NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Are carbon credits a legitimate tool to fight climate change? Despite their growing popularity as a way for businesses and other carbon emitters to offset their own emissions by buying credits from other entities that reduce or remove carbon from the atmosphere, recent research has called their effectiveness into question.

Earlier this year, an investigation conducted by The Guardian, the German weekly Die Zeit and the nonprofit SourceMaterial claimed that more than 90% of rainforest carbon offsets under Verra, the world’s leading carbon certifier, are likely to be “phantom credits” that don’t represent genuine carbon reductions. And another recent report from the University of California, Berkeley found that the cookstove sector — which sells carbon credits as a way to monetise its own emissions impact — could be over-reporting its carbon reduction by 6.3 times on average: In other words, a typical cookstove project could be claiming to produce roughly six times more carbon credits than the actual climate benefits it generated.

Based on these reports, it’s understandable for people to conclude that carbon credits are nothing but greenwashing — a charade designed to allow big corporations to pretend to take climate action while making no real effort to reduce their actual emissions.  

Working in and around carbon markets for eight years, I’ve gone through these doubts myself. But as is typical in highly technical fields, a deeper understanding of the mechanics, structures, opportunities and risks of carbon credits produces a more nuanced view. I’ve come to see that putting a price on carbon is actually one of our most effective ways to accelerate decarbonisation and give ourselves the best possible chance of meeting science-based targets in climate change.

From my perspective, there are three questions that help clarify the role carbon credits must play in global decarbonisation:

• Should the entities that are creating carbon emissions be charged if they continue to release them?
• Should we take that money and direct it towards high-impact projects that stop or remove emissions, such as saving the world’s forests, removing smoke from kitchens in the developing world and building tech that draws carbon out of the atmosphere?
• Should we make this happen as fast as possible?

If you answer yes to all three of the above questions, then pricing and trading carbon is the best-placed tool to achieve these goals. It taxes emitters to drive their behaviour change, directly funds projects that reduce carbon, and does it through a market-based mechanism that enables efficiency, investment and scale. 

But this doesn’t mean the problems cited by The Guardian and the University of California, Berkeley aren’t real — they very much are. And while there are multiple factors driving these challenges, the biggest one is that, until very recently, we’ve just not had particularly effective tools for handling one essential element of carbon markets: verification. 

The Verification problem for carbon credits

Verification of carbon requires a trustworthy process for confirming that a ton of carbon (the unit of measurement represented by a single carbon credit) equates to a ton of actual carbon or other greenhouse gas removed from, or not emitted to, the atmosphere. It is done through standards bodies, with Gold Standard and Verra being the most well-known at a global voluntary level. These bodies are the ones responsible for the creation of tools, methodologies and outcomes that both project developers and credit buyers can utilise to verify the climate impact of the credits they’re exchanging. With this verification, both parties can trade carbon credits, which are otherwise known as Verified Emission Reductions (VERs).

A simple example: A Nepali woman cooks with wood, which releases one ton of CO2 per year. With the support of a cookstove company, she then switches to electric cooking, 100% powered by hydro and solar which have no CO2 emissions — which means that over a year, one ton of CO2 is prevented from going into the atmosphere. If you can measure, report and verify (MRV) under a certified standard that this change has indeed occurred due to a dedicated project intervention that otherwise wouldn’t have happened, this generates one ton of VERs — which equates to one carbon credit that can be traded for a limited period of time.

It’s in this MRV process, ensuring that one ton is actually one ton, where the market is falling short. Why? Because as The Guardian and UC Berkeley pointed out, the traditional field-based tools used to date by the sector can too easily generate overestimates that then compound together. According to these sources, this compounding effect is leading to significant overestimates of credits generated compared to their independent reviews.

However, these inaccuracies, in my view, were highly unlikely to have been triggered intentionally. The majority of stakeholders in carbon markets — standards bodies, project developers, verifiers, buyers — are staffed and managed by people of integrity dedicated to the planet, myself included. We have done and continue to do our best to measure carbon in highly challenging conditions across the developing world. 

But we can’t avoid the mounting evidence that the traditional tools utilised with field-based processes are coming up short. The reason this is becoming evident now is because of the rapid advance of technologies that can more accurately measure emission reductions. This new wave of technology, often referred to as digital Measurement, Results and Verification (dMRV), is both helping us to better understand what is working now, and laying the foundation for the future success of measuring and pricing carbon.

IoT and Satellite – The technology-driven future of carbon credit verification

In The Guardian’s investigation, the conclusions were made possible because of recent advances in access to cost-effective satellite imagery. This imagery provided researchers with data that allowed them to review Verra’s claims of avoided deforestation, resulting in their finding that these claims had been substantially overstated compared to what was actually occurring in the rainforests impacted by the projects Verra certified.

