• Brianna Welsh

How Carbon Markets became a Greenwashing-Machine

Summary Position of Carbon

Carbon offsets have an integrity problem. Environmental commodities theoretically representing one tonne of CO2 ‘abated‘ from the atmosphere, carbon offsets are, at their essence, indulgences for polluters to continue business-as-usual. These credits, ‘worth’ a tonne of carbon allegedly being removed or avoided from the atmosphere, are abstracted from their environmental contribution and financialized, then purchased by carbon sinners to scrub that amount of carbon from their emissions balance sheet. Guilt is distributed.

By the United Nations’ annual climate A-list get-together – COP26 – in November, more than one third of all Fortune 500 companies had pledged carbon neutrality by 2030. Net-zero commitments now cover one-fifth of the world’s largest corporations and 68% of global GDP, compared to 16% in 2019. Green really is the new black.

Offsets represent a large component of these ‘net-zero’ initiatives; some 65% of the carbon drawdown proposed in these commitments are scoped to be achieved via offsets. To offer a sense of scale, the 18 oil majors’ net-zero goals alone will need to erase 3.3 billion metric tonnes of annual emissions, or a casual 18 times the amount of carbon offsets issued globally in 2020. Achieving these commitments will collectively require market growth by as much as 50 times, says Bank of America.

But the real question we should be asking is: do these virtuous announcements really translate into environmental impact? Or are they merely a flashy get-out-of-jail-free card?

But what are carbon credits, really?

A sweeping term for a “range of assets and climate activities with varying degrees of environmental impact and efficacy”, offsets are promises to reduce environmental degradation in one area to compensate for environmental degradation elsewhere. Create a market that turns a tonne of removed carbon into a commodity, and money will flow from the emitters to the fixers, they say. Leave it all to the markets. Markets are uncorruptible, right?

So here’s what happens: a company can make a green-sounding pledge to go ‘carbon neutral’ by buying credits from another company that has polluted less that year, or one that is actively contributing to new carbon drawdown. These ‘net zero’ pledges, while well-intending, often materialize into nothing more than shuffling deckchairs on a sinking ship. And many of these chairs have three-legs or holes in the seats, so the guests can’t even enjoy the ride as the ship goes down.

Falling somewhere between truly environmentally material, and outright fraud, offsets are not made equal. Much like the credit ratings of Moody’s and S&P, carbon offsets come in flavours of ‘good’. And there is an almost comically vast disparity between useful and useless. We’re talking about the difference between buying treasuries from a banana republic littered with a history of defaults and coups, versus a democratic, generally free society with reserves and peace treaties. The rating counts.

But unlike the transparent and public ratings of sovereign debt (among most other financial instruments, by now), the carbon joke is often on the buyer; snake oil advertising runs amok in the land of carbon credits. Peddled as climate conserving, they are often closer to climate quackery. In unregulated markets, they range from innocuous yet frequently ineffective chaff, to straight-up fraud and manipulation. With limited governmental oversight, the mortgage-backed securities ethos lives on in carbon. Don’t think I am alone in manifesting a Dodd-Frank for climate.

We think Greenpeace nails it: “carbon offsetting is truly a scammer’s dream scheme. It’s a bookkeeping trick intended to obscure climate wrecking-emissions. It’s tree planting window dressing aimed at distracting from ecosystem destruction; the fraud of carbon offsetting is built upon many of the hallmarks of a classic con”. Offsetting has reached financialization at its worst: reducing activism to arbitrary economic activity. Greenpeace notes that carbon sinks have a short shelf life: once a forest burns, is logged, or dies naturally, the carbon it traps is re-released. There is a reason that the Indigenous Environmental Network and Indigenous Climate Action both called offsetting a “new form of colonialismwhen protesting the carbon application during last year’s COP26. Their view: offsetting incentivizes the commodification of nature and allows powerful corporations to take over the lands of vulnerable communities, threatening both human rights and ecosystems in concert.

Genesis of the Carbon Markets

For a strange alliance of free-market Republicans and renegade environmentalists, carbon markets represented a novel approach to cleaning up the world—by working with human nature instead of against it. Anticipatory zeal among economists and environmentalists alike in the ‘90s was alluring, for what they contended as an opportunity for markets to fix human-induced climate change. To them we just needed better pricing structures, so that the environmental and social costs of suffocating the planet would be ‘priced in’; internalizing the externalities. Considered today by devout environmentalists as a climate pariah, the carbon markets were at one point, one of the most spectacular success stories in the history of the green movement.

