Bad apples, portfolio approach and the need for consensus: Lessons from CSO Futures’ carbon market webinar
The carbon market has had its share of ups and downs in the past couple of years – and yet, it remains a crucial part of our collective decarbonisation story. Speakers at a recent CSO Futures webinar emphasised the urgency of reaching a consensus on ‘what good looks like’ in the carbon market, in order to accelerate the flows of carbon finance to frontline communities.
After years of growth, the carbon market has been on somewhat of a whirlwind over the past two years: several highly publicised reports came out criticising low-quality carbon offsets, which led to a massive drop in demand and market value. Some companies even announced that they would stop using carbon offsets and redirect this budget towards reductions.
But this lost confidence has also led to incredible integrity initiatives, including the work of the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Market Integrity Initiative (VCMI).
“The scrutiny and the noise that we've seen in the market in the past two or three years – there is an importance to it. The fact is, those bad quality projects have always been there, but they have come out into play a lot more when more companies came out to set more ambitious targets and to commit to net zero, and then started buying all of those credits, and it got a lot more attention in the market,” said Ana Carolina Avzaradel Szklo, Technical Director of Markets and Standards at VCMI.
“But the main problem happens when the bad apples contaminate the entire basket, and that's what happened. Now companies and projects can be doing good things, but even so, they're concerned that they're going to be criticised – and that's exactly the opposite of what we need, because it scares companies away,” she added.
Leveraging VCMI and ICVCM guidance for high-integrity carbon credit use
To support companies, VCMI has developed a series of guides culminating in the 2023 Claims Code of Practice – a step-by-step process for companies to purchase carbon credits with credibility and with integrity. It starts with the adoption of ICVCM’s Core Carbon Principles (CCP), a set of 10 rules defining carbon credit quality, through which the Council is now assessing carbon project methodologies.
Based on VCMI’s Claims Code of Practice, companies must prioritise CCP-labelled credits (though these are only now beginning to enter the market), but also abide by ‘foundational criteria’ ensuring the purchase of carbon credits is part of a holistic climate action strategy that also includes GHG reduction and Paris Agreement-aligned advocacy.
“There's a lot of criticism from those who think that this is an easy way out, or a cheap way out, and what we've seen from different research is that that's not the case,” Szklo added.
The Science Based Targets Initiative (SBTi) is also expected to finalise its guidance on carbon credit use for Scope 3 decarbonisation shortly – though this particular aspect of its Corporate Net Zero Standard update has sparked much debate among sustainability professionals.
Local contribution for impactful storytelling
Because of the scrutiny around carbon credit purchases, particularly in the Global South, some companies are also looking to shift their carbon offsetting investments closer to home. Despite their higher cost, European carbon credits, for example, come with a number of benefits.
“The way in which projects that are closer to home, and specifically within the European environment, can have a bit more trust is, for example, one is around the permanence, or the duration, of carbon storage,” explained Lisett Luik, Co-Founder and COO of forest carbon project firm Arbonics.
“We do a lot of afforestation projects, so that's planting trees on previously non-forested land, and we then legally convert that into forest land. In Europe, that comes with a legal requirement to manage that land as forest land in perpetuity, and that is enforced quite strictly. And so that gives the buyer confidence that this carbon sequestration is going to last beyond the first few decades.”
Another reason to procure local carbon projects is that it makes it easier to tell a coherent story – particularly as carbon neutrality becomes a less valid driver of investment.
“I think we're increasingly moving towards a contribution model, where companies are just thinking about how they are contributing to whether it's carbon or co-benefits like biodiversity. And [bringing] some of that positive contribution to your local communities is an added benefit for them. It's a great way to understand and tell the story: not only are we contributing to nature – we're contributing to nature in your town, or near to your town, so that you can go out and check it,” Luik added.
However, speakers at the webinar don’t think local carbon credits should entirely replace projects in the Global South – which also contribute to many Sustainable Development Goals and provide much needed funding to the communities most affected by climate change.