Likewise, though the UC Berkeley report concluded that traditional field-based MRV methodologies are potentially over-reporting cookstove VERs by 6.3 times, it also found that one methodology actually was generating more accurate credits aligned with the study’s estimates: namely, Gold Standard’s new metered methodology, which requires stoves to be integrated with technology like Internet of Things (IoT) SIM cards to verify exact usage data. 

The dMRV technologies being used to uncover these areas for improvement in the current system are the same technologies that are already being used to build the future of digital verification. For instance, Pachama is a U.S. startup utilising satellite verification to calculate carbon credits for deforestation projects. And at ATEC, we recently signed a landmark multi-country agreement with Engie that will use dMRV to verify the purchase of up to 11.5 million tons of carbon credits generated by ATEC cookstoves in Bangladesh and Cambodia. This verification will be conducted using the Gold Standard metered methodology that the Berkeley report rated as the most accurate available. You can view the power of this IoT technology in tracing decentralised carbon credits in the walkthrough of ATEC’s dMRV Carbon Credit Dashboard shown in the video below.

With dMRV technologies we can build higher levels of trust in carbon projects and direct billions of dollars in carbon financing to the developing world, helping these communities to play a significant role in addressing climate change: a problem they didn’t create, but one that is impacting them disproportionately nonetheless.

A call to action for people and planet

We are just beginning to understand what putting a price on carbon can do to solve one of the great existential challenges of our time. But it’s already becoming clear that dMRV, through IoT and satellite data, is a big step forward in building trust in carbon credits — as well as enabling the infrastructure for their massive scale. By ATEC’s estimates, transitioning the 4 billion people who still cook with wood to modern, decarbonised cooking will reduce global emissions by one gigaton — an amount greater than the emissions produced by the global airline industry. But further steps are needed to continue to build trust in carbon markets, and to scale them to reach their technical potential.  

Beyond the widespread implementation of dMRV, as a project developer we recommend five other steps forward to help build scale and integrity into the market. There may well be others — and there are likely differing views on these points — so we welcome debate on the topic. 

Our recommendations for building robust voluntary carbon markets for people and the planet include:

• The creation of a truly global system for carbon trading, to remove barriers between buyers and generators. Uncertainty around issues of inter-country trading under Article 6 of the Paris Agreement is a common challenge expressed by carbon credit buyers. A frequent criticism is that credits are too inexpensive and companies can offset emissions too cheaply — and this is true. Creating a truly globalised market where every emission is counted and can be traded will liberate projects to achieve their true value. Bilateral agreements to allow trading between countries, under Article 6.2 of the Paris Agreement, are one potential way forward, and these are being pursued by Singapore, Switzerland and others.
• Required tracking of the ultimate beneficiaries of carbon finance, ensuring that those who are actually generating emission reductions are the ones receiving the majority of that financial benefit. There have unfortunately been reported cases of projects with little financial benefit flowing to the households and communities that do the actual hard work. New advances in automated data generation and mobile/digital payments mean we now have the technology to provide that direct flow of finance in a transparent and scalable way — something that will also lead to traceable improvements in additionality.
• The creation of separate price indexes for digitally-verified and field-verified credits. Digitally-verified credits are clear leaders in ensuring that a carbon credit represents a ton of actual carbon. But digital tech costs time and money — expenses that are typically incurred initially by project developers and their funders, then built into the ongoing carbon pricing. These costs must be compensated appropriately and not lumped together under the same index reference price with field-verified credits from lower-quality projects. This is similar to other commodity and asset classes that have different quality tiers which attract different pricing, and companies like BeZero Carbon, Sylvera and others are helping to move this sort of recognition forward.
• Standards to tighten independently-verified baseline figure ranges for project design. Though dMRV addresses over-crediting concerns in usage verification, if there is a lack of reliable data on what was happening beforehand (i.e., baseline figures) then there’s still the risk of verified credits not being accurate within a project. To reduce this risk, standards bodies could further tighten allowable baseline figures into an independently verified range per country.
• Tracking of credit purchases against emission type, to increase visibility and make it harder for companies to effectively “pay to pollute.” Many companies participating in carbon markets are understandably buying credits to align themselves with their customers, who want to ensure that their personal spending is achieving the best outcome for the environment. By tracking what types of emissions they are offsetting through carbon credits and communicating this publicly, companies can give customers confidence that they’re reducing the emissions they should, then responsibly using carbon credits only where necessary.

Combined with dMRV, these recommendations can increase confidence in carbon credits, building a market that’s credible, transparent and based on trustworthy, internationally respected norms. We believe they can help carbon credits play a vital role in the global decarbonisation efforts that will be key to the ongoing fight against climate change.

Ben Jeffreys is the Co-Founder and CEO of ATEC Global, an international leader in PAYGO clean cooking. 

Photo courtesy of ATEC.