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Voluntary carbon markets carry risks

In this piece for Reuters Breaking Views, SEI’s Derik Broekhoff explains how to avoid a “train wreck” amid a surge in voluntary demand for carbon credits.

This perspective originally appeared in Reuters Breaking Views

Derik Broekhoff / Published on 21 January 2021

As the urgency of the climate crisis becomes impossible to ignore, private voluntary demand for “carbon credits” has surged. Corporate carbon-neutral pledges led to record volumes of carbon credit transactions in 2019, according to Ecosystem Marketplace, and initial evidence suggests that 2020 volumes may be even greater despite the pandemic. This is a positive sign. It indicates growing seriousness about the necessity of addressing climate change and, when coupled with support for ambitious government policy, is a truly welcome development.

In response, and with commendable speed, the Task Force on Scaling Voluntary Carbon Markets (TSVCM) – launched by Mark Carney, the United Nations Special Envoy for Climate Action – recently came up with a blueprint for scaling voluntary carbon credit markets.

But the draft blueprint fell short on a key question for these markets. In the context of the Paris Agreement, what can the buyers of carbon credits legitimately claim to be achieving?

Carbon offsets

Voluntary carbon market demand is driven by the desire to make offsetting claims, which net out a company’s emissions. When Royal Dutch Shell offers “carbon neutral” oil to its customers in the United Kingdom, for example, the idea is that burning this oil will result in zero net emissions. These emissions will be counterbalanced by offsetting reductions, or by increases in carbon absorbed by forests or other carbon “sinks”.

For this to be true, however, Shell’s purchase of carbon credits has to result in a lowering of global carbon emissions, compared to a scenario where it did not purchase them. This is a fundamental criterion for the environmental integrity of any offset claim.

But under the Paris Agreement, there is no guarantee that voluntary carbon credit purchases will actually lower global emissions.

The Paris conundrum

Under the Paris Agreement, every country has pledged to reduce greenhouse gas emissions in the form of a “nationally determined contribution,” or NDC. Although current pledges are widely seen as insufficient to avoid dangerous climate change, they cover nearly 90% of global greenhouse gas emissions.

The problem for voluntary carbon credit buyers is that the emission reductions they are funding will very likely fall within the scope of countries’ NDCs, and countries will therefore count these same reductions towards their pledges. If this “double claiming” occurs, there is no guarantee that the purchase of a carbon credit will result in lower global emissions. Instead, the country where the emission reductions occur could simply count the reductions, relax other efforts at reducing domestic emissions, and claim to have achieved its NDC.

This may help the country achieve its NDC pledge, but it has not lowered global emissions, and therefore the reductions cannot be counted as offsets. The only way to guarantee a valid offsetting claim is if countries, when reporting progress on their NDCs, agree to forego counting the emission reductions funded by the voluntary market. Unfortunately, the TSVCM draft blueprint fails to recognize this fact, even claiming (incorrectly) that using double-claimed reductions for carbon neutrality claims is “environmentally sound.”

What to do

The most important thing the Taskforce could do is to proactively clarify how Paris creates a new paradigm. Voluntary action can either contribute to the achievement of NDCs, or it can lower global emissions by going beyond what countries have pledged. The latter requires proper accounting by countries under the Paris Agreement, and only the latter can be counted as a compensatory offset.

Failing to address this issue sets up a potential train wreck. It will move carbon offset investments forward at scale, based on a faulty premise that civil society and the public at large will inevitably question. It makes no sense to scale up voluntary markets if it is not clear from the outset what these markets are for, what carbon credits actually represent (offsets or NDC contributions), and how they can advance global climate goals.

Voluntary carbon credit buyers have so far not embraced the idea of contributing to NDC achievement rather than simply offsetting their emissions, and this is perhaps the crux of the challenge. The TSVCM and civil society must better communicate the distinction between “offset” credits backed by proper national accounting, and “contribution” credits that help countries achieve their NDCs – and emphasize the value of the latter for global climate action.

This should not be difficult. One thing the Paris Agreement makes clear – with its all-hands-on-deck approach to climate ambition – is that a self-centered focus on individual “carbon neutrality” misses the forest for the trees. Climate change is inherently a collective action problem, and the more that voluntary action can be leveraged to raise ambition collectively, the better our chances of avoiding dangerous levels of global warming. Both “offset” and “contribution” credits can play a role in a collective approach. But they can only do so if buyers know – and faithfully represent – what they are buying.


You can read the original article in Reuters Breaking Views.

Written by

Derik Broekhoff

Senior Scientist


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