissions - is facing ever-greater scrutiny and criticism with researchers questioning the validity and climate benefits of the offsets.

Delta in 2020 announced it would invest $1 billion by 2030 to mitigate all emissions, and has since spent at least $283 million on carbon offsets, according to reports on its website.

Macaws sit on a tree at the Amazon rainforest in Manaus, Amazonas State, Brazil October 26, 2022. REUTERS/Bruno Kelly
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However, its spokesperson said that since March 2022, Delta "has fully transitioned its focus away from carbon offsets toward decarbonization", which includes investing in biofuels.

From airlines and fashion houses to technology giants, a growing number of corporations globally have bought credits from the voluntary offsets market as pressure grows on the private sector to achieve net-zero emissions to limit global warming.

Yet the market has been criticized - with studies citing poor transparency, a limited supply of credits, and the dubious effectiveness of many projects in actually cutting emissions.

Separately from the voluntary market, the 2015 Paris Agreement sets out the basis for global regulated carbon trading overseen by the United Nations, under which one country could offset emissions by buying credits generated by another nation that has surpassed its own targets.   

While a few regulated markets have been established by South Korea, the European Union, and the U.S. state of California, for example, large-scale bilateral agreements or a broader U.N. framework allowing for international exchanges are not likely to materialize in the near future, several industry experts said.

Delay in establishing the rules for the proposed U.N.-regulated market is often used as justification by the private sector to take the lead in financing environmental projects by generating and selling credits on the voluntary market.

Ana Carolina Szklo, technical director of the Voluntary Carbon Markets Initiative (VCMI), said regulated carbon offset markets have proven costly and time-consuming to set up.

"There is a (climate) urgency that does not (allow for) this time, which naturally led to the voluntary market," said Szklo, whose organization seeks to bring transparency to the market.

An aerial view shows trees as the sun rises at the Amazon rainforest in Manaus, Amazonas State, Brazil October 26, 2022

An aerial view shows trees as the sun rises at the Amazon rainforest in Manaus, Amazonas State, Brazil October 26, 2022. REUTERS/Bruno Kelly

An aerial view shows trees as the sun rises at the Amazon rainforest in Manaus, Amazonas State, Brazil October 26, 2022. REUTERS/Bruno Kelly

Credibility crisis for voluntary carbon offsets

The voluntary market was worth about $2 billion in 2021 and will reach $10-40 billion in value by 2030 - transacting 0.5-1.5 billion tonnes of carbon dioxide equivalent, up from 500 million tonnes currently, energy major Shell said in a January report.

But its credibility crisis in the face of growing criticism and looming regulation are casting doubts over what role the voluntary market can play in climate action in the long-term - and if it will be eventually absorbed by the regulated market.

"We have to act now - we can't wait for politicians to save the world," said Oscar Schaps, president of the Latin American division of financial services company StoneX, during a debate at the Latin America Climate Summit held last month in Panamá.

The voluntary market faced fresh scrutiny in January after an investigation by the Guardian and Die Zeit newspapers said that most rainforest credits approved by Verra - a leading standards group - did not represent genuine carbon reductions.

Verra strongly disputed the findings, and said in a statement in January that it "develops and continually improves methodologies based on the best-available science and technology through rigorous consultations with many academics and experts".

Following the investigation, the value of voluntary carbon credits from nature projects registered by Verra - which were already on a downward trajectory - nearly halved, falling to a record low of $2.07 per tonne of CO2 equivalent in early February, according to U.S. exchange operator CME Group.

The credits were trading at about $2.29 as of July 12.

Despite the market's woes, Verra issued 93 million credits in the first six months of this year, up from 77.8 million credits in the same period for 2022, data on its website shows.

Carbon offsets from "avoided deforestation" projects have been the focus of much of the criticism of the voluntary market.

Through this mechanism, land that would have been deforested or degraded is instead kept intact, with the ensuing avoided emissions sold as carbon credits. Yet there have been doubts raised by several academics and analysts over the methodology.

Separately, conservationists in Kenya have said the approach can fuel inequality by benefiting land owners more than the wider community, while in Brazil, researchers and authorities have accused project developers of sourcing credits from public or communal land without authorization, based on invalid titles.

From voluntary to regulated markets?

The VCMI last month launched a new code of practice - partially funded by the British government - which aims to help investors establish whether climate claims made by companies using carbon offsets are credible.

Under the framework, instead of declaring carbon neutrality achieved by buying voluntary offsets, companies should make "contribution claims" based on emissions mitigation efforts.

Governments of the countries hosting offsetting projects should be able to claim the carbon mitigation as part of their nationally determined contributions - action plans to cut emissions laid out by the Paris Agreement - said VCMI's Szklo.

Susana Vélez Haller, a senior manager for Verra in Latin America, said she was skeptical over whether the VCMI's new code would appeal to the private sector.

"When companies invest they want something in exchange, some sort of advantage", such as claiming carbon offsets, she added.

Going forward, the establishment of regulated national and international carbon offset markets is likely to replace much of the voluntary one, according to Haller, yet she said the latter would remain an important source of funding for poorer nations.

This is because such countries lack the resources to keep an updated inventory of their emissions, which will be required for them to tap into bilateral trade agreements or a U.N. regulated global market, she explained.

Another issue is whether nations will want companies to keep investing in voluntary carbon offsets projects, often overseas, if those emissions reductions cannot be counted as official national contributions to climate action under a U.N. framework.

"Why would you allow an unregulated activity to compete with a regulated one?" said Carlos de Mathias Martins, CEO of EQAO, a Brazilian company that develops carbon credit projects connected to renewable energy, from hydropower dams to biomass combustion.

Martins said he expects national and international regulations to eventually absorb most of the voluntary market.

However, Dirk Forrister, CEO of the International Emissions Trading Association (IETA) - a non-profit business association - said voluntary and regulated markets would be able to coexist.

"In places where you don't have government regulation, that's where the voluntary market can really kick in and make a difference", he said.

(Reporting by Andre Cabette Fabio; Editing by Megan Rowling and Kieran Guilbert)

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