The Centre for Economic Policy Research is a European think tank, with offices in Paris, London, and Berlin. CEPR recently published a VoxEU column titled, “An autopsy of the voluntary carbon market.”
It is written by Ugo Panizza, vice president of CEPR and professor of economics at Geneva Graduate Institute, Francesco Tripoli, doctoral student at Harvard Business School, and Beatrice Weder di Mauro, president of CEPR and professor of global economics, climate and nature finance at Geneva Graduate Insitute.
The column starts by outlining two options that companies have to reduce net emissions:
reducing emissions by changing production or investing in more efficient equipment; or
buying and retiring carbon credits.
As buying carbon credits is often cheaper, “the offset market blunts firms’ incentives to cut emissions”, CEPR writes. Companies can claim lower emissions while avoiding the costs of improving the production process to reduce their emissions.
CEPR writes that,
This would not be a big issue if the market worked well, if there were a large supply of offsets that are linked to activities that actually remove carbon from the atmosphere, and firms had to buy these offsets bringing their price to equal the marginal cost of abatement. Unfortunately, none of these conditions holds. When we started working on the voluntary carbon market with the idea of conducting an anatomy of this market, we soon realised that what we were doing was closer to an autopsy.
The issue of low-quality carbon credits has long been raised by academics, NGOs, and journalists. In January 2023, reporting by The Guardian, Die Zeit, and Source Material revealed that more than 90% of Verra’s rainforest carbon credits were worthless. As a result, many companies stopped buying carbon credits.
CEPR used three data sources:
a dataset from Allied Offsets that covers more than 36,000 projects with carbon credit retirements linked to corporate buyers;
the disclosed emissions of those same firms; and
the firms’ financial accounts.
Four problems
CEPR highlights four problems. The first problem is that avoidance projects dominate the market. These projects claim carbon credits for emissions that did not happen. The number of carbon credits generated is calculated against a hypothetical world in which the project did not exist. This is the counterfactual baseline problem — predicting what would have happened without the project is impossible to verify, because the project did go ahead.
The second problem is that while registries have issued about 5 billion carbon credits, the majority have not been retired. 3.5 billion carbon credits are unused. “The result is a market for lemons, where cheap and doubtful credits crowd out the good ones,” CEPR writes.
The sellers know that the carbon credits are junk, but the buyers don’t.
The third problem is that a small number of “flagship projects” accounts for most retirements. Demand stopped growing after 2023.
The fourth problem involves the price of carbon credits. According to carbon accounting, one carbon credit is supposed to represent one tonne of greenhouse gas emissions. “A single price should therefore prevail,” CEPR notes. “It does not.”
Companies that stopped buying credits reduced emissions more
After the January 2023 investigation revealed that the vast majority of Verra’s rainforest credits were junk, companies split into two groups. Some companies stopped buying credits, while others continued.
CEPR found that the emissions of these two groups diverge. Companies that stopped buying credits cut Scope 1 emissions (from the company’s own operations) by about 20% more than companies that kept buying credits. Scope 2 emissions (from the company’s purchases of electricity) fell slightly. Scope 3 emissions (from suppliers and customers) were unchanged.
CEPR writes that,
Most work on the voluntary carbon market polices the supply side. Our finding, that the option to offset substitutes for a firm's own abatement, suggests that the policy conversation should also address what drives demand.
Abolish offsets
Perhaps surprisingly, CEPR concludes that, “The answer is not to abolish offsets,” because aviation, cement and “other hard-to-abate sectors” will need them. This is a bizarre conclusion to an otherwise useful overview of some of the problems with carbon credits.
In the introduction to the column, CEPR acknowledges that, “Even a market of flawless credits could still slow real decarbonisation.” CEPR’s researchers write that they are carrying out an “autopsy” of the voluntary carbon market, which suggests strongly that the market is dead.
About half way through the column, they put the “patient” on the table to look at its symptoms, which suggests we might be dealing with a zombie. Again.
The “hard-to-abate sectors” are exactly the sectors that must urgently make massive reductions in greenhouse gas emissions. Allowing these sectors to continue buying credits would mean allowing carbon credits to continue playing their role as a dangerous distraction from the urgent need to leave fossil fuels in the ground.
The fifth problem is that the underlying assumption - that carbon taken up in trees or by some similar process - is the negative of adding carbon dioxide to the atmosphere by burning fossil fuels, is wrong. While the simple subtraction of a sequestered quantity from an emitted quantity is allowable under carbon accounting rules, the result of that subtraction is not a meaningful measure of climate harm. The problem is that when an emitter buys offsets, they subtract the quantity of offsets they bought from their emissions and use the lower number - the so-called “net emissions” - as a indicator of how well they are looking after the interests of future generations. This claim is false. I explore the three arguments for why the concept of “net emissions” is false in this video: https://youtu.be/SaFa778OsRI?si=4TngvGfAdXER6pgA