Carbon credits were born 30 years ago out of the 1992 UN Earth Summit in Rio, which hosted the first bona fide conversation about the intersection between economic development and environmental sustainability. A milestone was eventually reached at the 1997 Kyoto Protocol, representing an attempt to move from symbols to action for the first time. Off the back of international negotiations, binding targets and timetables to reduce developed country greenhouse gas emissions were established. It was the birthplace of the compliance carbon market that included carbon offsets. Countries that adopted the treaty were assigned maximum carbon emission levels and were penalized if they went above these levels. Largely at the insistence of the United States, the agreement incorporated a series of “flexible,” or market-based mechanisms, affording developed countries the option of employing different forms of emissions trading mechanisms to achieve their targets, more cost-effectively. This allowed carbon-positive companies to sell a piece of paper if they could prove they reduced pollution, prioritizing pollution reduction where it was cheapest first, aiming to tackle the big stuff when technology grew up. This all makes sense – until you have a think about game theory… The EU Emissions Trading Scheme, established in 2004, then became the cornerstone of the European Union’s policy to fight climate change and the world’s first and biggest carbon market. Evolving its principles out of the United States’ cap-and-trade program, established to regulate sulfur dioxide emissions through allowances, the ETS became the world’s largest market focused on limiting emissions, covering roughly 40% of all EU greenhouse gas emissions. Capping greenhouse gases allowable from select heavy industries, it involves tradable permits that are bought or received by power stations and industrial plants. Each year, the cap ratchets down, and the shrinking pool of allowances gets costlier; polluters must play a game of musical chairs to match allowances to emissions. It was heralded as Europe’s ace card in reducing emissions. But by 2005, the ETS began to flounder. Excessive allocations of free allowances and a recession that dented industrial demand left the price of emitting a tonne of carbon dioxide languishing for years in the single digits. The bedrock of the market was that polluters pay. Well, they didn’t. Certainly not at a price that reflected the true costs of their activities. Eleven years later, the famous Paris Accord was signed in France to set a target for limiting global warming to 2 degrees Celsius. Much to the dismay of climate scientists and activists however, negotiations stalled for the subsequent 6 years as parties to the agreement bickered on semantics. The rules for how these “cooperative approaches” would function were hotly contended. The classic example of the horse-trading that characterises international negotiations led to the famous Article 6, qualifying “voluntary cooperation” towards climate goals, encompassing a potential international carbon market. The contentious clause left negotiators to navigate a thicket of impenetrable legal jargon, a series of technical accounting challenges and ambiguous bear-traps in the text, that expose often incompatible visions of how Article 6 should work and what it was created for in the first place. Even as recently as COP26 in November, this point drew such intense scrutiny that the conference was extended by 3 days to allow for protracted negotiations. The long-winded result: no formal, no unified, no consistent regulatory oversight for a market that is lauded as being a key determinant in carbon drawdown and climate mitigation. What. A. Disaster.

Why the Carbon Industry is Broken So what’s the deal now?

The EU’s ETS is the largest and most robust market for carbon in the world, with pollution reduction activities undergoing heavy regulatory scrutiny to calculate the real price of their impact. These markets are pretty legit, and if we could manage to agree on collective global regulation like these best practices, we’d be in a good spot.

So why not extrapolate their success to the rest of the world? It’s this sticky point in Article 6. Encumbering global negotiations for years, it all came down to accounting; who is entitled to what and when. Unclear rules to prevent carbon emissions being credited twice, and in some cases, project financing risks that led to perverse incentives that generated additional GHG emissions, notably for toxic industrial gases such as hydrofluorocarbons and nitrous oxide.

To illustrate the complexity, think of what happens when a European HQ’d company buys a reforestation project in Brazil. Brazil technically produces those credits, the environmental benefit being accrued to the region of the Amazon and hence, good work done to protect local land. But the payer, the European corporate, is the one being penalized here, shelling out their sheckles as good corporate citizens. So which country takes credit here? In this scenario, if Brazil never actually buys credits, despite all the efforts of carbon sink protection, they net out on the global balance sheet of the Nationally Determined Contributions (NDCs) – national climate actions and emission reduction plans as part of the Paris Agreement, that allows countries to use carbon offsets to fund greenhouse gas emissions-reducing projects in other countries and claim the saved emissions as part of their own efforts to meet international emissions targets – at zero. Hardly a fair equation.

Aggravating the potential for ubiquitous application of compliance markets, is the burden of project certification. An arduous, costly and time-consuming endeavour, many stakeholders were deterred. Participation became a Herculean task, with the combination of accounting frustrations and certification bottlenecks inhibiting the diffusion of effective regulated carbon markets. The result: compliance markets simply weren’t capable of scaling fast enough or wide enough, to truly make an impact.

