Can the voluntary carbon market ride out the storm?

VCMI executive director Mark Kenber tells RI that carbon offsets are needed to help achieve net zero – but says the market can only flourish if projects can demonstrate integrity.

The past year has not been easy for advocates of the voluntary carbon market.

A succession of high-profile controversies has seen the credibility of carbon offsetting schemes come under severe scrutiny. Reports in the Guardian and other international media outlets have highlighted egregious examples of apparently ‘worthless’ schemes with severe methodological flaws.

To get an inside view on the development of the voluntary carbon market, we spoke with Mark Kenber, the executive director the Voluntary Carbon Markets Integrity Initiative (VCMI), a non-profit group working to enable ‘high-integrity’ credits.

Scathing media coverage over the past year, combined with litigation against companies that have used carbon credits, “has clearly had a cooling effect on the market”, says Kenber, who also sits on the boards of the Integrity Council for Voluntary Carbon Markets (ICVCM) and standard-setting body Verra.

Mark Kenber

“Prices have stayed pretty low. Volumes issued and retired are flatlining at best and dropping off in some cases. We know that lots of companies, that either had carbon credit purchases as part of their strategies or were considering them, are holding back, waiting to see what emerges at COP, but also in 2024.”

Still, Kenber believes all is not lost. “There’s a slowdown, but I don’t think it’s a death knell by any means.” He notes that the pipeline of projects awaiting validation or implementation continue to grow, suggesting that project developers are expecting more demand in the future.

Removing carbon

The potential benefits of carbon offsetting are widely recognised. The Intergovernmental Panel on Climate Change said last year that removing carbon to counterbalance emissions from hard-to-abate sectors is an “unavoidable” part of achieving net zero.

The amount of carbon that needs to be removed from the atmosphere to meet Paris Agreement goals is hotly debated – but estimates run into the billions of tonnes (or ‘gigatonnes’) each year.

Kenber could be forgiven for feeling frustrated that the negative publicity might be making it harder to attract investment for carbon offsets. He acknowledges, however, that “scrutiny is vitally important because there are undoubtedly some projects that are not up to scratch”.

But Kenber warns that some of the “horror stories” around carbon credits could be creating a “baby and bathwater problem”, in which the media, corporates and investors assume that “all projects are rubbish”.

This is not the reality, he insists. He points out that several rating agencies interrogate the validity of carbon offsetting projects and that a large number of projects are independently assessed as performing well.

He advises that the ICVCM’s Core Carbon Principles are a “good starting place” for companies looking to understand the requirements for a ‘high-integrity’ carbon offsetting scheme. But Kenber adds that the perfect must not become the enemy of the good.

“What we haven’t been very good at, or haven’t been very sophisticated at, is saying. ‘What’s good enough?’ Because if the only thing that’s good enough is perfect, then we will have no market. And we will have no finance flowing to the several gigatons of emissions reductions and removals opportunities that exist across the developing world.”

Restoring confidence

The VCMI recently issued a ‘Claims Code of Practice’. Kenber tells us that the code is designed to answer two questions: “One is when and under what circumstances can companies credibly make voluntary use of carbon credits? And the second is what can they say about it?”

The final code, the first part of which was published in June, sets out a pathway that companies are instructed to follow in order to make a credible claim. This includes corporate governance criteria, requirements to purchase credits labelled by appropriate bodies, and “pretty robust and comprehensive” requirements on transparency.

“We’re trying to give confidence to companies to invest, so that they do so without the fear of reputational damage,” says Kenber.

He adds that, from VCMI’s perspective, carbon offsets must be used to supplement emissions reduction efforts. Companies cannot rely on offsets alone, without also maximising efforts to abate their emissions.

“There’s a slowdown [in the voluntary carbon market], but I don’t think it’s a death knell by any means”

Mark Kenber,
Voluntary Carbon Markets Integrity Initiative

Yet many activists remain convinced that carbon offsets merely provide a “permit to pollute”. Even some investor groups are wary. The Net-Zero Asset Owner Alliance barred the use of carbon removals in the latest edition of its target-setting protocol, which runs until 2030. Members are required to reduce emissions in line with a 1.5C pathway through abatements alone during this timeframe.

