Busting Carbon Credit Myths

Delta Air Lines, JetBlue, and easyJet are among a growing number of airlines beating a retreat from the voluntary carbon market (VCM), as mounting controversies call into question the role of carbon credits in corporate decarbonization strategies. In the hard-to-abate energy sector, offsetting leader Shell has executed an unexpected U-turn from prior verbal and financial commitments.  Here’s what critics are getting wrong—and right—about carbon credits.

In 2017, Article 6 ink was still drying on the Paris Agreement, and the VCM appeared poised for explosive growth. Six years later, the situation is more “explosive,” less “growth.” Besieged by controversies concentrated mostly in the first half of 2023, the VCM has cooled on slowing demand. Corporate purchases fell 9% compared to credits retired (93 nm) in the first half of 2022, according to Trove Research estimates cited in the Financial Times, driving down prices by 10% relative to last August. 

In theory, lower prices should stimulate more purchases. In practice, the headwind is proving both systemic and entrenched. Fearing greenwash accusations, companies reevaluate how and where they incorporate carbon credits into their net-zero pathways. The VCM has serious flaws that require urgent attention; at the same time (and as the Financial Times also reports), market liquidity today could avert climate catastrophe tomorrow. In the interest of (2), every public and private organization within the VCM must squarely address (1).

Flying Too Close to the Sun

The about-turn has been particularly pronounced in the airline industry, where one company has borne the brunt of recent controversy. The Financial Times reports that Delta Air Lines accounted for more than a tenth of all carbon credits used between 2020 and 2022, on which grounds it advertised itself as “the world’s first carbon-neutral airline.” In May, a class-action lawsuit challenged that claim and, by extension, its supporting carbon-reduction calculations.

Two of the most popular criticisms leveled at carbon credits have legs — but the reality is more nuanced than either side of the docket would suggest.

Criticism #1: “Carbon credits are a license to keep polluting.”

Reality: Carbon credits are a license to keep operating while decarbonizing, but corporate claims deserve scrutiny in the absence of regulation. Decarbonizing a business and offsetting its emissions (in that particular order) go hand in hand. In its Claims Code of Practice published this June, integrity body the Voluntary Carbon Markets Integrity Initiative (VCMI) recommended that companies use credits only once they have cut emissions and as only one part of any net-zero strategy. The advice is long-held wisdom to the average corporate buyer, which has in place (according to research) more ambitious and better-funded decarbonization targets than its non-buyer peers. Moreover, there is no evidence that withdrawing from the VCM translates into a meaningful difference in operating emissions as companies “redirect their focus” toward their business models. Notwithstanding the very real phenomenon of “greenhushing,” it follows that the average buyer of carbon credits cannot, meaningfully and at present, reduce their primary emissions immediately. Hard-to-abate sectors are the biggest buyers of carbon credits precisely because the low-carbon technology does not yet exist. Credits afford them time. Instead of carbon credits, airlines such as JetBlue and EasyJet have pivoted entirely to Sustainable Aviation Fuel (SAF), the only means by which the industry can achieve true carbon neutrality. The intent and investment are important, but SAF is years, if not decades, from being commercially viable. In the interim, disavowing carbon credits means many more emissions will be released into the atmosphere on a net basis. That is potentially catastrophic, given carbon released today has an exponential or compounding impact on tomorrow’s climate.

Criticism #2: “Carbon credits have no environmental benefits.”

Reality: Carbon credits have environmental and social benefits, but project quality deserves scrutiny in the absence of regulation. High-quality carbon credits, such as those that align with the Integrity Council for the Voluntary Carbon Market (ICVCM)’s Core Carbon Principles and associated Assessment Framework, do more than  mitigate environmental damage by pulling carbon from the atmosphere. They also deliver sustainability co-benefits to local communities, promoting employment and investment opportunities in climate-vulnerable communities (which have, despite pushing for “loss and damage” reparations from developed nations, gained little else by way of redistributive justice). Perhaps most importantly, VCM liquidity can help subsidize clean-energy development and costs in developing countries and green-technology innovation globally. Counterintuitively, however, carbon credits are not created equal. Evidence of additionality and permanence—two of the most important quality metrics—vary between projects. For instance, data suggest that just “50% of 90 REDD+ projects and only 30% of 1830 Renewable Energy registered projects already provide evidence that income from carbon credits was considered prior to the project’s inception,” thus falling short of ICVCM industry standards. Corporate buyers can control what they claim about their carbon credits, but the quality of those purchases is one or more degrees removed from their purview. That may be daunting, but the alternative—“greenhushing,” or withdrawing from environmental commitments—is less viable by the day. Regulators and shareholders are beginning to mandate disclosures from international and publicly listed businesses, supported by concrete disclosure frameworks, such as the International Sustainability Standards Board (ISSB) sustainability reporting standards and impending U.S. Securities and Exchange Commission (SEC) Climate Disclosure Rules.

How Should Corporate Buyers Move Forward?

Private markets need private-market solutions. Just as they have in capital markets, credit ratings—such as those provided by Sylvera, with whom we recently entered a partnership—and insurance solutions, such as Carbon Protect™, can help companies identify high-quality credits and provide post-purchase financial and reputational protection. By directing our collective data and modeling capabilities at often-inscrutable projects, no matter the origin, we aim to provide an additional verification and validation screen to mitigate client uncertainty and foster market integrity. No longer in its honeymoon period and not yet a fully sophisticated market, the VCM is (perhaps inevitably) acutely vulnerable to exploitation by a minority of project developers and corporate buyers. Those are, however, an exception and not the rule. High-quality and used appropriately, carbon credits can foster environmental and social progress and accelerate technological development, all while keeping the economy from collapsing. To that end, we must focus our collective efforts on eradicating poor-quality carbon credits and misleading corporate claims rather than giving up on the market completely.

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