Enter, voluntary carbon markets. Proposed as a more efficient market-based mechanism to broaden participation, voluntary carbon markets (VCMs) exist because of the imperfect suite of carbon solutions to fully address GHG reductions. Lagging regulatory actions combined with a desire to remain unregulated, led corporate players to propel climate action through pledges in VCMs that meet or exceed the analogous mandates of compliance markets. In the battle between private and public, private usually shows up when it comes to efficiency, especially in the interest of cost savings. Technically designed as a stopgap “transition” mechanisms- not a panacea solution – the private sector showed how profitable this market could become, offering a safe haven for polluters while still feigning climate consciousness.

Problem is, the true cost of polluting externalities and climate solutions penalizes companies and governments by an order of magnitude more than what they can get on the voluntary market. This translates roughly to a 10x (even up to 20x) price increase per tonne of carbon for regulated offsets. Hence, a market rife for arbitrage and scapegoating. Under the VCM, a greater variety of project activities are permitted, creating the need for ‘rated’ offsets. Let’s just say that organizations operating under the voluntary market have more freedom to create projects that generate meaningful reductions in emissions while pulling carbon from the atmosphere. This led to the predictable onslaught of fraud and manipulation by malevolent actors; because carbon offsets can be used to negate any method of C02 generation and, fund any type of carbon reduction project, they are open to interpretation about what is truly “additional”, or, environmentally material, beyond business-as-usual. In fact, some projects were even revealed to be entirely unsustainable in their attempts to generate electricity or over-pollute to then scale back via ‘energy efficiency’ initiatives.

A 2016 report on behalf of the European Union by Martin Cames of the Oko-Institut, concluded that only 2% of past carbon projects have “a high likelihood” of delivering the promised benefits to the atmosphere. Branding voluntary carbon a ‘zombie market’, Gilles Dufrasne, policy officer at Carbon Market Watch, calls foul, claiming that the VCM has not helped to reduce emissions, at all. “Handing out money to a decade-old project that will run anyway does nothing to neutralize pollution from continued use of fossil fuels”.

Carbon markets profited many layers of intermediary business people; brokers, consultants, and market-makers with very little independent oversight or transparency. Trust was shattered. And due to intense industry lobbying, power generators were allocated more allowances than they needed, which led to a surplus in supply. All factors combined, led to the predictable crash surrounding the 2008 Financial Crisis. A decline in voluntary sustainability initiatives led to a corresponding drop in prices of credits as global financial liquidity disappeared. A flooded market resulted, devaluing the credits even further. This contributed to the price of carbon dropping so low that it became a negligible cost to industry players, and made it easy for them to acquire “offsets” for very little consequence. As a result, thousands of projects were left with unclaimed credits; a problem fueling the complexity with cryptocarbon that we explore below. Ultimately, the market collapsed, taking a decade-long hiatus until being resuscitated around 2019, when global carbon emissions hit a record high and grassroots activism like Extinction Rebellion and Fridays4Future really made waves.

So What's the Big Deal about these VCMs?

Now, amid recent IPCC reports, new climate policies from the Biden administration and mounting calls for corporate action to slow global warming, these credits are suddenly back en vogue. The American Petroleum Institute has announced its endorsement of carbon pricing, and the world’s airlines have agreed that beginning this year they will cover any further increases in their emissions with carbon offsets. The VCM grabbed headlines in 2021 with record transactions and soaring credit prices, growing to more than $1 billion, a three-fold rise over 2020 and an important milestone to establish market credibility. Momentum is increasing.

The mounting attention on carbon has not all been glowing though. As a cascade of corporate PR campaigns has ensued, so has the criticism. Pundits warn of a growing market in outdated credits that offer no carbon benefit for the planet, since the carbon-saving projects they were once intended to fund have long been in operation. The market contains hundreds of millions of tonnes of poor-quality credits, driving increasing calls from industry and the finance sector to reform markets in carbon credits to improve their performance in delivering actual carbon reductions.

One investigation after another, from journalists, environmental groups, ratings agencies, and even offset-brokering companies (who would risk directly implicating their own partners), has unearthed questionable assumptions and systematic accounting misrepresentations in the offset market that ultimately drive emissions up, not down. They act in effect, to allow offset purchasers, intentionally or not, to greenwash their image without actually addressing the climate crisis.

Much of the problem is rooted in the fact there is no official international standard for carbon offset accounting. Governed by a close-knit collection of private standards bodies, each running non-interoperable, closed-system carbon credits registries with differing formats, different methodologies and definitions for a credit, and also use different data models, the industry is a mess. Private groups like Gold Standard, Verra, and the American Carbon Registry use a mishmash of methods to tally, certify, and broker offsets. 90% of which either failed to offset as much as they claim, are not permanent, come with damaging side effects for local communities or ecosystems, or a combination of all.

