Understanding The Quality of Voluntary Carbon Credits

The world is abuzz with various environmental, social and governance initiatives to transition to a sustainable and clean future and achieve the Paris Climate Agreement goal of curbing global temperature increase to 1.5 degree Celsius. An important strategy of most well-defined net-zero corporate road maps is the adoption of voluntary carbon credits and funding of carbon offset projects. The growing interest in carbon markets around the world has boosted the voluntary carbon credit transaction volume to all-time highs, with the market value breaching $1 billion for the first time in 2021. 

How does voluntary carbon market work?

A carbon credit is a certificate of proof that one ton of carbon dioxide has been removed from the atmosphere. Six major offset project categories allow voluntary carbon credits to be generated: forestry and land use, energy efficiency, renewable energy, household devices, chemical processes and waste disposal. A number of sub-categories exist within each of these categories. Once verified and audited, these projects generate credits, which are then bought by retailers, traders and corporations. The idea behind the voluntary carbon market is that carbon credit sales incentivise more offset projects and allow a buyer of these credits to directly fund activities that remove CO2 from the atmosphere and provide financial assistance to combat climate change.

Concerns regarding voluntary offset quality

Although the intent of creating such a marketplace is noble and theoretically seems to tackle climate change and CO2 emissions effectively, concerns surrounding the efficacy of voluntary carbon offsets are gaining ground. The biggest concern is that corporations will buy voluntary carbon offsets to reduce their carbon footprint while continuing to fund carbon-emitting projects, such as oil & gas and coal power businesses. Besides, concerns abound the quantum of carbon voluntarily offset projects actually curb and whether these projects are, indeed, eliminating carbon. Credits generated on measurable operations, such as electricity units generated by a renewable project, have relatively straightforward accounting norms and can clearly measure the emissions avoided if the same electricity would have been generated by a coal-based power plant. However, emission estimates and accounting are complex for forestry and land-use projects (also called nature-based solutions). The accounting principles for these projects are evolving with technological advancement in satellite imagery and are expected to improve the quantification of actual project benefits in the future.

Parameters that need to be analyzed to ensure the quality of nature-based credits:

Additionality and baseline estimates: Additionality and baseline estimates are somewhat intertwined. A project is said to be additional if the desired greenhouse gas (GHG) reduction would not have been achieved in its absence. In order to assess whether a project is additional, accurate baseline estimates are required. A baseline is an estimate of pre-project GHG measurements and business-as-usual emission projections. Concerns have been raised on false baseline estimates made by project developers to show greater project additionality. For example, a forestry project that has been implemented in an existing forest conservation area may not be additional since the region is already protected and restricts deforestation and other illegal human activities. Such a project should be considered additional only if there is an immense threat of deforestation and green-cover reduction in the region from human activities. Accounting is more complicated when assessing financial-based additionality, which stipulates that returns from implementing a project are necessary to run the project and ultimately lead to reduced GHG emissions. 

Permanence: Permanence of a carbon offset project refers to the assurance that the captured carbon will not enter the atmosphere for a long period, usually 30-100 years. Although trees can capture CO2 for a long time, increasing instances of forest fires and other natural and man-made calamities in forest areas in recent years raise questions on the permanence of nature-based projects and their long-term GHG reduction benefits.

Socioeconomic benefits: Voluntary carbon offset projects, particularly nature-based projects, affect ecological systems well beyond the activities that directly generate carbon credits and can have material unintended social, economic and environmental ramifications. A well-designed project involves the relevant stakeholders, such as local and regional government bodies, at each stage of the project life cycle and ensures local communities also reap the benefits of the project, such as jobs, schools and healthcare centers. However, some early REDD+ projects have restricted local communities from accessing their traditional lands and livelihoods, seriously undermining the adverse effects of the projects on local communities. 

Gunung Capital offers quality voluntary carbon credits thoroughly vetted through a detailed due diligence process. This ensures high-quality diverse offset projects in Gunung Capital’s portfolio. The company assesses a project from multiple lenses to ensure a cost-optimum project that is impactful and helps fight climate change, but also offers significant financial upsides to customers.

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