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Carbon Market Mayhem

In today's edition of This Week in Climate, we look at trouble for carbon offset markets.
Julian Moore
Aug 25, 2023 9 min read
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The Inflation Reduction Act celebrated its first birthday this week, but the party was mostly cut short by ongoing political beefs over the bill.

One of its authors, Sen. Joe Manchin, is on a one-man press campaign to denigrate the law, while Republican officials in regions that have benefitted from renewable investments still promise to repeal the bill that created them. Some Democrats and climate hawks, for their part, are irked that the President isn’t taking more credit for the law.

While the impacts of the IRA are typically measured in megawatts of renewables under construction, the law has been just as critical in leading carbon polluters away from more problematic climate solutions.

Prior to the IRA, the world’s largest companies typically made up for gaps in their emissions pledges by buying offsets in the absence of incentives to support carbon reductions in hard-to-abate sectors like manufacturing.

Even companies such as Nissan that devoted considerable engineering resources to reducing emissions at their factories still resorted to voluntary carbon markets to meet their 2030 goals.

The dependence on offsets to drive reductions seemed like a precarious bet at the time, and news from this week showed how fragile even the best carbon markets are to this day.

Voluntary Carbon Offsets in Trouble

A study published in Science this week found that millions of the carbon credits sold on the voluntary carbon market Verra could have no impact on deforestation or carbon emissions.

Verra operates a market for forest-based carbon credits, known as reducing emissions from deforestation and degradation (REDD+). The idea behind REDD+ credits is to calculate how much carbon is stored in a section of forest that would have hypothetically been cut down, and assign it a dollar value for the carbon saved.

The system works in principle, but leaves several layers of ambiguity around future prices and the “additionality” of forests saved that make real-life impacts hard to measure.

In the Science study, researchers compared 18 regions where Verra sold verified REDD+ credits. The forest regions were selected for their similar historical deforestation, rates of deforestation and tree cover.

Of those 18 regions, only 7 reported any noticeable reduction in deforestation, while the other 11 showed no significant change in either direction.

That could translate into a significant number of useless credits on the Verra registry. Researchers estimated that the area they studied could ultimately correspond to 89 million credits, and that 60.2 million of those are related to projects that made no difference in deforestation.

The research adds to a rough year for voluntary markets, but the study’s authors also suggest that solutions are at hand.

A principal cause for the discrepancies on Verra’s registries is a lack of focus on historical deforestation rates when making projections on carbon savings. By siting more carbon credits away from areas that do not have a history of deforestation, REDD+ credits could come closer to reflecting the reality in areas that do.

Government Carbon Markets Hurting, Too

Government-regulated carbon markets, known as mandatory markets, have proven to have higher standards, compliance and emissions reductions than voluntary markets like Verra.

But despite their relative success, government markets are running into roadblocks, too.

This week, five environmental groups in Virginia sued to stop Republican Gov. Brett Youngkin from pulling the state out of the Regional Greenhouse Gas Initiative (RGGI), an 11-state cap-and-trade carbon market that opened in 2010.

Mandatory markets like the RGGI have many of the accountability mechanisms that even the highest quality voluntary markets lack.

Like voluntary markets, the RGGI has to be compatible with a patchwork of regulatory frameworks in each of its member states. Each of the eleven states in the RGGI has to establish its own carbon trading programs to regulate credit issuance. But those policy differences are laid out transparently and incorporated into a system based on a common set of principles known as the RGGI Model Rule.

The RGGI also has its own system to track the chain of custody of each credit, regular scientific reviews and transaction price reports to give data on historical price shifts that have made it a model for what regulated carbon cap-and-trade markets can achieve.

Unfortunately, the success of systems like the RGGI are running into the thicket of climate politics.

The recently-elected Gov. Youngkin ran on an anti-ESG platform, and leaving the regional carbon market amounts to a campaign promise easily fulfilled. Pennsylvania joined the RGGI just last year in spite of intense opposition from both sides of the aisle, and since then the Democratic Governor Josh Shapiro has been accused of slow-rolling the state’s full adoption into the carbon market.

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The Author

Julian Moore