A credibility crisis for climate efforts

It is now common to encounter headlines about corporations embroiled in controversy for failing in their climate pledges. This is unsurprising, as many corporations make lofty climate commitments. But a deeper dive reveals a recurring problem: fraudulent carbon offsets. And because it will be difficult to meet ambitious global climate targets without carbon offsets, we must determine how to fix them.

The issue stems from defining carbon offsets, along with their handling in accounting. Put simply, a carbon offset is a payment in which one party purchases a “carbon offset credit” intending for the money to flow to another party that undertakes some change that reduces emissions.

Carbon offsets are growing in popularity because there are many emission-intensive industries that have lots of cash — think airlines, tech giants, online retailers, etc. — and many opportunities to reduce emissions globally that people would undertake if paid to do so, such as planting trees, changing farming practices, switching to cleaner cook stoves, using renewable energy, etc. This is great, and a classic example of how the free market helps yield environmental benefits that are beyond the reach of U.S. regulators.

But it is too easy for carbon credit producers to fudge the numbers, selling credits that cost them nothing to produce and don’t induce behavior changes that cut emissions. Examples include preservation for forests that were never in danger and payments to renewable energy suppliers that would have been in business, credits aside.

One concern is that the market response to these controversies will be to walk away from carbon offsets altogether. If this happens, however, it could seriously stymie climate progress. There are billions of tons of greenhouse gas emissions that could be avoided with carbon markets.

In fact, McKinsey estimates that carbon markets could offset emissions by anywhere between 2 to 13 billion metric tons per year, making a big impact on the global yearly emissions rate of 50 billion tons. That is more than enough to offset international aviation emissions plus U.S. industrial emissions. Forgoing carbon offsets means abandoning their potential climate benefits, which is obviously inadvisable. Not to mention, carbon offsets are paid for with private money, meaning these markets can capture emission abatement opportunities that don’t rely on taxing the public.

There is clearly big potential benefit in refined carbon offset markets, but unlocking it is challenged by how fraud distorts pricing. Prices are always determined by supply and demand, and in carbon offset markets, weak verification leads to high supply while controversy lowers demand.

Carbon offsets are cheap, usually under $10, and these prices are too low to stimulate the many potential emission abatement opportunities. In agriculture and forestry, there is an estimated emission abatement potential of between half a billion to 1.1 billion metric tons by 2030. But most farmers say they will only undertake changes if offered a payment of $60 per acre, yet they are typically offered $10 – $20.

We know cutting fraud from the carbon offset market is good for the climate and economy as more dollars will flow to genuine emission abatement opportunities, lowering emissions. And this will properly align market incentives for investments that lower the cost of emission abatement rather than reward fraud. Currently, there are few ways to reduce fraud.

One effort underway to improve carbon offset credibility is through work done by the Integrity Council for the Voluntary Carbon Market, which has a simple theory of change: “build integrity and scale will follow.” More scandal and fraud are seen as preventing carbon markets from achieving their potential. Most markets are, to a degree, self-regulating because consumers don’t like to buy low-quality products or be defrauded. But carbon markets are so complex that it’s hard for buyers to know what is fraudulent, and this makes it difficult for potential critics to chastise buyers of fraudulent credits. These dynamics stifle the self-regulating aspect of carbon markets, meaning some change is warranted.

One way to improve carbon markets with minimal policy change is to modify existing governmental and international programs that utilize or promote offsets and establish definitions that prevent fraud. For example, there is a program dedicated to offsetting international air travel emissions called CORSIA, and the United States could petition the United Nations’ body overseeing it to set higher offset quality standards. There are also new U.S. governmental efforts underway since passage of the Growing Climate Solutions Act last year that create opportunities to improve the definition of what counts as a carbon offset and could induce private markets to follow suit.

Issues with carbon markets are ultimately fixable. Given the enormous potential climate benefits they offer at low cost, they deserve improved credibility. The only real barriers are quality and confidence, and these are well worth overcoming.