The voluntary carbon market - what are the current shortcomings?

The voluntary carbon market needs higher standards of quality. So what are the issues that need to be tackled?

The following is an excerpt from our white paper, Reforming the Voluntary Carbon Market. You can access the white paper in full here. At Compensate, we often talk of the need to raise the bar for quality in the voluntary carbon market. In this blog post, we take a closer look at the big questions facing the market.

The big question: Do offsets create perverse incentives to continue emitting?

Compensation is often cheaper and easier than emission reductions. A major criticism for offsetting is that it just provides an opportunity to continue emitting. The argument is that offsetting creates “perverse incentives”: Organizations might be tempted to use offsets to achieve reduction goals and not actually reduce emissions first. Similarly, individuals might continue high carbon footprint lifestyles because offsetting is convenient and affordable. Some consumer studies indicate a positive correlation between offsetting and overall positivity towards sustainability and emission reductions. These studies haven’t yet proven a causal relationship. Clearly, more research is needed to understand what motivates consumers and organizations to offset. Rather than completely dismiss the criticism, the industry should face it head-on. First, a stern look inwards is needed. Too often, offsetting providers liken compensation to reductions, making marketing promises that can be classified only as greenwashing. One key issue is the price of offsetting: If prices are kept low with dubious climate impact and goods sold with greenwashed promises, it is indeed tempting for individuals and companies to choose offsetting over emission reductions. Carbon credits should always be priced high enough to actually match the damage caused: At a high enough level, credits can incentivize emission reductions over or at par with offsetting. Another possibility for the industry to explore is going beyond “neutralizing” and “balancing”. When there’s clearly too much CO₂ in the atmosphere and too little being done about it, offsetting could provide a tool for positive action so that CO₂ is always removed from the atmosphere as well, rather than just not being added to.

The big question: What is being sold?

Offsets are often used for corporate responsibility reasons. It’s important for companies to be able to discuss climate action and tangible things the company is doing. Are consumers and stakeholders told which emissions are included in the carbon footprint calculations? What GHG emission scopes have been included? What’s being offset? What about the projects from which carbon credits are bought: How have they been chosen? Has their impact been evaluated, and by who? How are they monitored? Companies and offset providers now turn to international standards for quality assurance, as they have limited information about the offsets they are buying. With these widely accepted standards in place, there is also little public pressure on buyers to dig deeper into the projects. As Compensate’s research shows, not even the most renowned international standards guarantee real climate impact (read more in our white paper ). Compensate has come across projects with unbelievably overestimated impact, or, worse yet, no impact at all. The market is flooded with millions of essentially worthless credits. Still, these credits have the stamp of approval of the leading international standards, and offsetters keep buying them with no knowledge of the fact they’re engaging in a lie. If such credits are used for offsetting, the climate is saved on paper only. Additionally, as long as buyers have limited understanding of the complexities of the market, the industry has no incentive to improve underlying quality issues. If you can sell bad credits for a reasonable price and the market seems to be growing, why rock the boat? Many offsetting operators also believe sustainability issues should be fixed after the market has first grown to a more substantial size. But growing the market as-is risks causing active harm to the very thing it is trying to save: the climate.

The big question: The lack of transparency in pricing

The voluntary carbon market is dominated by a handful of major credit resellers. They buy credits from project developers and sell them as offsets to corporate buyers and individual consumers. The profit of the reseller is made in the margin on top of the resale price. Pricing models are corporate secrets, and few offset providers openly disclose their margins. It remains unclear how much of the credit revenues go to the developer or local communities. Given the complexity of financial streams related to offset projects, and the increasing use of carbon credits for corporate carbon neutrality claims, increasing transparency on pricing is crucial to build trust.

The big question: Current business models do not support emission reductions

If and when market operators base their business on cuts from offsets, they themselves have a perverse incentive: The more emissions, the more offsets, the more credits, and the more profits. Somebody’s emissions are another’s profit. Logically then, this discourages commercial offset providers from helping their customers reduce emissions. Typically, offsetting has only been done after emissions have already been created. This has pigeonholed offsetting as a clean up tool. Providing emission calculations and offsetting information before emissions take place could encourage corporations and individuals to avoid and minimize emissions first. These alternative models could push behavior towards a more sustainable direction, and should be explored. Building models and services that support emission reductions instead of providing an “easy way out” will be crucial if the market wants to create an even wider climate impact that goes beyond offsetting.

The big question: Low quality credits

Low quality carbon projects have no real positive impact on the climate, ie. they do not remove or reduce emissions. In addition, they can also have negative effects on biodiversity, local communities, and the environment. Still, the market is flooded with these kinds of projects. This should be taken as a sign of serious, fundamental flaws in the current system. Take timber plantations for example: in order to maximize growth and profit, plantations will plant fast-growing species like eucalyptus and use chemical fertilizers and pesticides. This contaminates bodies of water, harms biodiversity and pollutes the soil. Large tree plantations often have well-recorded negative socioeconomic effects: lower wages, higher food prices, loss of jobs, evictions, restrictions on land use, and pressure on locals to sell land. Using low quality carbon credits with questionable climate impacts is harmful for the climate. This happens when non-additional credits that don’t go beyond business as usual are used as offsets. The result is net positive emissions as the compensated emissions are not actually counterbalanced by additional removals or emission avoidance.

Learn more about the carbon market and Compensate’s sustainability approach in our white paper .