From hysteria to transparency: Are we on the verge of credible carbon markets?

Image: Tufts University- Fletcher School of Law and Diplomacy, Medford, MA Dean Rachel Kyte photographed in her office at the Fletcher School of Law and Diplomacy on the Tufts University Medford Campus, Wednesday, August 11, 2021. Photo by Jake Belcher

Carbon markets are swiftly turning into the marmite of the corporate sustainability world. Some businesses and green groups believe they have a crucial role to play in delivering ambitious net-zero transitions, while others believe they enable firms to greenwash their way to better market conditions, leaning too heavily on them rather than focusing on actual emissions cuts.

It doesn’t help that the swelling global carbon market – now worth around $2bn (£1.6bn) for voluntary offsets alone – has been plagued with noteworthy failures in recent months.

The high-profile case has been that of Verra, the leading carbon standard for the voluntary carbon market. A nine-month investigation has been undertaken by the Guardian, the German weekly Die Zeit and SourceMaterial, a non-profit investigative journalism organisation, uncovered some serious doubts about Verra’s work.

The research found that 90% of Verra’s most common credits – rainforest offset credits – were “likely to be phantom credits and do not represent genuine carbon reductions”. The investigation found that 94% of the credits had no benefit to the climate and that threats to the forests where projects were based had “been overstated by about 400% on average”.

Verra, which certifies credits for major businesses including Shell and Disney,has heavily disputed the findings, but has agreed to evaluate its credit ratings scheme.

Indeed, the market seems to be in a bit of a pattern of trial and error, but breakthroughs are starting to emerge that will add some much-needed legitimacy to green claims.

Rachel Kyte is Dean of The Fletcher School at Tufts University and co-chair of the Voluntary Carbon Markets Integrity Initiative (VCMI). Kyte is spearheading the development of a more transparent and accountable code to reduce greenwashing – which has been trialled by Google, Unilever and Hitachi.

The Provisional Claims Code of Practice has been developed by the VCMI – a multi-stakeholder initiative that launched last July with the aim of ensuring that voluntary carbon markets actually deliver the levels of mitigation and sequestration needed.

For Kyte, the voluntary carbon markets are moving in the right direction, but confidence in the market is still suffering while codes of practice are developed and introduced.

“How does everybody get held accountable in a voluntary market for their voluntary commitments and their voluntary pledges? That’s the whole debate,” Kyte tells edie for Business Leadership Month. “I think there has been indecision from businesses in this market because of a lack of clarity and the fear of greenwashing, or even the fear that you’re engaging and investing in something that might not be worth anything at the end of the day.

“But 2023 is shaping up to be a really critical year [for these markets]. In 2021, everybody got really hysterical about voluntary carbon markets and this provoked an extraordinary backlash based on greenwash. Last year allowed us all to simmer down a little and start working together to uncover the real opportunities.”

Kyte states that a lot of data and analytics needs to be done, as well as more tangible work on the supply side of the credit market. When combined with new codes of practices from the organisations orchestrating the voluntary carbon markets, better quality credits should be more apparent.

Indeed, Kyte states that 2023 will be the year where the “fruits of our labour” start to come forward and more confidence is placed in the voluntary carbon markets as more standards are introduced.

Last month, for example, eight major NGOs launched new guidance to the Tropical Forest Credit Integrity (TFCI) Guide — a comprehensive, step-by-step guide for companies to follow when investing in tropical forest carbon credits to fight climate change.

The updated guidance aims to help businesses implement and deliver climate mitigation and net-zero strategies by navigating the tropical forest carbon credit marketplace with “clear purpose and high integrity”.

Junk credits

Kyte notes the imbalance between “well-intentioned companies” that want to work with “integrity” who are still reluctant to participate in the market due to concerns over greenwashing or the quality of the credits on offer.

These issues have given a lot of media attention to “junk” credits. Indeed, edie has its own feature on the issue here.

Persistent problems that could render credits ‘junk’ include double-counting; accounting for activities that do not result in additional or permanent emissions avoidance or sequestration, and getting the ‘vintage’ of credits right. The term ‘vintage’ refers to the timeframe in which the emissions reduction or removal takes place; you cannot plant a sapling today and immediately assume the benefits of a tree that has stood for decades.

“Right now the big question being asked is ‘will any of these cheap credits sloshing around actually count?’” Kyte adds. “At the moment, the market is doing its best efforts to make credits work for the purposes of emissions reductions and getting financing flowing to places where it needs to flow to.

“Part of the insecurity is that we are operating beyond where legislation and regulation are well defined.”

While these credits rightly need to be scrutinised, those operating within the carbon markets believe that as these issues are highlighted and, ideally, rectified, they can take away from the transformative impact that carbon markets can have.

Carbon finance consultancy South Pole’s director of communications Isabel Hagbrink recently took to LinkedIn to highlight that carbon market financing is crucial as otherwise, projects which actually are delivering results wouldn’t receive funding.

“These projects – which are actually reducing emissions RIGHT NOW – need buyers of their carbon credits to survive,” Hagbrink wrote. “They have no alternative sources of finance – and, frankly, the NGO community does not have the funds to step in, or they would have gotten climate projects off the ground decades ago.”

Kyte is of the belief that businesses will ultimately get what they pay for when exploring the carbon markets, and if they fail to do due diligence on where their money is going, they should be aware of the ramifications.

