Europe's voluntary carbon market risks being swamped by old offset credits

The voluntary carbon emissions offset market risks being swamped by the supply of 600 million-700 million tons of credits related to existing offsetting projects, with some of those credits having "dubious claims of environmental additionality," according to a study by climate policy advisors Trove Research and academics at University College London.

"Older projects that were registered in previous eras with poorer quality controls have continued to issue credits, and the volume of legacy credits in the system is now very sizable in relation to demand," the report's authors state in the study published in January, warning that the purchase of many of those credits offer little benefit in reducing future emissions.

The report focuses in particular on credits for projects that complied with the Clean Development Mechanism (CDM) that was formulated by the Kyoto Protocol of 1997, the international agreement to reduce emissions that came into force in 2005. CDMs allow emissions-reducing projects in developing countries to earn certified emission reduction (CER) credits. "If the vast quantity of CDM credits created under the Kyoto Protocol remain valid for country-level compliance, the intentions of governments to genuinely reduce emissions under the [2015] Paris Agreement will be greatly threatened," the report warns. "There is also an even larger volume of credits in the CDM system that, in theory, could back-issue credits up to 2020. The maximum theoretical volume that could be used from the CDM registries could increase from 100 million tons to a maximum of 6,800 million tons of carbon dioxide emissions. If this supply came to market it would swamp demand by 50 to 60 times," the report says.

CER March 2021 futures on ICE settled at 0.35 euro/mt on 14 January, 2021, lower than OPIS's weighted average assessments for voluntary REDD+ credits under Verra at $6.583/mt for vintage 2020. Meanwhile OPIS assessment for Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) eligible offsets (CEOs) was at $0.865/mt on Thursday, with CERs from renewable projects under the CDM and verified carbon units from Verra setting the price for CEOs so far, according to sources. Offset projects with their first issuance date for credits from and after Jan. 1, 2016, are eligible under CORSIA.

The researchers propose three measures to combat the potential risk of old carbon credits undermining the goals of the voluntary carbon offset market.

First, they say that the five registries of carbon offset projects -- Verra, Gold Standard, American Carbon Registry, Climate Action Reserve and Plan Vivo -- should "clean their registries of low-quality legacy projects."

However, the authors say, "an obvious difficulty is that the registries have contractual obligations to the developers who have undergone the process of registering and validating their projects, and paying for credits to be issued."

A second solution could come in the form of an independent body that would oversee the integrity of the market, the report says. "Part of this organization's role could be to decide on how to restrict the use of legacy credits," the authors wrote. The creation of such a body is being discussed by the Taskforce on Scaling the Voluntary Carbon Markets that was launched last year by former governor of the Bank of England, Mark Carney, who is now the UN's special envoy for climate action.

Finally, the report argues that "a consumer-led approach" could help to see "a drive to only buy high quality credits [with] guidance [being] issued by independent organizations advising buyers on the authenticity of the bought credits."

Article written by OPIS editors Anthony Lane and Nandita Lal.