Carbon credits: reinforcing quality for impact and returns

High-quality carbon credits offer a critical tool for channeling much-needed finance to protect and restore nature, and to create sustainable livelihoods for Indigenous and local communities. Following contentious press coverage in recent weeks, we highlight important actions being taken to enhance the ability of carbon credits to meet these challenges.

A market under scrutiny

In recent weeks, a new wave of media reports has raised concerns about the integrity and credibility of carbon credits – particularly in relation to their ability to help protect and restore nature. Recent articles in The Guardian, Die Zeit and SourceMaterial have highlighted new research criticising the quality of forest carbon credits sold to multinational corporations using methodologies approved by some of the world’s most established standard setters in this market. 

These press articles focus on the most attention-grabbing, negative findings. Meanwhile, other studies and reports have produced more favourable evaluations, including for the same projects. Nevertheless, the negative stories and latest research spotlight legitimate concerns around the quality of many carbon credits traded in the market today.

Low-quality credits that allow companies and countries to claim emission reductions that have not actually been made do more harm than good, leading to a false sense of progress and complacency, which the world cannot afford. In addition, market participants face serious reputational, legal, and financial risks if the carbon credits they transact do not deliver the promised benefits. 

3 drivers for higher quality carbon credits

These quality concerns are not new, however, and what these headlines miss are the rapid and profound carbon market developments – both on the supply and demand side – that are addressing these challenges. Here we describe three positive changes:

1. Carbon credit acquirers have become much more discerning and are shifting rapidly to high quality. Today, the single largest demand commitment in the voluntary carbon market is for carbon credits linked to reduced tropical deforestation from ‘jurisdictional’ programmes. Launched in 2021, the public-private LEAF Coalition has mobilised over USD $1.5 billion to date in forward commitments for such credits. This is a significant number considering that the entire size of today’s voluntary market stands at about USD $2 bn in annual transactions. It is also noteworthy because the jurisdictional approach was explicitly designed in response to quality challenges with so-called ‘project-based’ programmes, which have been the main target of negative academic research and press. 
   
   At the head of these critiques is the challenge of ensuring additionality: would a forest that a project claims to conserve truly have been lost in its absence? Rather than measuring benefits against an assessment of future threats, jurisdictional credits can be issued according to observed reductions in emissions relative to historical levels across large landscapes. 
   
   The shift in demand for higher quality is not just for tropical deforestation credits but across the board as buyers become more sophisticated and sensitive to the risks of purchasing low-quality credits.  
    
2. New policy and industry norms are further driving demand for high quality. As the use of carbon credits grows, new guidance to strengthen the integrity of the market is rapidly emerging. For example, a group of the leading environmental and Indigenous organisations have also put out a Tropical Forest Credit Integrity Guide for Companies for how buyers of credits should differentiate their purchasing decisions, including by supporting jurisdictional accounting and Indigenous-led approaches. Similarly, industry groups such as the Integrity Council for the Voluntary Carbon Market (ICVCM) and Science-Based Targets Initiative (SBTi) are developing new guidance for participants to strengthen the integrity of the market.
   
   As market requirements shift, standard setters such as Verra, American Carbon Registry and Gold Standard are adapting and updating their methodologies and requirements, too. Verra, for example, as the world’s largest standard setter, is currently consolidating all of its methodologies for reduced deforestation to ensure more robust baselines.
    
3. Supply innovations are developing to meet demand requirements. The market for project development is rapidly evolving and becoming more professional with new project developers as well as jurisdictional programmes coming online to meet demand for higher-quality projects. In addition, new technological innovations, including dynamic baselines to address additionality concerns and greater transparency and monitoring through the use of geospatial analysis, including with machine learning, are facilitating more sophisticated approaches to project design and implementation. Finally, a suite of new rating platforms to assess carbon credit quality is emerging to inform buyers about the quality of their carbon credit transactions.

The potential for real impact

The world must cut greenhouse gas emissions by 43% by 2030 to limit global warming to 1.5°C. At the same time, there is an urgent need to take action to avoid catastrophic biodiversity loss. Tropical deforestation needs to be halted and reversed within the next decade, including by supporting Indigenous and local communities, which are proven to be the best guardians of their territories. These are gargantuan tasks that will demand we use every lever available – including carbon credits – which have the potential to be a key tool to reach a nature-positive, net-zero world. 

The carbon credit markets are rapidly evolving to support this effort. Critically, there is growing consensus that use of high-quality carbon credits should be a way for leading companies and governments to supplement, rather than substitute, ambitious internal decarbonisation strategies.

Through an informed and disciplined investment approach focused on high quality, we believe that the foundations are in place for the voluntary carbon market to represent one of the most exciting and impactful investment opportunities of the climate transition mega-trend.¹

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