“I used to work for the US government. I managed very large international programmes that did international development assistance, and I can tell you honestly, I would have given my right arm for some of the outcomes that I see the carbon market delivering to frontline communities every day on the ground. This market's ability to move money from where it is to where we need it to go, when it's well designed and properly managed, is truly incredible. And if you're a carbon market skeptic, or if you don't believe they're real, like, please go visit a project, because it really does change your perspective,” advised Alexia Kelly, Managing Director of the Carbon Policy and Markets Initiative at the High Tide Foundation and board advisor to ICVCM.
Adopting a portfolio approach to decarbonisation
This is where a portfolio approach comes into play. All speakers at the webinar recommended that companies invest in a portfolio or solutions, from carbon reduction projects to tech-driven carbon removals and a mix of local and international carbon credits – including forest credits, despite their long development time and wildfire risks.
“About 30% of the global decarbonisation potential, between now and 2050 is coming from nature, at extremely cost-effective prices. So including forests is not an optional part of a comprehensive climate strategy globally,” Kelly added, pointing to a recent call by scientists not to deprioritise forest and nature-based carbon mitigation investments amidst the rise of tech-driven carbon removal techniques.
As a forest project manager, Arbonics is well placed to know how to mitigate reversal risks in this type of project – that is, the risk that the carbon benefits of the project could be reversed in the case of a fire.
“There's a couple of things that help mitigate that risk,” Luik explained. “One is taking a more of a portfolio approach. So, in our example, we work with hundreds of landowners across multiple countries, and thousands of individual little parcels of land. And because they're not geographically concentrated, fire risk is distributed. So it works a little bit like insurance: if you have a big enough pool, then yes, one or two of the plots may burn down, but across the portfolio, you're probably going to be okay, because some other plots will probably outperform.”
In the same way, companies that invest in carbon credits should include different types of methodologies and different types of credits, which will help to offset each other's risks.
But we also need to be having an honest conversation about carbon removal duration and permanence, acknowledging that while forest removals may last less time than direct air capture, they will still play a crucial role in climate mitigation over the next few decades.
“If we're only prioritising 1,000-year solutions, then frankly, we're going to be nowhere near the level of impact we need to have in the next two decades,” Luik added.
Overcoming our differences for collective progress
But the main point on which panellists agreed at the webinar was the urgency to overcome the controversy around how much of a role the carbon market should play in global decarbonisation, and to work together to leverage all solutions at our disposal.
“I really hope we can resolve this debate around what is a credible claim and what companies say about the work that they're doing and what they're buying, quickly. Because frankly, it's really hurt our ability to move forward together. And I hope we can move towards more truly science-based frameworks for thinking about the full range of interventions that companies can and should be making to contribute to solving this problem,” said Kelly.
“The IPCC is abundantly clear that we need to protect standing forests, we need to be massively scaling investment in renewable energy, we need to be transitioning agricultural systems, we need to be investing in hard-to-abate sectors, we need to be decarbonising supply chains and operations, and we need to do all of these things at the same time.
“And this portfolio approach really enables us to do that, and to recognise that some companies are going to be better placed to lead in certain areas, and other companies are going to be better placed to lead in other areas. I still have a lot of confidence in the rigor that the assessment process that we're using is bringing to the market, and I hope that, as we really do coalesce around ‘what right looks like’ for the carbon market, that we're able to fully integrate this amazing tool for unlocking finance, particularly for the Global South, as quickly as possible.”
To support this acceleration, ICVCM, VCMI and 50 more organisations across the corporate, finance and nonprofit sectors have just launched the new Verified Carbon Market (VCM+) Coalition – which aims to deliver “5 billion cumulative tonnes of CO2e reduced and removed between 2026 and 2035 based on modernised and trusted market systems”.
The September 18 CSO Futures carbon market webinar was brought to you in partnership with Arbonics.
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