ENVIRONMENTAL MARKETS: AHEAD OF COP26, HOW DO YOU OVERHAUL LOW QUALITY CARBON CREDITS IN THE OFFSET MARKET?

The global voluntary carbon market, which allows companies to invest in environmental projects to offset their own carbon footprint, could undermine the fight against climate change without a major overhaul, according to a study by University College London (UCL) and Trove Research.

The growing number of corporate climate commitments has prompted renewed interest in carbon offsets. More than 1,000 companies have pledged to become carbon neutral by 2050 to align with the Paris Agreement. For many companies, achieving this goal will require the use of carbon offsets.

But with nearly 700 million tons of old carbon credits available, many of which are no longer considered valid in terms of offsetting, legitimate carbon reductions remain at risk.

“The regulations have gotten tighter and tighter as the markets and political bodies have gotten to know more about the systems,” Mark Maslin, UCL Professor of Climatology, study co-author, and Director and Co-Founder of geospatial AI company Rezatec Ltd, told New Project Media. “It started off with the clean development mechanism out of the Kyoto Protocol, and it was a way countries could buy offsets to make sure that they got to the cut they had agreed to out of Kyoto. And so, the rules were quite flexible--you could buy credits from other countries. But when we look back at them, it turns out that most of the credits from developing countries were bought by Holland and the UK, so it was quite a skewed system.”

There are approximately 580 metric tons (Mt) of CO2e (CO2 equivalent) surplus credits currently in the major voluntary carbon offset registries. This represents more than seven times the current carbon offsetting demand of roughly 80 Mt in 2020--and the surplus continues to increase.

“There was also a noticeable gaming of the system,” Maslin said. “The classic case is in China. China actually created factories to create HFCs (hydrochlorofluorocarbons) so that they could then have credits to make sure that they disposed of them properly. And the reason that was problematic was because HFCs are supposedly 35,000 times more powerful as global warming than CO2. If it’s one dollar to clean up CO2, you get USD 35,000 for one HFC.”

On average, carbon credits issued from older projects are less likely to meet today’s tests of environmental integrity. The challenge is how to manage these legacy credits without disincentivizing future, well-intentioned private capital, according to the study.

One potential route is for carbon market registries to clear out low-quality legacy projects. An obvious difficulty with this plan is the fact that registries have contractual obligations to the developers who have undergone the process of registering and validating their projects, as well as paying for credits to be issued. But a strong consensus could lead registries to selectively amend these contracts.

We now have registries that all basically compile the actual data, they verify them, and therefore they can put them onto the market,” Maslin said. “The problem is that there are lots of different fruit. One example is Total, the French fossil fuel company, who just announced that they have the first liquid gas carbon-neutral cargo. What they've done is offset the whole of their container of liquid gas by buying carbon credits. But some of the carbon credits they bought are from a Chinese wind farm that has already been operating for nine years. That carbon credit money clearly wasn't used to build it, so there’s no additionality. That wind turbine is going to be there producing lots and lots of electricity whether there were carbon credits or not. We need to move the whole market to more prestigious, more high-quality credits such as reforestation--actually capturing CO2 from the atmosphere.”

Sorting it out
Maslin and his team are working closely with the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), launched in September by Mark Carney, U.N. Special Envoy for Climate Action and Finance Advisor to UK Prime Minister Boris Johnson for COP26.

The taskforce, comprised of more than 40 leaders from six continents with backgrounds across the carbon market value chain, estimates that voluntary carbon markets must grow by more than 15X by 2030 in order to support the investment required to deliver the 1.5-degree Celsius pathway laid out in the Paris Agreement.

“Mark Carney was given the job by the UK Government to pull together industry to say, let’s sort this mess out, this has to work, how do we do it?” Maslin said. “We have been funded by the Children's Investment Fund Foundation (CIFF), and they are paying us to do this research with Trove Research and UCL to basically be the honest data broker. Our job is to be the provocateur. This was the first report of a number that we sent to the Mark Carney taskforce to say, ‘Okay, you're having great discussions, but here is the baseline. Forget what everybody's telling you--they’re trying to skew the market in their favor. This is how it is, and this is what you need to deal with.' And that’s why we gave three solutions.”

Three potential routes to deal with legacy credits include:

• handing registries a central role in the market, which would create standards for defining and approving projects and authorize the release of carbon credits once verified by approved auditors.

• creation of an independent regulatory body to oversee the integrity of the market and restrict the use of legacy credits.

• A consumer-led approach could also help limit the use of older, poor quality credits, with groups of carbon offset buyers agreeing to the highest standards of environmental integrity.

A consumer-led approach could also help limit the use of older, poor quality credits, with groups of carbon offset buyers agreeing to the highest standards of environmental integrity.

“We need a proper international governance body for carbon credits,” Maslin said. “We need the registries to realize that they are being overseen, and therefore they will remove low quality credits and retire them. And we also need buyers to be savvier. And a lot of them are. There are some really brilliant, very large corporations who know this stuff, and they won’t touch low quality carbon credits because they are worried about their reputations. But there are other companies who just want to pay the cheapest they can and then say, ‘Look, we’re green.’ And so, what we’re trying to do is shift the whole market into high quality, where the company pays money to remove a ton of CO2, and it really does remove a ton of CO2.”

All eyes on COP26

Discussions are currently underway with the TSVCM around the creation of an independent governing body to oversee the carbon offset market, which would coordinate opinions from corporate buyers and the carbon offsetting industry to reach a consensus.

“I get the feeling that the UK Government and other governments would be quite happy with someone with the stature of Mark Carney to head up such a body,” Maslin said. “I think what an ideal situation would be is this taskforce sets down the actual basis for governance, and then some of the people become part of the governance body, because I think ours and everybody’s viewpoint is you don't need a top-down U.N. directive.”

What is needed, says Maslin, is a regulatory body that includes buyers, verifiers, and the people who actually provide the credits to collectively figure out how to make the market work.

“It's that classic case of how do you make money?” Maslin said. “How do you make sure the customer is happy, whether that happens to be the direct customer buying it, or the customer who’s going to buy your goods because they believe that you are now carbon neutral? And of course, the final thing, which is that it actually does make a difference, because lots of companies are incredibly aware that they've got to get to carbon neutral by 2050. The thing that is really exciting is that this is a time-limited opportunity. The UK Government wants this to be sorted out and start to really motor in 2021 because the whole focus is on COP26 in Glasgow next year. We’ve got less than 12 months to actually sort out the supply and demand of carbon credits.”

Over the next several months, Maslin and his team will be looking at supply and demand around carbon credits through 2050 and beyond.

“It could be USD 90bn to USD 240bn per year as a market, depending on which of the industries really go for it,” Maslin said. “If the airlines suddenly say that they're going to offset everything, that's a huge cost basis, which is fantastic. We’ve done a huge amount of work on the supply and demand side, and this report was literally the first salvo, which was, 'Look at what we found out.' It's going to be a very interesting 12 months."