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Green Finance
Credibility crunch slows carbon credit demand
Fear of reputational risk from buying low-quality offsets, increased scrutiny in the offing
Bayani S. Cruz 3 Feb 2023

The long-term growth of the voluntary carbon markets (VCMs) is facing the challenge of dampening demand for carbon credits, which began in 2022 and was brought on by scepticism arising from scandalous allegations of greenwashing and weak best practices.

The volume of voluntary carbon credits (VCCs), which had been growing steadily since 2016, reached its peak in 2021 when approximately 354 million tons of carbon-dioxide equivalent (mtCO2e) of credits were issued and 162mtCO2e of credits were retired. However, in 2022, VCC volumes dropped sharply (21.25%) to 279mtCO2e of credits issued and 16mtCO2e retired, according to data from Climate Focus.

During the same period, investments in VCM projects grew to US$10 billion in 2022, up from US$7 billion in 2021, and yet the carbon market failed to grow last year, notes BloombergBNEF’s Long-Term Carbon Offsets Outlook published in January. And firms investing in VCCs bought only 155 million carbon credits as offsets in 2022, down 4% from 2021.

There is a consensus among VCM investors that the major reason for the sudden drop in VCC investments is the fear of reputational risk from buying low-quality credits.

Aurelia Britsch, Sustainable Fitch’s senior director, best sums up the prospects for VCMs in 2023 by saying: “Several factors, including the increased scrutiny into offsetting practices and greenwashing, the challenging macroeconomic environment and the progress made at defining good practice in the market, are dampening the demand for carbon credits in 2023.”

Public allegations of greenwashing, in particular, are likely to cast dark shadows over the growth of the market since addressing the root of these allegations would involve a sizable, concerted effort among all stakeholders focused on an overall strengthening of best practices.

For those who are not aware, an investigative report published in major European media outlets in January 2023 claims that 94% of the rainforest offset credits verified by Verra, the world’s leading carbon standard, are likely to be “phantom credits” that do not represent genuine carbon reductions. These REDD+ projects (the acronym stands for reduced emissions from deforestation and degradation and the + is added to include sustainable management and the conservation of biodiversity) are among the most commonly used by companies and have been criticized on their actual effectiveness.

The report was the product of a nine-month investigation that has been undertaken by the London-based Guardian newspaper, the German weekly Die Zeit and SourceMaterial, a non-profit investigative journalism organisation. It is based on a new analysis of scientific studies of Verra’s rainforest schemes.

Several rebuttals have been published by market participants. For example, Sylvera, a carbon offset ratings provider, estimated in a 2022 study of over 85% of REDD+ credits on the market that 31% of them are of high quality and have sound and credible baselines.

“While this is significantly higher than the 6% figure quoted by The Guardian, it still means that about two-thirds of this type of offset are subpar,” Britsch notes. “ [Because of these,] the voluntary carbon markets are facing a credibility test in 2023 over the quality of offsets and the lack of regulation, and the reputational risks for buyers have increased and some market participants are in fact reconsidering their offsetting strategies altogether.”

A key trend in 2023 and beyond is the heightened examination by investors and regulators of carbon accounting practices, net-zero claims and credible transition plans, and increased efforts from authorities to tackle greenwashing. As a result, corporations, Britsch shares, could keep a cautious approach regarding offsetting, which suffers from a growing lack of credibility.

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