Fixing forest carbon credits
By Rohini Pande
This article first appeared in Science on January 11, 2024
The world’s forests store an estimated 861 billion tonnes of carbon – equivalent to approximately 100 years' worth of anthropogenic emissions at current rates – and, with good husbandry, could potentially store up to 226 billion tonnes more. Clearly, preserving and repairing forests is a vital element of mitigating climate breakdown.
However, forests worldwide are under threat, particularly in low- and middle-income countries; for example, 17% of Amazon forests have been destroyed, with another 17% degraded, and 11% of all carbon emissions come from deforestation. In an ongoing climate breakdown, preserving forests as a carbon sink likely has higher overall benefits than clearing them, selling the wood for charcoal, and using the space to grow both food and cash crops. But the benefits of preservation accrue slowly to all of humanity, whereas the benefits of deforestation all accrue more rapidly to local landowners, businesses, residents, and governments. Even where country-level authorities attempt to preserve forests, the financial and political incentives to clear land can often defeat attempts at regulation by a low-capacity state.
One answer is to transfer some of the global benefits of preservation to forest communities, paying them to preserve the forest that they would otherwise have cleared and thus preserving the forest while compensating communities for foregone income.
We know that, at least in some environments, paying communities not to clear forests can be effective; for example, Jayachandran et al. (2017) conducted a randomized trial of payments to landowners in Uganda and found that these payments significantly reduced forest degradation.
However, attempts to formalize this process internationally through a carbon market structured by the United Nations (UN), an initiative known as REDD+ (reducing emissions from deforestation and forest degradation), have been relatively slow and inadequate owing to both concerns about measuring and monitoring of carbon sink preservation – and so about the actual value of carbon credits – and inadequate international finance.
In the absence of formal transfers between countries on anywhere near the scale required and of a functional international market for carbon, a voluntary carbon market has emerged in which companies and other institutions buy carbon credits to, in theory, offset the emissions generated by their own activities. More than $36 billion has been invested in this market since 2012, and buyers include over 36% of Fortune 500 companies.
This market suffered a severe correction in 2023 when researchers examined voluntary carbon market forest preservation schemes across several countries and found that they have not meaningfully reduced deforestation. If a scheme does not preserve forests relative to a baseline, it does not prevent carbon emissions relative to that baseline – it does not provide "additionality" – and the voluntary carbon credits (VCCs) that were sold on the basis of the expected success of preventing emissions become worthless.
So, what went wrong?
Several parties are involved in the creation and trading of a VCC: the developer of a mitigation project or activity aimed at reducing or removing GHG emissions from the atmosphere; local stakeholders who, in theory, benefit from VCC payments in exchange for either ceasing economic activities that might damage the forest, engaging in active stewardship, or both; a crediting program that uses its own methodology to calculate the potential carbon benefits of mitigation projects and issues VCCs for the projects; an independent third-party auditor that verifies and validates the calculation of carbon credits from the mitigation project or activity; and last, the buyers who buy these VCCs to trade or to offset their own emissions.
In January 2023, it was reported that over 90% of the offsets certified by Verra, one of the largest offset crediting programs, were essentially worthless. In October 2023, the New Yorker published a story describing the failure of one carbon offset venture certified by Verra in Kariba, Zimbabwe. Two fundamental problems were identified: First, the projects had not prevented deforestation and carbon emissions anywhere near equivalent to the value of credits that had been sold; and second, in the Kariba project at least, it was not clear how much of the share of credit sales receipts promised to local communities had been delivered to them.
What went wrong? Well, first, there was no single agreed-upon method to estimate potential emissions reductions from certified projects, leaving the certifier with substantial leeway in what they chose. Second, they were paid according to the number of credits they certified, so there was an incentive to choose the methods that gave the highest number of credits rather than the most credible. Third, the project paid "independent" third-party auditors directly. When there is a competitive market for auditors, there is also an incentive for those auditors to collude with those being audited to give them the results they want. This phenomenon is not restricted to the auditing of VCCs. In research conducted in Gujarat, India, co-authors and I found that auditors conducting emission audits of polluting firms, whom those firms also paid, tended to find that firms emitted pollution at levels that clustered just below the legal limit.
Despite the recent setbacks that have been encountered, VCC markets, particularly those centered around preserving forests, are still considered a key policy in working to prevent climate breakdown. This year, Blue Carbon, a United Arab Emirates–based broker with no experience in carbon trading, is negotiating deals to manage forests across one-tenth of Liberia’s land; one-fifth of Zimbabwe’s land; and vast tracts of land in Kenya, Zambia, and Tanzania, with the intention of trading carbon credits from these areas. At COP28 in Dubai, the US government, along with the Bezos Earth Fund and the Rockefeller Foundation, announced the "Energy Transition Accelerator," which aims to use what they term "high-integrity" carbon crediting.
Meanwhile, the UN has been negotiating – although failed to agree on, at least at COP28 – rules for including VCCs in formal international carbon trading mechanisms through Article 6.4 of the Paris Agreement. The UK’s Climate Change Committee has set out guidance on developing functional voluntary carbon markets, and in the United States, the Commodity Futures Trading Commission has been developing its own rules for trading derivatives based on VCCs.
The rules in development all have a similar focus. They prioritize transparency in methodology, measurements, and finances; additionality, ensuring that projects genuinely lead to a reduction in emissions, or an increase in sequestration, that otherwise would not have taken place without the project; and robust quantification of emissions reduction and sequestration.