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Emissions Offsetting: What makes a reliable carbon credit

As awareness and analysis of carbon crediting methodologies has increased, the carbon markets have a crucial role to play in the race to a net-zero future.

07/03/2023 · 4 minute read

In recent years, the voluntary carbon markets have grown exponentially, channelling increasing amounts of capital towards climate-positive goals. Preserving existing landscapes is a major goal for NGOs and governments alike, and a key part of reaching the goals of the Paris Agreement. To make landscape preservation and responsible land-use economically viable, carbon credits can be issued to reward the carbon that remains locked up in healthy ecosystems under threat of deforestation. As governments look to act on their Sustainable Development Goals and incorporate rainforest preservation in national climate strategies, awareness and analysis of carbon crediting methodologies has increased. Verra, a non-profit whose standards are used to certify the vast majority of rainforest preservation credits, have been subject of particular scrutiny.

Reducing Emissions from Deforestation and Degradation (REDD+) projects aim to preserve rainforest (most commonly) that would otherwise have been destroyed; therefore preventing carbon emissions. This relies on a baseline – “what would have happened without any intervention?” – and in this question lies the challenge. Despite the questionable legitimacy of tangible carbon reductions through this method, the urgency of halting deforestation remains. Nascent mechanisms for carbon accounting will have inaccuracies, but these should never detract from the fundamental need to preserve climate stability. Baselines are subjective by nature, and criticism of them is nothing new. However, the scrutiny that accompanies a growing global market have put the limitations of REDD+ on full display.

The peer-reviewed studies of Guizar-Coutiño et al and West et al both use systematic methods to establish baselines for a selection of REDD+ projects on Verra’s registry. Analysis of these studies indicates that of c.95MN credits claimed, only 5.5MN tonnes of CO2E emissions were avoided. However, Verra claim that systematically derived baselines, also called “synthetic controls”, are a poor way to establish the deforestation that would otherwise have occurred. Instead, site-specific drivers of logging and agriculture are too important to ignore. Regardless, the overall conclusion that there is widespread over-estimation of carbon emission reductions from REDD+ projects damages the integrity of the whole system.

The results are not all negative however. Guizar-Coutiño et al state that their analysis provides “promising evidence that site-based REDD+ projects have helped reduce deforestation; particularly in areas of high deforestation threat”. Some of their results stand in direct contradiction to West et al, highlighting the difficulty of establishing credible baselines. However, this indicates there is real evidence that targeted conservation efforts, funded by carbon finance, can indeed help preserve threatened landscapes. The debate around this, however, is in danger of drawing attention away from the integral issue. To stand any chance of staying on a Paris-aligned 1.5C pathway, society collectively cannot afford increased levels of deforestation. The real issue is that carbon pricing is considered the most effective widespread mechanism currently available to assign value to forests and other landscapes. This means that the way to optimise revenue for a forest preservation project, and hence economic viability of the project, is to adopt the most favourable baselines. Regrettably, this has the unfortunate side-effect of jeopardising the quality and accountability of the underlying carbon credits, thus reducing confidence in Net Zero claims.

The incentive to inflate baselines doesn’t negate the importance or value of rainforest preservation. However, in its current state, carbon accounting is an insufficiently mature mechanism to assign a financial value to all the benefits of natural landscapes to businesses and the wider economy. The Taskforce on Nature-related Financial Disclosures (TNFD) highlights in its v0.3 beta release the need for an approach to measurement that is aligned with global policy goals of reversing nature loss. Corporations and governments should not abandon the current carbon-based mechanism, especially given the urgency of the need to halt deforestation. In the medium-term, there are two clear paths forward:

  • Agencies should continue tightening their guidelines for issuing carbon credits and use increasingly independent and conservative baselines. This is imperative to bolstering confidence in REDD+ credits. Market participants will be looking to the new version of the Verified Carbon Standard (VCS 5.0) for tightening of standards and closing of possible loopholes. This will ensure the voluntary carbon markets are as robust as possible. This is nothing new to Verra and other organisations. As recently as August, Verra released an update on its plans to transition projects to an upgraded and consolidated REDD+ methodology, with a specific emphasis on “establish[ing] robust project baselines consistent with jurisdictional activity data”.
  • Markets should look to develop and adopt improving methodologies for capturing the whole value of landscape preservation and avoided deforestation, possibly through biodiversity credits or even a per-hectare credit. Emerging technology around biodiversity assessment and quantification provides a promising opportunity to combat biodiversity loss and ecosystem damage; without an inherent coupling to carbon emissions. This, crucially, can be achieved while avoiding issues with baselines and potentially improving the economic case for a wide range of forestry projects. Per-hectare funding for preservation, while an inadequate long-term solution due to lack of control for leakage and permanence, could also help prevent short-term ecosystem loss. Corporations and nature-based project developers will be looking to TNFD to provide clarity around the metrics for measuring financial risk and opportunity from nature-based assets.

Overall, scrutiny applied to the voluntary carbon markets is healthy and indicates reaching an inevitable stage in their maturation. Some current methods can be interpreted as flawed, but this does not mean that the goals of the markets and of offsetting itself are not worthwhile; or indeed anything less than urgent. Scrutinising the carbon markets should not prevent investment in forest preservation, but rather encourage the markets to redouble their efforts to generate high quality and solid environmental benefits. A flawed but improving mechanism of valuing and protecting these assets is infinitely better than no mechanism at all.

Meet the authors

Dom McGough

Dom McGough

Managing Consultant, Marsh Advisory

Charles Sincock

Charles Sincock

ESG Advisory and Strategy Lead, Marsh Advisory

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