Businesses Have ‘Gone Quiet’ After Voluntary Carbon Market Revelations

Global stakeholders are witnessing the effects of climate change — a phenomenon that caused hundreds of billions in economic damages in 2022, ranging from Pakistan’s floods to Europe’s wildfires to California’s droughts. Altogether, 29 events wreaked havoc, including Hurricane Ian, which cost $20 billion.

The corporate world recognizes the problem, with thousands of businesses setting net-zero targets. While the ultimate objective is to limit their CO2 releases from their operations and the fuels they buy, they can have an immediate impact by purchasing carbon credits to save rainforests. Indeed, the Intergovernmental Panel on Climate Change says that deforestation contributes to 15% of global carbon emissions and that natural solutions will significantly reduce atmospheric CO2.

But the quality of carbon credits varies, necessitating greater transparency. How can any company buy those vehicles without fully accounting for where the money goes? Voluntary carbon credits support specific projects, although landowners get a small percentage of the corporate investment. The rest goes to intermediaries. The Wall Street Journal points to Peru, where little money went to locals, and most went to “traders, registries, raters, governments, and investors.”

The industry “will collapse under its own stubbornness if it’s not careful,” says Patrick Greenfield, a lead reporter in the Guardian story, which concluded 94% of voluntary offsets sold by VERRA were “worthless.”

“There will be a role for high-quality offsets in the future, (but) it’ll be a pretty small market once you have integrity in it,” he said in a lecture at Oxford University. “In theory, governments will take action in response.” But carbon credit purchasers must “pay countries for standing trees at a more generous rate than we have now.”

Even before the Guardian investigation, the World Economic Forum said the corporate community questioned the voluntary carbon credit market. Building confidence is a must, which comes with complete transparency. But REDD+ sovereign carbon credits — monitored by the UN Framework Convention on Climate Change — provide such lucidity. The website quantifies deforestation rates and how the UNFCCC awards carbon credits.

Market transparency is urgent

The World Economic Forum and Bain & Co. surveyed 137 companies, finding that less than 20% planned to buy carbon credits. The January 2023 report says that companies need “precise information” to make good decisions. However, 55% of the businesses cited a lack of transparency, 55% referenced varying carbon credit quality, and 50% noted the complex web of standards. Meantime, 40% of them worried about “reputational risks” — a public backlash about investing in iffy projects at the expense of creating operational efficiencies.

“The transparency of the market urgently needs to be improved,” says the study. “Recent reports suggest that in some cases significant shares of end-user costs do not reach the projects and communities that so acutely need financial support.

“There are important opportunities for market reform that would increase transparency and ensure that market capital flows to where it should,” it continues. “Global standards and integrity bodies could play a vital role in defining norms for and instilling confidence in the use of credits.”

The analysis says the voluntary carbon market has attracted $1.2 billion through 2022, mitigating 161 megatons of carbon emissions. But that process is drawing increased scrutiny. Overall, the demand for forestry-related carbon credits is declining, says Trove Research and AlliedOffsets — from 380 million in 2021 to 359 million in 2022.

And the Guardian’s investigation is causing a lot of introspection, pointing out that companies are buying credits to save trees that are not at risk, inflating the threat of deforestation by 400%. ChevronCVX -1.1%, Shell, BP, Gucci, BHP, Salesforce, and Samsung are among the companies buying Verra-approved carbon credits.

“Businesses have gone really quiet,” says the Guardian’s Greenfield. “They haven’t said much. No one is really buying these credits at the moment.”

VERRA has a registry, which it says post emissions reductions and carbon credit issuances, including auditors’ reports. But commercially-sensitive information is under lock and key.

“Verra agrees that transparency is a critical characteristic of a well-functioning, high-quality carbon market, (and) is committed to providing the highest degree of transparency about carbon projects and the credits they generate,” the organization told this writer in an email.

Consider: Morgan Stanley Capital International indexes the stocks of thousands of companies from advanced and emerging countries. It says that 3,152 of those businesses made net-zero pledges in 2022, up from 2,891 in 2021. Carbon credits can make a massive difference in the short run — well before their investments in energy efficiencies and cleaner fuels kick in. To that end, the Paris climate agreement has adopted REDD+ sovereign credits, and 192 nations have agreed to those standards.

National governments issue sovereign credits and distribute all the money to local projects: rainforest nations must take stock of their trees and create a national forestry inventory to get the funds. They calculate the CO2 the forests absorb annually. The government must report its emissions and what its trees absorb if it wants to sell carbon credits. The operation must be transparent and verified, understanding the root causes of deforestation and degradation.

For example, the Dominican Republic’s forest sector captures about 350,000 more tons than the country’s overall annual emissions. Next year, it expects to sell 25 million tons of sovereign carbon credits at at least $5 a ton.

“The money will go to create more forests that will capture more carbon and build water resources,” says Federico Franco, vice minister of protected areas and biodiversity, in an interview with this writer at his office in Santo Domingo. “This will change the financial metrics that come from farming and timber.”

The World Economic Forum says more regulation of the voluntary carbon market is likely — and it’s something that U.S. regulators are considering. The forum calls such a move necessary, given that the lines between voluntary and sovereign carbon credits are “blurred.” In other words, the business world can’t tell one from the other. More sunlight is essential to attract more corporate buyers.

The benefits of doing so are broader than meeting the 2030 climate goals. They extend to 350 million people, who rely on the rainforests for their livelihoods, not to mention the terrestrial species that live in tropical forests.

An independent body aims to boost trust and confidence in the voluntary markets. “It’s not the role of the Integrity Council to forecast the size of the market, but it’s clear that a lack of confidence in the quality of credits is one key factor limiting growth,” says Daniel Ortega-Pacheco, a co-chair of the Integrity Council for the Voluntary Carbon Market’s expert panel, in an email. “We expect the market to scale substantially once buyers can have confidence in the quality of credits.”

Alphabet, Disney, General MotorsGM -3.8%, Honeywell, and UnileverUL -1.2% are among the most significant buyers of carbon offsets. Their mission is to do their due diligence to guarantee that the credits they buy have an impact.

Businesses can now buy credits directly from the governments trying to preserve their rainforests. If the credits are Paris compliant, the funds are distributed nationally and protect the entire rainforests — not just specific projects in which agents take a cut. The goal is to ensure the survival of natural habitats and meet global climate targets.

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