“Everyone’s strategy is a transitional strategy,” Kyte says. “It’s like we’re making a pledge to be net-zero at a certain date, but today we’re not [net-zero]. But we’ve got to get there, and so you use the voluntary carbon markets, but people are afraid of that ‘gotcha’ moment because some companies are claiming to be carbon neutral or net-zero now. Some of those claims are laughable. Some of those claims are spurious. Some of those claims are not scientifically based.

“So for companies that want to cut and run and buy those low-quality credits now and deal in the junk bond end of the market, they shouldn’t be surprised if something bad happens or they get called out down the line”.

Kyte does state that there are a lot of “well-meaning” companies trying to traverse the voluntary carbon markets and that it is the role of the VCMI to attract them to projects and initiatives that can showcase demonstrable decarbonisation.

The VCMI’s new Provisional Code, for example, will provide businesses with a methodology by which climate claims relating to offsetting can be categorised as Gold, Silver or Bronze.

Elsewhere, BeZero Carbon, a global ratings agency for the Voluntary Carbon Market, updated its carbon credit rating scale, with scores ranging from the “highest likelihood” AAA rating to the “lowest likelihood” D of a tonne of CO2e avoided or removed along an eight-point scale. Previously, BeZero Carbon only offered scoring across various “A” ratings.

The new scoring, introduced this month, has uncovered a common problem with the voluntary carbon market; of the projects rated by BeZero Carbon only 15% of credits by issuance have been assigned an A rating or higher.

Verra, which is the operator in the voluntary carbon market, has also confirmed that it is scrapping its rainforest protection programme by 2025, to be replaced by new rules to help organisations navigate credits.

Guard rails and guide ropes

Kyte argues that the markets need to be guided by policy, but this raises its own challenges, specifically for companies operating within nations and then paying for credits for projects elsewhere across the globe.

The UK, EU and US are all placing greater regulatory scrutiny on how companies can communicate the impact that their carbon credit purchasing has, including on claims of carbon neutrality, and Kyte believes that the discussions held at COP27 in Egypt late last year should help create further regulatory guidance moving forward.

“Everyone has been pulling in different directions on this and I think COP27 was a significant moment. I think the side event activities around voluntary carbon markets allowed us to get a lot of different feedback from different participants in the market. As a result of those conversations, we will be issuing a revised code of practice, hopefully at some point this year.”

“But for now I honestly think the business community should be breaking down the doors of regulators and legislators, telling them that without guard rails and guide ropes that corporate best efforts run the risk of being suboptimal. I do think businesses are frustrated by a lack of support on this.”

It will take time, years even, for the voluntary carbon markets to improve transparency and viability to the point where businesses will feel more confident to invest in them, but as the regulatory landscape and market frameworks improve, businesses will still need to be wary of investing in those “junk” credits.

Kyte, like many others, notes the prominent rise in greenwashing accusations. With one in every five cases of corporate risk incidents linked to environmental, social and governance (ESG) issues stemming from greenwashing and misleading communications, businesses will need to get their strategies and communications right.

Indeed, the UN’s High Level Expert Group on Net Zero Emissions Commitments of Non-State Entities outlined a new set of key recommendations to help organisations develop and deliver net-zero targets credibly, avoiding common greenwashing pitfalls at COP27.

The report offers steps to avoid greenwashing and recommends that non-state actors should no longer claim to be net-zero if they continuously build or invest in new fossil fuel supply, support deforestation and other environmentally destructive activities that should be branded as “disqualifying”.

Additionally, firms should avoid purchasing cheap carbon credits instead of reducing emissions. The report does state that “high-quality” carbon credits can be used, but only to balance out remaining emissions once short and medium-term science-based targets have been met.

Carrot and stick

For Kyte, the immediate external pressure placed on businesses investing in voluntary carbon markets will come from investors and consumers while the regulations and frameworks continue to develop.

“You may need to use the voluntary carbon markets for many years to come,” Kyte states. “I think it’s important for the boardroom to understand how this all fits together to understand what the opportunity is, but also to understand the risk of making claims that can’t be backed up by a science-based pathway. In the interim, pressure is going to come from consumer protection bureaus, advertising standards authorities and an increasingly sophisticated investor and consumer market.

“Businesses should be extremely concerned [by those pressures]. That’s the stick in this. People are scrutinising your claims, but the carrot is that if you are on a science-based pathway then you can use these markets to actually reduce and remove emissions.”

Kyte offers some final words of advice for organisations that are starting out on their decarbonisation journey and want to utilise these markets in a credible way. She recommends that businesses get transition plans in place in order to highlight the role that carbon credits will play in the short and long term.

Additionally, Kyte suggests working with “reputable” agents and financial institutions to ensure a business can access “high quality, high integrity credits”, noting that the pricing differences of higher quality credits will become apparent as the market matures.

Rachel Kyte is edie’s Guest of Honour at the edie Awards

edie is delighted to announce that Rachel Kyte will appear as the official Guest of Honour at the 2023 edie Awards in London on 30 March.

Kyte will deliver the opening address to attendees at the Awards, which celebrate the people and projects that are together transforming business and helping nations push towards net-zero emissions for good.

Now in its 16^th year, the world’s largest sustainable business awards scheme – formerly known as the Sustainability Leaders Awards – champions bold and brilliant climate leadership. From the most ambitious net-zero carbon programmes through to cutting-edge green innovations; from impactful climate partnerships and social sustainability initiatives to the heroes on the ground who are driving positive change.