Carbon credit buyers take more nuanced strategies amid market criticism

Energy & Climate Consulting
Energy & Climate Consulting

In recent weeks, criticisms of the climate integrity of various types of carbon credits have surfaced in mainstream media, capturing the attention of many stakeholders. As a result, organizations looking to supplement their emissions reduction efforts by financing carbon credit projects are increasingly aware of the reputational risks associated with projects that may have less climate impact than they claim. Consequently, buyers are adopting more nuanced approaches toward engaging the voluntary carbon market to ensure that the projects from which they buy carbon credits have undergone sufficient due diligence. 

Not all registry-issued carbon credits are alike

The voluntary carbon market has structures in place to safeguard climate integrity, such as methodologies developed and approved by non-profit registries like Verra, Gold Standard, the American Carbon Registry, and the Climate Action Reserve. These methodologies provide guidelines for quantifying the climate benefits of carbon credit projects. Independent third-party verifiers must also certify a carbon project’s compliance with registries’ methodologies in order for the project to generate carbon credits. While both registries and verifiers play key roles in ensuring a credit’s climate integrity, not all registry-issued credits are created equal.

Credits generated from different project types, such as forest conservation, tree planting, energy efficiency measures, landfill gas destruction, and others, each reflect the unique benefits and risks associated with their underlying emissions reduction or removal activities. For example, improved forest management projects may provide co-benefits such as biodiversity conservation, but face challenges in demonstrating additionality and ensuring permanent climate impact. Although registries design their methodologies to address the risks associated with each project type, there is often inherent uncertainty associated with proving additionality; robustly and conservatively quantifying avoided, reduced or removed emissions; and/or ensuring adequate permanence. Additionally, new data sources and technologies are making it easier to track real-time climate impact and identify outdated assumptions under current quantification approaches. Ultimately, this means that all methodologies stand to benefit from cycles of continuous improvement to ensure they align with new scientific consensus and emerging best practices.  

Many reputable carbon credit project developers rigorously design their projects to safeguard climate integrity in line with registry methodologies and best practices. However, there are varying quality risks associated with all carbon credit project types. In some cases, methodologies have not yet been revised to adequately address these risks, which has in turn contributed to the recent wave of academic and media criticism of the voluntary carbon market.  

Shift in carbon credit product preferences

As awareness of carbon credit quality risks has grown, some buyers have been shifting their purchasing activity toward structures that offer transparency into the underlying projects. Buyers are increasingly making over-the-counter purchases of credits from individual projects or buying portfolios of credits from specific projects that have undergone due diligence by a third party, on top of the required registry verification process. While buyers often used to enter purchase agreements in which the individual projects would not be specified until delivery, they are now increasingly wanting the projects to be specified at the time of contracting. This trend has been reflected in the price gap between over-the-counter credits and standardized contracts, which has grown in recent months. For example, the N-GEO standardized contract, which can consist of any agriculture, forestry, and land-use credits issued by Verra with Climate, Community, and Biodiversity accreditation, has seen its 2023 futures price decrease more than 50% since the start of 2023. Over the same time period, prices for over-the-counter, project-specific transactions have either remained flat or decreased at a much slower rate.

Standardized contracts play a key role in providing liquidity to the entire voluntary carbon market, but end-buyers seem to be less interested in standardized products that filter carbon credits for only high-level criteria, such as project type, vintage, and geography. Instead, many end-buyers want to ensure that the specific projects from which they are purchasing credits meet rigorous standards for climate integrity. 

Professional procurement approaches reduce risk

Buyers should understand the risks associated with the carbon credits projects they are supporting. This could include knowing from which projects they are purchasing credits and conducting project-specific due diligence to ensure these projects will help them achieve their climate objectives, tell a compelling sustainability story, and minimize reputational risk. In cases where buyers lack relevant in-house expertise, trusted advisors can fill the gap by sourcing credits from reputable project developers and conducting project-specific red-flag analyses to identify potential reputational risks.

At 3Degrees, we remain committed to supporting clients with effective carbon credit strategies and procurements – both within and beyond our own portfolio of carbon projects – that uphold the integrity of the voluntary carbon market. If you have questions about your carbon credit strategy or are interested in discussing your procurement options, please reach out