How is it possible that these offsets are so consistently comprised of hot air? It’s all in the metrics. Fundamentally, the problems in carbon are: leakage, additionality, permanence, and measurement:

  1. Leakage refers to the fact that while, offset-funded initiatives like deforestation might be avoided in one place, the root causes of deforestation aren’t tackled, so the problem is just moved to another area of forest or a different country.

  2. Additionality refers to the impossibility of predicting what might have happened in the absence of the project. Would this initiative have been developed, funded, operated, if it weren’t for the funds earned from the offsets? If not, it’s not additional.

  3. Permanence refers to the long-term impacts of the initiative. With tree planting, for example, carbon stored in trees is only temporarily stored, until trees are cut or burnt down, at which point, they release the carbon back to the atmosphere.

  4. Measurement refers to the fact that accurately measuring the amount of carbon stored in forests, soils, etc, is extremely complex — and prone to significant errors.

Take REDD+ reforestation carbon projects. Comprising nearly 80% of the carbon offset market, rforestation allegedly helps countries value the carbon and ecosystem services their forests provide, and create financial incentives to reduce deforestation, reduce degradation, and promote sustainable management.

Under proper scrutiny though, reforestation projects come with a lot of risks: carbon reductions may be short-lived, carbon savings may be gutted by increased logging elsewhere, the offsets were ‘preserving’ forests not actually in jeopardy of being chopped down, or producing credits that don’t reflect real-world changes in carbon levels. Not to mention, these projects were bad news bears for people who lived in and around REDD+ forests; indigenous peoples have regularly been booted from their land via “green grabbing’, forcing them into unsustainable livelihoods involving poaching, illegal logging, or operating destructive palm oil plantations.

And for those new forests being built via a REDD+ tree-planting project, it’s important to remember that a tree seeded today does not equal carbon sequestered today. A tree takes 20-ish years to see any carbon reduction benefits, so that offset technically shouldn’t be claimed for two decades. How many companies do you think would be chomping at the bit to acquire these offsets if they were actually operating in environmental honesty? Pay today and claim your PR benefits in 20 years. Slightly less of an enticing offer.

According to a new analysis by CarbonPlan – a San Francisco nonprofit that analyzes the scientific integrity of carbon removal efforts – California’s top climate regulator, the Air Resources Board, glossed over many of the details in their offset program. They estimate the state’s program has generated between 20 million and 39 million credits (tonnes of carbon worth approximately $410 million) that don’t achieve real climate benefits. They were, in effect, ghost credits that didn’t preserve additional carbon in forests but did allow polluters to emit far more CO2, equal to the annual emissions of 8.5 million cars! Those ghost credits represent nearly one in three credits issued through California’s primary forest offset program, highlighting systemic flaws in the rules and suggesting widespread gaming of the market. One investigation of oil company Shell’s promise to let customers carbon-offset their fuel purchases, found that three of the projects used to drive that offsetting were either at risk of deforestation or that their actual impact was hard to prove. The company had also claimed for the carbon reducing impact of a forest that was simultaneously being claimed as a carbon offset by the Scottish government. Or the example of the Lionshead Fire — which tore through 190,000 acres of forest in Central Oregon—almost completely engulfing the largest forest dedicated to sequestering carbon dioxide. Before the fires, the state of California had issued more than 2.6 million offset credits based on the carbon stored in its trees, now utterly erased. And environmental groups like the Nature Conservancy have sold credits for protecting trees that weren’t in danger of being harvested, leading to misleading claims of emissions reductions by Walt Disney Co., JPMorgan Chase & Co., and others. Meanwhile, North America’s largest carbon reforestation project, GreenTrees, has sold credits for trees that were already planted through government programs, sometimes more than a decade earlier.

But What About the Carbon Renaissance?

As carbon markets have exploded in the past few years, ears have perked. In September 2020, the Taskforce on Scaling Voluntary Carbon Markets, headed by Mark Carney, a former Bank of England governor who is now UN special envoy on climate finance, announced plans to establish a cleaned-up and more credible carbon market, endeavouring to expand the controversial market for the financial instruments to a $100 billion behemoth. Some 18 months after their announcement, and in the wake of fierce debate around whether the traded assets really help avert global warming, the body is re-purposing its mission to tackle the criticism that offsets don’t represent real carbon reductions. The sector remains mired in confusion over the integrity of carbon removal projects and a lack of clarity over how global trading of them should function.

Prioritizing a more moderate version of the initial taskforce, the Integrity Council for the Voluntary Carbon Market, will instead focus on assuring the quality of offsets sold. Targets to increase the size of the market have been ditched, and Carney’s promise of a pilot market early this year has also been scrapped.

My personal view: carbon offsets are launching primetime but they’re still in production mode. It is basically the Wild West.