The voluntary carbon-offsets market, valued at $2 billion, has faced allegations of credits not delivering promised emissions cuts. Rebuilding credibility in the market is proving to be a challenging task. The Commodity Futures Trading Commission has stated its commitment to policing carbon offsets, Nestlé has chosen to exit the market, and standard setters have released guidelines that only a small percentage of current buyers and projects would meet.
According to Trove Research, only 5% of companies purchasing voluntary credits would meet the new standards for their proper use, and less than 2% of projects issuing credits would comply with new standards for sellers. These estimates assume that the final rules, expected to be published in July 2022, align with the draft.
“The offset industry’s inability to self-regulate has created a slow-moving crisis,” says Danny Cullenward, research fellow at the Institute for Carbon Removal Law and Policy at American University. Companies are questioning whether the marketing benefits outweigh the legal risks.
Carbon offsets play a crucial role in scenarios that limit global warming to 1.5 degrees Celsius. Initially embraced by companies and seen as a key way to fund climate action worldwide, carbon offsets were estimated by Morgan Stanley to become a $100 billion market by 2030.
However, the market’s credibility has suffered over the past year due to allegations that credits are not delivering on emissions-reduction promises. This has led to companies being hesitant to participate.
Each carbon credit should represent one metric ton of carbon dioxide avoided or removed from the atmosphere. Removal credits typically support restoration projects such as tree planting, while avoidance credits fund initiatives like energy efficiency, renewable energy, or forest conservation. Voluntary credits are separate from government-regulated carbon trading and are usually cheaper. There are also more expensive voluntary credits for direct air capture of CO2.
Nestlé has decided to withdraw from carbon offsets and no longer claims carbon neutrality for brands like Nespresso, Perrier, and San Pellegrino. Other companies such as easyJet and Kering have also exited the market due to reputation risks and increased scrutiny.
To combat fraud in carbon markets, the CFTC has established an environmental task force and called for whistleblowers to report misconduct. Various efforts are underway to rebuild the market’s credibility.
Efforts include the establishment of rules for suppliers and buyers of offsets by standard-setting organizations like the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Market Integrity Initiative. These rules aim to ensure high-quality offsets and provide guidance for credible claims.
The new standards set a high bar, addressing concerns of poor corporate climate claims and low-quality credits. However, it is crucial for rule-setters to avoid alienating well-intentioned companies.
Under the Paris Agreement, U.N. climate negotiators are working on rules for a global marketplace for carbon offsets. However, there is still no agreement on qualifying projects for the marketplace.
In conclusion, rebuilding credibility in the voluntary carbon-offsets market is a challenging task. Efforts by regulators, standard setters, and companies are underway, but significant work is still needed to address critical issues and provide clear guidelines.
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