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Carbon Markets: Part 1

Two steps forward or one step back?

80% of all net zero commitments and strategies emphasize the use of carbon offsets to meet them.  Most claims currently of net zero, at least by corporations are being met by buying carbon offsets. A report by McKinsey estimates that we would need close to 3 gigatons worth of carbon offset credits to meet net zero claims by 2030 and 7.5 gigatons by 2050. Trading of carbon credits has expanded significantly over the last 7 years and recent estimates put the total traded value of carbon credits at over USD 2 billion with approx. 400-500 million carbon credits being traded. The media is flooded with news about how large corporations like are looking at ways to achieve very ambitions Net Zero targets. So clearly offsets will play a vital role in meeting climate goals. This is where we have a strong differentiating point of view!

Sticking with the Status Quo 

The problem we face today is that most companies are looking at re-compensation rather than doing the hard work of avoiding and mitigating GHG emissions. If 80% of a Net Zero plan rests on implementing carbon offset projects, in my mind is a problem. It’s the age-old way of throwing money at the problem to make it go away. Today one can buy gasoline, oil, cement, or even steel that is “green” from companies, because of the use of carbon credits to offset the emissions in making them. We can continue to consume at the rate at which we do today, without thinking about making resources circular, only because the companies making and selling these products have balance sheets that allow buying offsets. This must change.


Diverging from its principles

Like most self-regulated industries or markets, the greed of capitalism usually twists and turns on its head the principles and intents with which these markets were established. This is the main issue that is plaguing the voluntary markets today. Voluntary standards for issuances of carbon offsets are also being criticized, mainly if the emissions reductions could have happened without the support of carbon offset credits. John Oliver (host of HBO’s Last Week Tonight Show) in his talk on Carbon Credits, mentions how nature reserves, which are already large carbon sinks, are being bought up by large corporations to so that they can get carbon credits issued on them. This goes against the principle of Additionality (the project would not have been realized if the project had not been carried out, and the project itself would not have been undertaken without the proceeds from the sale of carbon credits) which is key to the issuance of any carbon credit. The Guardian’s investigation into Verra, the world’s leading carbon standard, found that more than 90% (~90M credits) of the rainforest offset approved do not represent genuine carbon reductions. While protection of the environment that is left is paramount; This shouldn’t be a choice driven by a monetary incentive.

Dubious track record

The unfortunate reality is that carbon offsets have a long and well-researched history of failures. Whether they realise it or not, far too many offset purchasers end up relying on offsets without really contributing to climate crisis solutions. There is ample evidence to indicate that offsets, by and large, do not reduce the amount of pollution they’re claimed to remove, resulting in temporary and quickly reversed benefits. Carbon removal projects also fail to provide benefits that can’t be accurately measured. The legitimacy of offsets as a climate change solution is being seriously questioned (and increasingly revoked) by civil society groups, academics, and the public at large. These critics fear that offsets empower emitters to continue emitting instead of taking the strategic action required to truly meet their emissions reduction targets. Additional issues about carbon offsets are:

  • Double counting: If carbon credits are used multiple times to offset emissions and not retired after one use, there is a serious risk of double counting of carbon credits. 

  • Measurement and Verification: Measurement and verification standards vary significantly among countries based on capacity and resource availability, affecting the transparency and making it difficult to determine the quality and legitimacy of the credits. 

There are also issues around pricing of carbon credits and how they are not fair and reflective. For example, the average value of carbon credits so far is USD 4 / ton of GHG emissions, and these are go up to USD 25 / ton for projects that have additional social benefits – something like Reforestation for example. Comparatively the IMF back in early 2000s, after doing a large amount of research, came to a price estimation of USD 75 / ton, considering all the external impacts the GHGs have. Clearly the impact of negative GHGs have moved since then, with every additional MT having a marginally higher impact, driven by a compounding effect. So, the questions is that are we pricing these credits properly? Clearly the answer is no and a large reason for this is because of asymmetries present in today’s carbon market. 

(Dose of) hope and skepticism

We believe for Carbon Offset Credits and Carbon Markets to be used as an effective tool for meeting net zero emission targets, there needs to be a change in the Standard Operating Procedures as we know it today. The main focus should be on how we create and retire (use) these credits in all aspects of industry. Carbon Credits need to be used as a tool to incentivize change rather than maintain a status quo and “offset” by merely passing an accounting entry. 

Carbon Credits have been used as an effective tool to incentivize the adoption of clean energy projects in the past and going forward they can be used as an incentive to adopt additional technologies that are looking to decarbonize industry, buildings and consumer choices.

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