How Can We Increase the Effectiveness of Carbon Credit Markets?

It all started with good intentions

Article 6 of the Paris Agreement... Of course Paris! Somehow the Parisians managed to be in the centre of everything yet again. But back to the point, Article 6 introduces the trading scheme for voluntary carbon markets. Under this umbrella, a vast collection of offsetting carbon projects are being traded. The carbon credits market consist of three essential parties:

• the buyer: a company interested in offsetting their emissions,
• the seller: an organisation responsible for taking actions to mitigate the emissions that without its intervention would have happened,
• the certifying body or “the middle man”: an entity that verifies the seller's efforts and issues “carbon credits” to certify the project’s contributions in reducing the emissions.

Project types vary in terms of technology, approaches and expected reduction in emissions. For instance, if an adaptation of certain procedures in agriculture will result in mitigation of CO2 emissions, the difference can be assessed, certified and the corresponding difference sold to an interested buyer to offset his emissions. 

Project developers can acquire a parcel of degraded land and engage in reforestation to capture some of the CO2 from the atmosphere (ARR projects - Afforestation, Reforestation and Revegetation), and use the profits for the benefit of the local community and/or expand the project. Analogously, this scheme can be used to protect existing forests from degradation and logging through conservation activities (e.g. REDD+ initiatives - Reducing Emissions from Deforestation and forest Degradation, plus the sustainable management of forests).

Project developers and local communities can use the funds for their sustainable development, rating bodies pocket their middlemen fees and finally buyers can offset their emissions to facilitate their transition to net zero with all the bragging rights that come along.

So what could possibly go wrong?

Someone decided to make extra cash

The key to understanding the carbon credit pricing is the concept of baseline. The baseline is the “what if” scenario or rather “what if not” scenario that represents business as usual where no action is taken. Let's zoom in into the specific context of forestry. Baseline for ARR projects is quite straightforward. First, one must prove that the land was deforested at least 10-15 years before the start of the project (depending on the local regulations, and certifier’s specification). Here remote sensing comes in handy. Publicly available archives such as MODIS, Landast and Copernicus enable baseline evaluation for all interested parties and external auditors alike regardless of the project’s location. Once the baseline is established the projected carbon offsets can be calculated based on species planted and other auxiliary data about expected growth. This case is easier.

What happens in the case of preserving the forest under REDD+ projects? How are the so-called “avoided deforestation credits” (ADC) issued and valued? Clearly the baseline for this one is a lot more complicated, business as usual scenario means “forest was, forest is”. The catch is that the forest might be in danger! Here comes the point of contention for the ADC-oriented projects. If the destruction of the forest is prevented then clearly it is a net gain or a reduction in emission. But if the forest was never in danger, the proposed offset is zero and the ADC is worthless. Now the picture of a skewed incentive structure unfolds.

In the triangle buyer-seller-certifiers everyone tends to overestimate the deforestation risk. It could be done with an outright fraud by artificially inflating the risk with a suitable paperwork testifying to immediate logging planned. Or in the most common case by choosing a reference-control area (aka. the baseline) with high deforestation risk that does not correspond to the condition in the area of interest. The latter case can play out  by choosing a project in the middle of the large forest far from large settlements and road infrastructure. But the corresponding baseline area would be located at the forest edge next to a large settlement with extensive infrastructure and a history of logging. This fact was promptly pointed out in a number of publications with the most recent and publicised case being the January 18 article in The Guardian that brought this issue to the direct spotlight of public attention. The article, itself sourced from three scientific papers, (Thales A. et al.  , Guizar‐Coutiño, Alejandro, et al. 2022 ,Thales A et al. 2020, ) sparked a discussion about the legitimacy of the ADC.  Part of the controversy caused by this article can be attributed to the difference in the way that a baseline is established. The go-to solution of the industry is the Jurisdictional and Nested REDD+ (JNR), methodology that derives the risk score from a temporal series of forest-non forest maps. It is a simple and robust solution that relies only on deforestation rates in the local administrative region. However, it is the JNR assessment that allows for artificial risk inflation. Guizar‐Coutiño, Alejandro, et al. 2022 used a different approach. In their work they incorporate a number of risk-associated factors in their calculations such as: slope, elevation, terrestrial biome, and country. For all each of the analysed REDD projects a number of sites with similar risk-associated factors are considered. Then a synthetic “average expected deforestation rate” for the “no intervention-business as usual” case is drawn from the similar sites. This approach gives less extreme risk estimates but is the extra complexity making the whole process more robust and transparent?

How can we avoid unnecessary evil?

Since the publication, the discussion of the ADC evaluation schemas is gaining momentum and there seems to be three clear ways that can be taken onwards:

Lets look at some of the proposed solutions:

• Avoid the ADC all together

This might be a little bit extreme but in the end it is the only sure way to exclude the interpretation and subjective accounting from the equation. It will also boost the reputation of the carbon credit as a whole. 

• Stick to the current methodologies

Current methods are not perfect but at least their deficiencies are well known. Furthermore, for most of the cases the ADC is the only incentive for the local community to preserve the forests. Flawed it might be but with the lack of funding for the conservation efforts and increasing cost of capital it seems like a lesser evil.

• Introduce a more holistic risk assessment

Past deforestation in a larger administrative area is certainly not always the most suitable way of calculating the deforestation risk. However, choosing which of the risk-contributing factors are worth incorporating in the risk assessment depends on particular conditions.

This approach certainly results in lower evaluation of the projects that is to be expected after this bubble burst. Hence the downside of this approach is that in the short term it will result in less money for the conservation projects over all.

Our response

On Orbify platform you can easily compare the results of the JNR with our take on the risk assessment. We also include anthropogenic risk assessment that factors in things like accessibility by communication infrastructure, agriculture & pasture expansion, combined with natural hazard risks. This is supposed to yield the highest level of objectivity when it comes to establishing the effectiveness of the conservation project and the value of the carbon credits that it will produce.

Orbify platform in action

• What’s next?

To take it a step further we’ve called an expert panel to see how our proposed approach on increasing the effectiveness of ADCs will be met by all players of the carbon market. In addition we would like to address another glaring issue: transparency when it comes to the use of funds that can also be improved with the inclusion of certain technology. The panel will take place on Tuesday, May 23rd at 4pm CET, you can save your spot here.