In the years since the voluntary carbon market was put on the map by the Paris Agreement, it has grown at an astronomical rate. Its value quadrupled from under $200 million in 2016 to $2 billion in 2021, prompting projections of $1 trillion by 2037 by hopeful analysts in 2022. Tailwinds accelerated in the form of regulatory progress on corporate disclosures—particularly the EU Corporate Sustainability Reporting Directive (CSRD) and the U.S. Securities and Exchange Commission (SEC)—and environmental, social, and governance (ESG) investor pressure.
Then came the PR backlash.
Beginning last year, an abundance of negative headlines threw into doubt claims about project and credit quality. Demand dipped, prices dropped, and the gap grew between credit issuance and retirement. Today, the voluntary carbon market has serious trust issues. If they are to realize its ambitious growth potential, market participants cannot ignore the jitters impeding buyer demand.
Bad Press Gives Buyers Pause
Through our own conversations with institutional sellers of carbon credits, we are finding anecdotal evidence for escalating anxiety at the point of sale. “Buyers are becoming more concerned about their reputational risk,” conceded one broker, while another added that, increasingly, customers “want assurance that their credits will not be downgraded or invalidated after purchase.” Unsurprisingly, their trepidation has consequences for due diligence. “Buyers want to trace the impact of their purchase all the way through to the project and its co-benefits,” explained a Big Four consultancy. A major marketplace remarked, “sales transaction times are lengthening.”
The data backs up what market participants are seeing. In a survey of 502 business leaders in July and August 2022, Conservation International found that senior managers almost unanimously (89%) agree that carbon credits are an important or very important tool with which to compensate for or neutralize emissions. Despite widespread consensus behind closed doors, however, businesses admit to “shying away from further investment due to concerns with the rapidly evolving market.”
Other recent studies reach similar conclusions. In a co-authored report published in early 2023, the World Economic Forum and Bain & Co. found less than 25% of corporations plan to use carbon credits despite 90% having net-zero targets. Of those canvassed, 50% cited “imperfections and a lack of transparency” as their reason for nonparticipation in the voluntary carbon market, while 40% fear “the reputational risk of participating, with concern about public criticism, including legal action.” In its review of the industry, issued in March of this year, South Pole reported just 13% of companies with science-based targets have also adopted carbon credits.
Crisis of Confidence Is a Catch-22
The crisis of confidence is bad for buyers, bad for sellers, and, most importantly, bad for the environment. If they fail to offset their residual emissions, many would-be corporate buyers will fall short of their net-zero targets (and shareholder expectations). If demand fluctuates, sellers of carbon credits must contend with additional market risk on top of already-significant upfront time and capital investment. Finally, less money in the voluntary carbon market means less money for environmental solutions such as greentech innovation and biodiversity conservation.
The good news? Despite highlighting headwinds to adoption, recent research also underscores the scale of the opportunity—if market jitters can be assuaged. Of global listed companies with net-zero targets, just 2% have ruled out carbon offsetting entirely, according to Net Zero Tracker. Some 40% plan to become buyers if they are not already, which leaves nearly 60% that have yet to decide or disclose.
What can be done to convince them?
Introducing Carbon Protect™If corporate buyers have more confidence in the offsetting portion of their climate commitments, then sellers will be assured more liquidity and environmental solutions more capital. For that reason, Oka, The Carbon Insurance Company™ is introducing the carbon credit insurance solution Carbon Protect™. On top of additional benefits, such as reputation defense and proactive risk monitoring, Carbon Protect replaces or augments carbon credits in the event of several high-risk scenarios.
1. Invalidation risk should the credit certification be canceled or voided due to any one of the following perils:
a. Non-additionality: Your carbon credits must be deemed “additional” by a registry and verifiers. This means that the credits remove carbon from the atmosphere that would not have been removed if the associated project had not existed. New information can come to light that causes the registry to change its assessment of your credits’ additionality, leading to them being invalidated.
b. Over-crediting: Your carbon credits are subject to central oversight by registries and verifiers. They use detailed methodologies to establish how many credits are produced by a project. However, scientific advances sometimes uncover issues that cause the registry to change their methodology. Separately, an incorrect baseline could have been used to measure the amount of carbon being removed. These discoveries could invalidate previously issued credits.
c. Double-issuance or double-claiming: More than one project may claim the same carbon being removed or more than one entity could count the carbon removed by your credit in its own carbon offset goals.
d. Project fraud: The project owner could intentionally misrepresent the carbon removed by your credits for financial gain.
2. Reversal risk should the carbon reduction claimed by a project be negated, which happens when the carbon is released back into the atmosphere. This can be caused by the following perils:
a. Natural catastrophe: Floods, fires, storms, drought, or other catastrophic events may destroy all or part of the related project, ultimately invalidating carbon credits linked to that project.
b. Human misconduct or negligence: Illegal logging or poor forestry management caused by human actors.
By guaranteeing the investment and reputation of end buyers, Carbon Protect unlocks liquidity benefits for every point in the value chain—and integrity for the market as a whole.