Kenber’s view is that carbon offsets do have a role to play, even in the relatively near term. “If a company gets to 2030 and it is not meeting its target, should it do nothing, or should it invest in carbon credits to make up the difference? To me, the answer to that is a no-brainer. You should definitely invest in carbon credits.”

Non-profit group Ecosystem Marketplace published research in October that found companies that participate in the voluntary carbon market are almost twice as likely to be reducing their emissions year-on-year, compared with companies that do not buy carbon credits.

“I can understand why people would say, ‘Well, if you allow companies to use credits at some point then you’re taking the pressure off,’” says Kenber. “But I think evidence suggests that that’s not the case, because companies are not dumb, and nor are investors, and they recognise they need to do both.”

Investors step-up

The investment community has largely eschewed a prominent role in the development of the voluntary carbon market up until recently. Kenber notes that some major investment banks have had long-term involvement in providing project finance and corporate finance for carbon offset projects, but investors have typically been less involved in the market.

This is now beginning to change, he says. “Financial institutions writ large have become more involved over the last couple of years, particularly since GFANZ was set up.

“Now, under GFANZ and Science-Based Targets rules, they are having to look at setting their own net-zero targets. And, of course, the biggest chunk of that and the most complex is their financed emissions, which exists under Chapter 15 of the Greenhouse Gas Protocol.”

Kenber says investors, particularly through GFANZ and other net-zero alliances, now need to consider a range of complex questions about how carbon offsetting fits into their net-zero commitments.

“How do you account for the emissions associated with companies on your loan book or where you hold an asset? And then how do you take into account what those companies are doing, how much they’re decarbonising? How do you treat any carbon credits they may have on or off their balance sheets?”

The future of the carbon markets will undoubtedly feature prominently at COP28. The summit will seek to resolve some of the outstanding technical details around Article 6 of the Paris Agreement, which established mechanisms for different types of carbon trading.

Kenber expects the voluntary carbon market and government-backed schemes established under Article 6 to “converge over time”. He hopes that those involved in discussions on Article 6 at COP take the opportunity to learn from how the voluntary markets have developed in the past decade. “There’s been huge advances in the use of digital technology for monitoring and reporting. A lot has been learned about methodologies, about how to test baselines. All sorts of learning has taken place.”

Despite recent controversies, he expects that COP28 will “hear a lot of noise” from organisations that believe the carbon market can be an important tool for organisations to meet their climate commitments.

Kenber’s view is that “that’s absolutely right”, but he comes back to the need for project developers and purchasers to ensure the ICVCM and VCMI principles are maintained to build credibility in the market. “It will only be sustainable and will only work if it’s done with integrity.”

COP28 host courts carbon controversy

The UAE’s fondness for carbon capture has been criticised as a means to rationalise its fossil fuel interests

One of the most enthusiastic proponents of carbon capture, along with other forms of carbon offsetting, is COP28’s host nation, the United Arab Emirates. Some fear that the Gulf state’s backing for carbon removal is a ruse to allow the country to justify its continued (and, in fact, increasing) oil and gas production. Christiana Figueres, former head of the UN Framework Convention on Climate Change, warned earlier this year that UAE’s support for carbon capture technology would help the country avoid phasing out fossil fuel production. 

Meanwhile, Emirati investors are increasingly active in seeking to develop large-scale carbon offsetting projects, particularly in Africa. A consortium of UAE-based entities pledged in September to purchase $450 million worth of carbon credits on the continent.

More controversially, Dubai-based investor Blue Carbon has attempted to negotiate huge land deals in countries such as Liberia and Zimbabwe with the aim of generating carbon credits through forest planting and restoration. The apparent failure to consult forest communities affected by the proposed deals has led to claims that the investor is engaged in “carbon colonialism”.