July 1, 2021

Negative Emissions Platform: In many people’s minds, there is a classic opposition between the EU’s emissions trading market and voluntary carbon markets, in the sense that one is regulated and the others are self-regulated markets that companies can choose to participate in or not. Would you agree with this view?

Peter Vis: The concept of a voluntary carbon markets co-existing with ‘compliance’ markets can be confusing. Why would companies buy carbon credits voluntarily unless they must? ‘Compliance’ carbon markets are based on mandatory obligations created by regulation, such as the European Union’s Emissions Trading System (EU ETS). Companies have no choice whether to be covered by the EU ETS, and the supply of emissions ‘allowances’ is strictly controlled. In contrast, voluntary carbon markets stem from voluntary commitments by companies whose activities are not covered by the EU ETS. Companies participate in such markets when they voluntarily commit to contribute to reducing greenhouse gases – either because they feel it is the right thing to do, or because that is what their customers want to see them do. The contribution often takes the form of buying ‘credits’ generated from projects that have avoided, reduced or removed greenhouse gas emissions. By buying credits, companies contribute to financing emissions reduction projects. But successful markets need rules and effective oversight to function properly. 

Environmental integrity and robust carbon accounting should be the guiding principles of any market that claims to benefit the environment. Ambitious voluntary commitments by companies are to be welcomed, of course, but voluntary carbon markets must not be a substitute for companies minimising their own emissions if economically feasible. Also, ‘credits’ that companies buy must represent real reductions or removals of emissions, and not amount to ‘greenwashing’. With respect to this, many players today are calling for a solid voluntary market oversight that both companies and the public can trust. But will that call be heard?

“Credits that companies buy must represent real reductions or removals of emissions, and not amount to greenwashing” 

NEP: At the 2019 UN General Assembly and during the New York Climate Week, there was a narrative that while national governments had failed to produce a strong climate commitments, the private sector was stepping up and showing its willingness to go beyond existing obligations. Don't you think that the media and commentators have been a bit too quick to give credit (no pun intended) to pledges from the private sector? 

Peter Vis: Indeed, in recent years, an increasing number of private companies and public bodies want to demonstrate their support for the Paris Agreement by showing willingness to act beyond what is asked of them. To do this, many are turning to voluntary carbon markets to use carbon credits to ‘offset’ their emissions, in some cases claiming that their products, services, or businesses are carbon- or climate-neutral. 

 A solid governance system for the voluntary carbon market would allow for these claims to trusted as reinforcing the impact of mandatory climate policies, in turn ensuring that private sector pledges are much more than words. This is how you see that private sector pledges and national commitments are, in fact, 2 sides of the same coin.

NEP: So, how do you build a well-governed, well-regulated market for carbon, one that cannot be cheated?

Peter Vis: There are several aspects to consider and conditions to apply. First and foremost, a well-functioning market system is based on confidence. Buyers of carbon credits need to believe that what they pay for is real and sellers must demonstrate that what they sell is worth the confidence of the buyer. An effective way to ensure that these conditions are met is to have a neutral third party providing independent verification of the credits being sold and the emissions being offset. Once used, credits must be cancelled so that they cannot be used again, and this use and cancellation must be done in a transparent manner. The case for these basic building blocks is made by the success of the EU ETS market, where total allowed emissions are capped and are being reduced progressively. Ex post emissions data per installation is transparently available. The result is that the EU ETS carbon price today is a little above €50 per tonne of CO2-equivalent. Significant emissions reductions have been achieved, in the order of 35% since the EU ETS was introduced in 2005.

NEP: I feel like we are touching upon an important question here and maybe the reason why the Clean Development Mechanism (CDM) and Joint Implementation (JI) have failed as carbon market mechanisms. We have all these uncertainties about the principles supporting voluntary carbon markets and credits, but some of these markets have now been active for more than a decade. What does the result look like?

Peter Vis: The UN’s CDM and JI instruments oversight bodies are widely considered to have failed to act as independent and neutral referees, able to guarantee the environmental integrity of their credits. Prices for these credits have languished below US$1 for almost a decade. One problem that should not be underestimated is that the technologies or solutions deployed through CDM were often not additional. ‘Additionality’ means that the activity would not have happened without the finance provided by sale of the credits. A concrete example of where additionality is absent would be credits from the deployment of solar energy technology, for example, where it would already be cost-competitive with fossil fuels. If that is the case, the added value of the credit amounts to no more than what would have happened anyway.

I always subscribe to the argument that an effective response is to use robust standards, including a solid baseline scenario for what would have happened without the credit. Otherwise, the creation of credits can too easily be inflated. Estimates vary, but there are certainly up to hundreds of millions of “low environmental integrity credits”, ones that do not credibly represent the declared quantity of emissions reductions or removals. Unfortunately, this applies to many forestry and land-based projects, and in particular to what are called ‘avoided deforestation’ projects, which are today linked to a large share of corporate offsets.

“You need removals rather than reductions to get to climate-neutrality”.

NEP: This sounds like a terrible state for any market to be in. Can voluntary carbon markets move forward from this, and what role could the EU play in solving the surplus of low-quality credits?

Peter Vis: I feel relatively optimistic! Europe is taking on ambitious target for 2030 and 2050, and there’s no doubt that Commission President von der Leyen is committed to climate change in a way that her predecessors were not.

Offsets are likely to be useful to meet these climate targets and it would be intellectually coherent for the EU to spend time on setting standards and getting the building blocks right – so that Europe can give offsets a second chance. It allowed CDM credits to be used under the EU ETS for a while, but that has now been discontinued, as there was just not enough certainty that these credits represented environmental added-value, and without that guarantee, what is the point? The carbon offsets market must be put back on its feet. What should be sought is a version of the voluntary carbon market that hangs between the EU ETS and the additional voluntary commitments that global companies want to develop.

NEP: There’s one last question that we haven’t touched upon, and it is the one of carbon offsets or reductions, versus carbon removals. Removals have a radically different, I would say more efficient, role to play in helping us to reach climate-neutrality. How do we ensure that we stop confusing reductions and removals?

Peter Vis:   It is true that you need removals rather than reductions to get to climate-neutrality, yet this is often missed. Altered voluntary market claims could helpfully reduce the amount of confusion through using ‘climate neutral’ labels only where robust removal offsets are used to compensate for emissions, and ‘emissions reduction’ labels are used when reduction or avoidance offsets are used.

By ‘robust’ removals, I mean removals where the carbon is sequestered ‘permanently’, such as when sealed underground for many decades and even centuries. No one can ever know whether carbon stored will one day be re-released, as a result of seismic activity for example, but in human terms carbon captured and stored for several decades – and probably much longer – provides a chance of avoiding the worst effects of climate change.

When removals are liable to be ‘reversed’, for example through forest fires or ploughing soil where carbon has been sequestered, then this should be stated as a risk, and the steps taken to mitigate the risk should be declared. One of the steps that need to be clarified is with whom liability lies in such cases of ‘reversals’, which will surely be addressed in the forthcoming regulatory framework for carbon dioxide removals that has been announced by the European Commission for 2023. 

 But we should be careful what we wish for: these ‘climate-neutral’ labels should not be a substitute for trying to reduce a company’s own emissions as much as economically feasible, and the costs of financing robust emissions removals will be much higher than CDM and JI credits! Indeed, if offset credits are cheap, companies should first ask themselves why and check their environmental integrity. Investments, notably in permanent removals, should be made as of now, before it is too late.