Carbon Credits Found to Be Mostly ‘Ineffective’ in Key Study
The world’s top arbiter of corporate climate goals has described as mostly “ineffective” a financial instrument that’s used by a number of major companies to back up their emissions claims.
The Science Based Targets initiative, the de facto global regulator of private-sector CO2 targets, said that its review of third-party studies indicates that “various types of carbon credits are ineffective in delivering their intended mitigation outcomes,” in a report published on Tuesday. What’s more, corporate use of carbon credits could stall decarbonization efforts and reduce the flow of climate finance, SBTi said.
The report is likely to reverberate through the market for carbon offsets, already tainted by allegations of greenwashing. In April, SBTi’s board was itself the subject of controversy after appearing to sanction a wider use of carbon credits, sparking cheers from offset-market participants but criticism from climate scientists and environmental groups.
Alberto Carrillo Pineda, SBTi’s chief technical officer, said in an interview that the goal of the review is to “bring a more nuanced approach” to a topic that has attracted “very entrenched, very polarized positions.”
When done right, a carbon credit represents one ton of CO2 emissions that have been removed from — or not added to — the atmosphere, typically generated from forestry or renewable energy projects. Demand for such credits — a market that BloombergNEF has estimated could grow to $1 trillion from roughly $2 billion today — stems from a realization that companies will struggle to deliver the outright emissions cuts needed to align with the goal of limiting global warming to 1.5C.
“These instruments can have value if they’re used in the right way, and also if they incentivize the right outcomes,” Pineda said.
There are currently high-level efforts in place to address the risks associated with trading carbon credits. These include new US guidelines to restore confidence in the voluntary carbon market (VCM), which Treasury Secretary Janet Yellen has said can become a “powerful ally” against climate change if done right. The US Commodity Futures Trading Commission is also working on finalizing its guidance on carbon credits, with a rulebook expected by the end of the year.
Details from the SBTi report:
“The vast majority of evidence submissions (84%) argue that treating carbon credits as fungible with other sources, sinks, or reductions of emissions is inadvisable, illogical, or damaging to global mitigation goals, with the other submissions not providing a strong view. Around half of the evidence submissions explicitly support the use of contribution claims over offsetting/compensation/ counterbalancing claims,” SBTi said.
SBTi received 111 unique pieces of evidence on carbon credits spanning research studies to white papers. The report is part of a broader package of research released on Tuesday that will inform an update of the group’s Corporate Net-Zero Standard, which is SBTi’s blueprint for corporate decarbonization.
The group also published an analysis on target-setting for Scope 3 emissions, putting forward several ideas for how to tackle this crucial, yet notoriously difficult, part of carbon accounting. One idea floated is to explore whether other metrics beyond aggregate Scope 3 emissions would better assess and communicate corporate climate performance, such as the alignment of a company’s procurement and revenue generation with global climate goals.
SBTi has been through a turbulent few months since its perceived embrace of carbon credits in April, including the departure of its chief executive officer due to “personal reasons.” The Technical Council of scientists and academics tasked with monitoring SBTi’s work went so far as to warn of lasting reputational damage, after the board’s conclusions weren’t cleared with the rest of the organization and appeared to breach SBTi’s approved procedures.
SBTi has said that the earlier statement on carbon credits was misinterpreted and that today’s report should bring greater clarity.
What SBTi said in April “was the board exercising its role to provide strategic direction,” Sue Jenny Ehr, the group’s interim CEO, said in an interview. “Not everyone interpreted the statement in the way in which it was intended.”
Even so, SBTi “did take notice” and will now work to be “more deliberative and careful, and utilize terminology that we hope on a going-forward basis will be better understood,” Ehr said. She added that the board wasn’t involved in the development of the research papers behind the review.
Readers of Tuesday’s report should be aware of its limitations, SBTi said and cautioned against drawing broad conclusions. The findings are specific to the evidence SBTi reviewed and should not be “generalized beyond this.” Further research into various related topics may be required, SBTi said.
To underline the sensitivity of the debate around carbon credits, SBTi staff working on the report were required to sign non-disclosure agreements, according to people familiar with the matter. Attendees at a closed-door focus group hosted by SBTi in May were also asked to sign NDAs, one of the people said.
The findings published by SBTi go a long way to supporting the group’s credibility, according to industry insiders. Thomas Day, carbon markets expert at New Climate Institute, an environmental nonprofit, said the review’s focus on the science around carbon credits puts SBTi “back on track to remain relevant for company transformation.”
“This is a very welcome development, given the enormous amount of pressure and interference the initiative appears to have faced in recent months,” said Day. “Powerful individuals and corporations with private interests must not be able to write their own rules.”
Tuesday’s report represents “an opportunity for us to continue to move forward, to work together constructively with our internal and external partners, and try to really bring forward real value to the climate community,” said Ehr.
