High-quality carbon credits are in high demand, but a widely questioned concept. The voluntary carbon market enables private actors to finance greenhouse gas removal or abatement activities outside regulated or mandatory carbon pricing instruments. It has facilitated the generation and trading of carbon credits and offsetting of carbon emissions since the late 1990s, but only recently has it gathered momentum. This increased popularity has also led to increased scrutiny and calls for transparency, to ensure that genuine contributions to climate change mitigation are being delivered.
The continued challenges of the rising voluntary carbon market
The number of carbon credits issued hit a record high in 2021. Nature-based solutions (NbS) are the second largest sector by volume for the generation of carbon credits after renewable energy, with a similar trend in growth to the overall market. However, nature-based solutions credits originate from a plethora of sources, meaning the certainty in their climate change mitigation contribution may vary. Recently, multiple academic and media articles have scrutinised credits from tropical rainforest protection, despite the credits being certified by carbon standards. One of the issues is that even though scientific methodologies constantly advance, the precision of methods for measuring carbon sequestration or emissions avoidance differ and the maturity of methods for different ecosystems varies. In essence, the quality of credits is a measure of confidence in their contribution to climate change mitigation.
Quality focused developments from market actors
Researchers have noted that the struggle with quality has become a characteristic of the voluntary carbon markets. They highlight that voluntary carbon markets are both a “contested” market (critics still question the validity of offsets) and a “concerned” market, as the buyers and sellers care about external critiques and wish to respond to broader concerns by improving their practices in a self-regulatory way.
The key criteria market actors need to ensure are real and additional carbon reductions or removals, a credible and carefully quantified (often conservative) carbon baseline, no spread of carbon emitting activities elsewhere (known as leakage), and long-term permanence.
Most of these criteria are built into the requirements of carbon crediting standards for projects to ensure from the start. However, even when credits are certified by a standard, some stakeholders are still concerned about the standards’ ability to ensure high-quality credits. Thus, multiple entities have popped up to provide an independent and objective rating of the quality of carbon credits. These entities can act either as advisors or retailers of a carefully selected set of credits. However, before their methods go through thorough peer review, their credibility will likely remain questioned.
Another new development is the integration of digital tools based on blockchain technology to increase transparency and traceability on the voluntary carbon market supply chain, while eliminating the risk of double counting. The decentralised nature of blockchain ensures easy public access to information relating to the buyer, the transaction, the seller, or the status of the credits. However, research shows most blockchain initiatives are far from maturity. Issues with scalability, development and lack of regulation could remain barriers, plus the blockchain system itself is only a means to manage the data: it cannot stop poor quality credits from entering the digital market.
Regulatory initiatives to boost the quality of carbon credits
Multiple initiatives have been developed or are developing which aim to push for improved market integrity such as the International Carbon Reduction and Offset Alliance set up by industry, the Carbon Credit Quality Initiative by NGOs, and the Voluntary Carbon Markets Integrity Initiative and the Integrity Council for the Voluntary Carbon Market by multistakeholder platforms, with plans for regulatory oversight of carbon standards by the latter organisation. However, the variety of integrity initiatives has the potential to add further confusion. Even though each has their own core goals and target market actors, some parts still overlap. Buyers, sellers and intermediaries would need to consider whether approval by all initiatives is required, what extra costs are involved, and whether compliance reflects in higher prices. Also, considering voluntary carbon markets are at their core voluntary, increased regulation may not necessarily be a welcome development.
The impact of quality issues on restoration projects
Even though most participants in the voluntary carbon markets have some level of responsibility for quality assurance, the burden to build quality from the ground up is on conservation and restoration projects themselves. That is why the Endangered Landscapes Programme has funded an Advancing and Applying Knowledge project – supported by UNEP-WCMC’s Nature-based Solutions experts, FFI and RSPB – with a goal to enable European landscape restoration projects to understand the opportunities and barriers associated with the voluntary carbon markets. European landscapes can have very high restoration costs, yet hold considerable potential for climate change mitigation which could make carbon markets an additional source of finance.
However, understanding not only what is required to provide high-quality carbon credits but learning the do’s and don’ts of voluntary carbon markets can be very challenging and requires a steep learning curve from projects. Plus, this investment in learning does not necessarily equate to higher returns by default, as carbon credit prices are highly variable and depend greatly on project characteristics and buyer willingness to pay.
The steepness of the learning curve also depends on factors such as the ecosystem in question. For example, the Endangered Landscapes Programme supported Koitajoki Watershed restoration project working in Finland considered selling credits, but the lack of methodologies for calculating greenhouse gas emissions baselines and sequestration potential for boreal peatlands meant providing high-quality credits was not an option. Furthermore, Kaisu Mustonen, the Head of the Biodiversity Programme of the Snowchange Cooperative, pointed out that Finland has “over 50 different types of peatland”, making any generalised greenhouse gas estimates likely impossible. On the other hand, the Endangered Landscapes Programme supported project in Romania’s Carpathian Mountains was able to apply an existing methodology from an international certification body for their forest carbon calculations, providing security in the quality of the credits. Knowledge building will always be necessary, but some ecosystem types may have very little information to begin with.
The way forward
In a space that is so dynamic and ever-evolving, confusion can seem perpetual. Given the smaller sizes of projects in Europe compared to the tropics, it may not make sense for projects to heavily invest in building capacity to navigate the markets and keep on top of developments. Organisations that lessen the burden on projects to learn everything about carbon finance while building a community for knowledge sharing could improve access to voluntary carbon markets in Europe.
We hope that the outputs from this ELP-funded project can offer valuable guidance for European restoration projects on capacity building and on the scope to engage with the voluntary carbon markets. Still, more community building initiatives which could provide finance and guidance to restoration projects are needed to lessen the burden on individual projects to become experts in voluntary carbon markets. One thing seems to be true for now: quality over quantity is the way forward.
This article was written by Minna Ots, UNEP-WCMC Nature-based Solutions Restoration Carbon Finance Intern. To find out more about the Understanding Voluntary Carbon Markets project, visit the project page.
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