News | May 2023
Minna Ots, UNEP-WCMC Nature-based Solutions Restoration Carbon Finance Intern, dives into the rapidly evolving world of carbon markets and explores how UNEP-WCMC and the Endangered Landscapes Programme are helping projects make sense of the options available to them.
High-quality carbon credits are in big demand, but their efficacy and integrity are widely questioned. The voluntary carbon market enables private actors to finance greenhouse gas removal or abatement activities outside regulated or mandatory carbon pricing instruments, such as the EU’s Emissions Trading System. It has facilitated the generation and trading of carbon credits and offsetting of carbon emissions since the late 1990s, but only recently has it gathered momentum. This increased popularity has also led to increased scrutiny and calls for transparency, to ensure that genuine contributions to climate change mitigation are being delivered.
The number of carbon credits issued hit a record high in 2021 with a quadrupling from 2020 values, although issuance of credits dropped slightly in 2022 in the context of the uncertain global economic outlook. Nature-based solutions (NbS) are now the second largest sector by volume for the generation of carbon credits after renewable energy, with a similar trend in growth to the overall market. However, NbS credits originate from a plethora of sources, with associated uncertainty in their climate change mitigation contribution. Recently, multiple academic and media articles have scrutinised and raised concerns about credits from tropical rainforest protection, despite the credits being certified by carbon standards. One of the issues is that even though scientific methodologies constantly advance, the precision of methods for measuring carbon sequestration or emissions avoidance differ and the maturity of methods for different ecosystems varies. In essence, the quality of credits is a measure of confidence in their contribution to climate change mitigation.
Researchers have noted that the struggle with determining the quality of credits has become a characteristic of the voluntary carbon markets. They highlight that voluntary carbon markets are both a “contested” market (critics still question the validity of offsets) and a “concerned” market, as the buyers and sellers care about external critiques and wish to respond to broader concerns by improving their practices in a self-regulatory way.
The key criteria that need to be met for quality credits are the real and additional carbon reductions or removals, a credible and carefully quantified (often conservative) carbon baseline, no spread of carbon emitting activities elsewhere (known as leakage), and long-term permanence.
Most of these criteria are built into the requirements of carbon crediting standards. However, even when credits are certified by a standard, some stakeholders have still raised concerns about the standards' ability to ensure high-quality credits. As a result, multiple entities have emerged providing independent and objective ratings of the quality of carbon credits. These entities can act either as advisors or retailers of a carefully selected set of credits. However, before their methods go through thorough peer review, their credibility will likely remain questioned.
Another new development is the integration of digital tools based on blockchain technology to increase transparency and traceability on the voluntary carbon market supply chain, while reducing the risk of double counting. The decentralised nature of blockchain ensures easy public access to information relating to the buyer, the transaction, the seller, or the status of the credits. However, research shows most blockchain initiatives are far from maturity. Issues with scalability, development and lack of regulation could remain barriers, and the blockchain system itself is only a means to manage the data: it cannot stop poor quality credits from entering the digital market.
Multiple initiatives have been developed or are developing which aim to push for improved market integrity, such as the International Carbon Reduction and Offset Alliance set up by industry, the Carbon Credit Quality Initiative set up by non-governmental organisations, the Voluntary Carbon Markets Integrity Initiative and the Integrity Council for the Voluntary Carbon Market established by multistakeholder platforms. This variety of integrity initiatives could add further confusion, because even though each has their own core goals and target market actors, some parts still overlap. Buyers, sellers and intermediaries would need to consider whether approval by all initiatives is required, what extra costs are involved, and whether compliance reflects in higher prices. Also, considering voluntary carbon markets are at their core voluntary, increased regulation may not necessarily be a welcome development.
Even though most participants in the voluntary carbon markets have some level of responsibility for quality assurance, the burden to build quality from the ground up is on conservation and restoration projects themselves. That is why the Endangered Landscapes Programme has funded a dedicated project - supported by UNEP-WCMC's nature-based solutions experts, Fauna and Flora International and the RSPB - with the aim of enabling European landscape restoration projects to understand the opportunities and barriers associated with the voluntary carbon markets. European landscapes can have very high restoration costs, yet hold considerable potential for climate change mitigation which could make carbon markets an additional source of finance.
However, understanding not only what is required to provide high-quality carbon credits but learning the dos and don’ts of voluntary carbon markets can be very challenging and requires a steep learning curve within restoration project teams. Plus, this investment in learning does not necessarily equate to higher returns by default, as carbon credit prices are highly variable and depend greatly on project characteristics and buyer willingness to pay.
For some projects, the persisting knowledge gaps about carbon sequestration in ecosystems and how it interacts with other ecosystem services means that accessing carbon finance remains extremely difficult. For example, many uncertainties about carbon in seagrass and saltmarsh habitats means that the voluntary carbon market remains mostly inaccessible for these landscapes in Europe.
For the Endangered Landscapes Programme’s Koitajoki Watershed restoration project working in Finland to restore peatland marsh mires, engaging with the voluntary carbon market is still too risky. Kaisu Mustonen, the Head of the Biodiversity Programme of the Snowchange Cooperative that is heading the project, pointed out that Finland has “over 50 different types of peatland”, making the team cautious about any generalised greenhouse gas estimates. “We feel there is a need for a very careful assessment of the restoration and its impacts on water and biodiversity” before making any promises of the climate impact, she said.
On the other hand, the Endangered Landscapes Programme project in Romania's Carpathian Mountains was able to apply an existing methodology from an international certification body for their forest carbon calculations, providing security in the quality of the credits. Knowledge building will always be necessary, but some ecosystem types may have very little information, to begin with.
In a space that is so dynamic and ever-evolving, confusion can seem perpetual. Given the small sizes of many projects in Europe, it’s difficult for many projects to balance the returns from engaging in voluntary carbon markets with the heavy investments in building capacity to navigate the markets, to keep on top of developments and to deliver to their requirements. Organisations that lessen the burden on projects to learn everything about carbon finance while building a community for knowledge sharing could improve access to voluntary carbon markets in Europe.
We hope that the outputs from this Endangered Landscapes Programme-funded project can offer valuable guidance for European restoration projects on capacity building and on the scope to engage with the voluntary carbon markets. Still, more community building initiatives which could provide finance and guidance to restoration projects are needed to lessen the burden on individual projects to become experts in voluntary carbon markets. Among the uncertainty one thing seems to be true for now that can be taken on board by all projects: quality over quantity is the way forward.