All Carbon Credits are equal, but some are more equal than others.
On the Voluntary Carbon Market, each carbon credit / offset is equal to the next as it represents 1 tonne of CO2 that has been removed from the atmosphere or where its emission has been avoided. However, they are not created equally and often differ so substantially that they have a multiple-fold price difference. Below we will look at some of the most important drivers of value behind carbon credits and challenge some of the conventional thinking around these topics.
It's a story...
Contrary to other commodities, such as shares in a company or oil, the narrative behind the carbon project is really important. Companies are increasingly seeking to associate themselves with projects that not only remove / reduce emissions but also have social and other ecological benefits.
For example, a forestry project that supports an indigenous community and their livelihood is more favorable to investors than a renewable energy project with private investment by wealthy individuals. Similarly, a regenerative agriculture project already carries a premium due to all its ecological benefits. Companies are increasingly willing to pay further premiums for other social benefits (e.g. giving ownership of a free-range chicken project to the farm workers or to empower the local community by teaching them valuable farming principles - like implementing a Foundations For Farming project).
Integrity of the Credits
There are some basic principles that give assurance to buyers that the carbon credits are of high-quality and integrity. These are listed below, but in general any registry-issued, 3rd party audited carbon credits can be considered of higher quality than those that are issued without any independent auditing or registries within the process. Registries include, but are not limited to Verra, The Gold Standard and CDM.
Belonging to other associations such as the ICVCM or ICROA adds further integrity.
The basic principles of integrity include the following concepts:
Additionality - Perhaps the most important principle is that the reduction or removal would not have happened in the absence of the project. In other words, a carbon project should not be a reward for good behaviour, but an incentive to change behaviour. The project activities should not be common practice and should have barriers which prevent the adoption of these practices. Ultimately, the funds channeled by the purchasing entity should flow to projects which make a real difference as a result of that funding.
Permanence - Relevant mostly to emission removals, the stored carbon has to be permanent and risks of reversals should be mitigated. Any remaining risks should be quantified to ensure credits are not being rewarded for removals which might not be permanent. A common system to mitigate this risk is to implement a buffer pool system whereby a carefully calculated portion of annual carbon credits are withheld for a period of time until the permanence risk is reduced or eliminated. As all carbon credits are based on the 100-year equivalent warming potential of that GHG, it is appropriate to attempt to remove the GHG for at least 100 years.
Verified - To ensure independence and elimination of corruption, and as a sense-check for genuine calculation errors, projects should be verified by an independent body with sufficient relevant experience and expertise. These "carbon auditors" should not be paid based on the success of the project or quantity of issued carbon credits and should be rotated regularly as a quality control mechanism.
Latest Science - The science around many aspects of GHG projects is changing rapidly. It is important to base projects on methodologies which take the latest science into account and are committed to reviewing these methodologies regularly to align with the most recent peer-reviewed publications.
Conservatism - No matter how sophisticated modelling and calculation approaches are, there will always be elements of uncertainty. In such cases, the principle of conservatism should prevail to ensure issued carbon credits are not over-estimated.
No double counting - Project developers, registries and other stakeholders should all work together to ensure that no project is enrolled in multiple programmes. A removal or reduction of 1 tonne of CO2 or its equivalent should be represented by only 1 carbon credit.
No leakage - Leakage occurs when carbon project activities that reduce / remove emissions result in an increase in emissions elsewhere. For example, reducing emissions by reducing fertiliser might result in a decrease in yields. This requires additional land to be cultivated or higher fertiliser rates to be applied on other farms, resulting in no net benefit on a global scale. Or the reduction of emissions by transporting less biomass could be rendered null and void if that biomass was being used to generate biofuels. Leakage could also occur not only in a different location / process but at a later date. For example, a manufacturing company could reduce emissions by decreasing fuel consumption in one period. However, the decreased production in that year might require additional travel in the next period, resulting in leakage from one year to the next.
No net harm - The project activities should not result in any harm to any stakeholders.
Removals vs Reductions
Another important consideration is whether the project removes greenhouse gases ("GHG") or simply reduces future emissions. Many argue that GHG removals are superior to emission reductions, but this is not necessarily true. A carbon credit based on reduction or removal both result in 1 tonne CO2 less in the atmosphere than there would have been without the project. For example, if there are 10t CO2 in the atmosphere and annual net emissions are 2t CO2, then without any project activities there would be 12t CO2. A reduction of 1t CO2 would result in 11t CO2 at the end of that year while a removal would also result in 11t CO2 at the end of that year. There is even a case to be made that in some cases, a reduction is better as there is no non-permanence risk associated with it whereas soil carbon can be lost in the case of natural events such as floods or fire, or through a change in practices to conventional practices. However, it is not that simple as some carbon removal projects have a very low risk of reversal and some even pump that carbon into rocks a few km below the earth's surface. Furthermore, a reduction project could result in reduced emissions in one year but increased emissions in the next, in which case a removal project would be superior. The result is that the project integrity based on principles of additionality, permanence etc., are far more important than differentiating between these two types of projects.
How they are offset
The above discusses only one side of the carbon equation, which is the manner in which they are generated. The other side, although not the focus of this discussion, is just as important - how are these credits being used?
Companies should always aim to reduce their own emissions to their best ability. However, we do recognise that the world can't stop turning and that there are unavoidable emissions in every industry or at a minimum, that we will need more time to get there. Carbon offsets should be used only to offset residual emissions after the company's own efforts have reached a peak.
Generally, companies that are genuinely concerned for the environment and their own sustainability will naturally lean more towards higher quality carbon credits while the cheaper-to-produce carbon credits are often purchased by companies that view carbon credits as a "license to pollute".
Why even consider the quality of carbon credits?
Carbon credits in itself are not good or bad and are neither ethical nor unethical. The integrity lies in the way these credits are generated and offset and is intertwined with the heart of the underlying project. Many carbon projects have sold credits based on dishonest claims or even simple mistakes. With the increasing scrutiny of stakeholders into these projects, purchasers of offsets take on a risk that should be carefully managed. Cheaper, lower-quality projects can result in clients or other stake holders raising serious questions and may even result in negative publicity in extreme cases.
While cheap credits bring risk, higher quality carbon credits bring credibility to the company's commitment to sustainability. And research has shown that this interpretation by clients can result in direct financial benefits for the purchasing company. For companies taking their climate actions seriously, it's worth doing thorough research and choosing quality over quantity!