The voluntary carbon market is burgeoning despite economic adversities and budgetary restraints. With a heightened demand for voluntary carbon-emissions credits, the shift in focus from reducing emissions to eliminating them is becoming apparent. Yet with issues of credibility and fraudulent practices permeating the market, questions have been raised about the efficacy and integrity of carbon offsetting. As such, the question becomes: How can we confidently navigate this thriving market?
Growth of the voluntary carbon market
Companies that aim to offset their greenhouse gas emissions can purchase two different types of credits in the voluntary market: avoidance credits for external projects that prevent or reduce emissions production, such as wind farm development, and removal credits for projects that decrease existing emissions. The latter involves nature-based solutions like afforestation or technology-based ones like renewable energy generation.
In 2021, the voluntary carbon market experienced unprecedented growth, reaching $2 billion, quadrupling its value in 2020, and showing signs of further acceleration in 2022. By 2030, projections estimate that the market could reach between $10 billion and $40 billion. This growth demonstrates an increasing commitment to achieving net-zero emissions and the growing importance of the carbon market.
From reduction and avoidance to removal
While projects that focus on avoiding or reducing atmospheric carbon dioxide emissions currently account for 82% of the offset market, Morgan Stanley anticipates a shift toward removal credits in the long term. Removal credits, currently comprising just 5% of the market, are based on projects that actively eliminate carbon dioxide from the atmosphere. These can include initiatives such as tree planting or advanced carbon-capturing technologies. While scaling and cost hurdles presently constrain supply, the importance of removal projects is expected to increase over time.
From nature to technology
Experts predict that technology-based carbon removal will take the lead post-2030, while nature-based carbon-offset projects like reforestation and prevention of deforestation continue to play an essential role today. According to Carolyn L. Campbell, head of ESG fixed income research at Morgan Stanley, well-established net-zero models are predicated on tech-based removal, potentially eliminating upward of 5 gigatons of carbon dioxide per year by 2050. These measures could include new renewable technologies, methods to prevent or capture methane leakage, replacing wood-burning stoves with clean alternatives, and carbon capture and storage techniques.
From offsets to investments
Companies and countries are expected to invest in technologies and efficiencies aiming at absolute zero emissions while using carbon offsets as an interim solution. Certain sectors, such as airlines, are already shifting their sustainability budgets towards research and development and moving away from offset purchases. However, industries like steel and cement, despite being high emitters, do not face the same level of global emissions regulation or have similar proximity to consumer pressure.
These trends will significantly contribute to the projected growth in the voluntary carbon-offset market, estimated to expand from $2 billion in 2020 to around $250 billion by 2050. It is evident that the market is expanding due to the pressing requirement to reduce at least one gigaton of carbon dioxide annually by 2030. This decrease is crucial to attaining the sustainability objectives outlined in the 2015 Paris Climate Accords. In the interim, carbon offsets remain a critical tool for companies and countries working to reduce their emissions.
The rise of digital monitoring, reporting, and verification (MRV) and its potential to revolutionize carbon offsets
Carbon offset markets have suffered from a tarnished reputation due to a history of scandals and perceived inefficiencies. However, a recent surge of technological innovations, notably in digital monitoring, reporting, and verification (MRV), could be a game-changer in making these markets more transparent and efficient.
One of the main bottlenecks in the carbon offset market is the process of MRV, which includes measuring the amount of greenhouse gas emissions reduced or absorbed by a specific activity, such as reforestation. Currently, this is a manually intensive process comprising largely analog data capture through in-person auditing of sites. These traditional MRV techniques account for about 90% of the process, leaving room for potential inaccuracies and inefficiencies.
Digital MRV, on the other hand, automates data collection, analysis, and validation using a combination of technologies like artificial intelligence, satellites and drones, blockchain encryption, and smart sensors. This speeds up the process and provides more reliable and consistent data, reducing the time and costs associated with issuing new carbon credits.
A perfect example of digital MRV in action is CTrees, a non-profit that uses AI-enabled satellite data to calculate the amount of carbon in every tree on the planet. This real-time data is invaluable to stakeholders in carbon markets, including governments, project developers, and carbon credit buyers. The platform can even track issues like “leakage,” where measures to protect forests result in deforestation shifting to another region.
Despite the promising potential of digital MRV, the technology is not without its shortcomings. The high cost of implementing such systems, particularly in developing countries, and the need for human intervention in data analysis and potential on-site investigations are some of the challenges that need to be addressed.
While digital MRV is not a magic solution to all the challenges in the carbon offset market, it is a step in the right direction, combining technology and human intervention to make carbon offsets more trustworthy and efficient. It can significantly enhance transparency, reduce malpractice, and scale up carbon reduction projects.
However, it is essential to remember that achieving targets for emissions reductions is not purely a numbers game. It also requires strong governance structures and good decision-making by companies investing in carbon markets. While technology can aid in data collection and analysis, the human element remains crucial in making strategic decisions, interpreting data, and identifying potential issues.
The marriage of technology and human intervention in the carbon offset market could pave the way for improved trust, efficiency, and scalability. As more organizations and governments embrace digital MRV, the carbon offset market could potentially overcome its longstanding credibility issues, enabling it to play a more significant role in the global fight against climate change.
Vetting Carbon Offsetting Programs
Reports have emerged of fraud, failure to deliver promised emission reductions, and common issues such as non-permanence, non-additionality, and double-counting. These problems have resulted in concerns over the market’s integrity and transparency, and such issues have dissuaded potential buyers.
The Integrity Council for Voluntary Carbon Markets (ICVCM), an independent oversight body, aims to address these concerns by providing guidelines for creating a “definitive global threshold standard for high-quality carbon credits.” The rules cover a range of issues, from permanence to consultation with Indigenous peoples. Despite these efforts, critics argue that the ICVCM’s guidelines fall short of addressing the industry’s extensive reliability problems and require a more substantial overhaul.
One major point of contention is permanence, particularly for carbon offset projects based on biological systems. Critics argue that the ICVCM’s guidelines allowing these projects to continue as long as they are monitored for at least 40 years are insufficient. There is also concern about the ambiguity of offsetting activities eligible for the ICVCM’s approval.
The Way Forward
With such challenges in mind, the best approach is a mixture of comprehensive verification and quality-based focus. The quality of both avoidance and removal credits should be prioritized as the market continues to mature. Decarbonization must begin with emissions reduction – offsets are complementary tools, not substitutes. Companies must ensure that credits deliver on their promises to avoid ‘greenwashing’ accusations.
For potential investors in this market, it is important to vet host programs carefully. Look for a robust monitoring, reporting, and verification (MRV) framework. Over 90% of buyers consider MRV a critical factor in credit purchase decisions. Ensuring the purchased credits are easily provable and defensible against greenwashing claims is crucial.
Additionally, potential investors should keep an eye on the development of Article 6 of the Paris Agreement. Companies sourcing credits internationally could be impacted by corresponding adjustments, an accounting mechanism to prevent double counting between countries. Understanding the nuances of Article 6 will be important for future carbon credit sourcing strategies.
The path to net-zero emissions is filled with complexities, and the voluntary carbon market is a crucial part of this journey. However, the path to successful carbon offsetting lies in the effective vetting of host programs, careful adherence to guidelines, and a continuous drive for improved quality and transparency.
