This post was revised for clarity on November 8, 2023
As urgency for climate action has hit an all-time high, trust in carbon credits has reached an all-time low. News reports highlighting the presence of low-quality credits have brought renewed scrutiny—and in some cases, increased regulatory oversight—over the use of carbon credits to offset emissions. With worsening trust in carbon credits and the voluntary carbon market, companies are re-evaluating their strategies and commitments. Some are abandoning carbon credits altogether.
That’s a mistake. Despite the evolving nature of the voluntary carbon market, purchasing high-quality carbon credits can be one of the most effective means of delivering climate benefits if it rewards good carbon projects. The voluntary carbon market is also necessary. Our climate outlook demands massive amounts of carbon reduction coupled with large-scale carbon removal to meet global decarbonization targets. The challenge for credit buyers is knowing how to separate the real, impactful credits from those that won’t deliver the promised emission reduction, removal, or avoidance.
Types of carbon credits: Reduction, Removal, and Avoidance
A carbon credit is a mechanism for one party to compensate another for the action of reducing, avoiding or removing carbon. Based on their net emissions impact, there are three types of carbon credits: carbon reduction, carbon removal, and carbon avoidance. Carbon avoidance is an action that prevents a carbon-emitting activity from happening. Carbon reduction is an action that decreases the amount of greenhouse gas emissions, compared to prior practices. Carbon removal is the process of removing carbon dioxide from the atmosphere and locking it away for decades, centuries, or millennia. For all three types, credits are measured and issued by assessing or estimating the climate impact from carbon credit purchases—specifically, how much carbon is avoided, reduced, or removed based on the purchase of the credit.
Credits are assessed in different ways depending on the type, but one of the most important indicators of quality is a project’s baseline—the level of greenhouse gasses in a business-as-usual scenario which allows project developers to compare net emissions impact of the project. Baselines must be accurately set, data-driven, and the resulting emissions impacts must be correctly calculated against those baselines. Avoidance, reduction, and removal are also three very different actions, and some actions present more challenges in establishing an accurate baseline. Without accurate baselines, the climate impact cannot be determined.
Carbon Reduction Credits
While carbon reduction must drive the majority of our push to net zero, the transmission mechanism of carbon reduction to a purchase of an external credit is challenging. Examples of carbon reduction credits include reducing fossil-fuel use by improving fuel efficiency, or programs that reduce the methane that is generated from farms or municipal waste processing. Reduction credits make up roughly 22% of certified credits on the voluntary carbon market.
Reduction credits are measured and quantified against baseline emissions of the existing technology or process. Some reduction credits are easy to track and measure, such as efficiency investments or destruction of fugitive methane. Other projects are more complex. For example, low-emission cookstove projects in developing regions rely on tracking patterns of cookstove use and quantifying emission factors for various fuel and stove combinations, both of which are hard to to do. The result, as studies have shown, sometimes leads to over-crediting.
Carbon Removal Credits
Projects that remove carbon come from a diverse set of solutions, from nature-based solutions like reforestation, to engineered solutions such as direct air capture and storage. Roughly 3% of credits on the carbon market today are classified as removals.
Carbon removal baselines are determined differently between engineered and nature-based projects. For engineered/technological removals, the baseline is zero, because no carbon removal was occurring in the absence of the project. The credited removal will amount to the difference between the quantity of carbon removed and any emissions that occur to facilitate the removal (e.g., through a life-cycle assessment). Baselines for nature-based removals can be more challenging. In natural systems, changes in carbon stocks created by removals must be measured/approximated over time, and creditable removals represent the additional carbon removed by the intervention relative to the baseline (e.g., fallow land vs. a reforestation project).
Another important consideration for carbon removal credits is project durability—a measure of likely duration of carbon storage. Stored carbon can re-enter the atmosphere either through deliberate actions (such as deforestation) or accidental ones (like wildfires). Nature-based solutions are especially vulnerable to being re-released, and for this reason, are usually considered less durable (stored for less than 50 years). In contrast, engineered solutions offer high durability (very often stored for hundreds to thousands of years).
While they’re generally less durable, nature-based solutions are effective, cost effective, and widely available: they make up over 99% of all carbon removal credits today. Engineered solutions are more expensive and scarce but offer longer durability. Prices of engineered carbon removal are likely to fall with innovation and increased market participation
Carbon Avoidance Credits
Examples of carbon avoidance include avoiding deforestation that would result in the release of carbon dioxide into the atmosphere. This can be confusing, since many avoided credits are called reduction credits (e.g., avoided deforestation credits are avoided emissions that are called “reductions” by REDD+ - the first D stands for deforestation).
Roughly 75% of all certified credits available are avoidance credits. Avoiding carbon dioxide emissions is an important goal with numerous important environmental, climate, community, and other benefits Carbon Direct works with clients and customers across industries on developing and implementing strategies to avoid emissions within their value chain. However, there are significant challenges with the way that many carbon avoidance credits are created.
Carbon avoidance credits are based on the emissions that might have existed had a project not been funded. Because it is impossible to observe what might have happened without project funding, carbon avoidance estimates are determined by considering what emissions might have been produced, but ultimately weren’t. Historic data, contextual information and statistical models can be used to create a presumed baseline that represents what would have happened in the absence of the project.
Because the baseline is not observed, there is uncertainty in how many carbon credits avoided emissions projects should produce and if the baseline is not set accurately, a project can over-credit. While the lack of a directly measured baseline means avoidance credits will always have some degree of uncertainty, high-quality avoidance credits are able to present compelling evidence to support their baselines and this can greatly reduce uncertainty. New datasets, statistical techniques and methodologies are providing opportunities for developing avoidance credits with more certainty.
Defining and standardizing quality in the voluntary carbon market
Carbon credits are intended to reduce, remove, or avoid emissions. Companies working to generate climate benefits through credit purchases must grapple with the differences and uncertainties of credit quality to ensure that those benefits are real. While high-quality credits exist for all types of projects, the differences in methodologies, geographies, physics, and ecology require a rich understanding of these differences to identify the highest quality projects and understand the differences in certainty, durability, and risk. The standard of climate impact validation for carbon credits thus demands extensive and project-specific diligence beyond carbon market certification.
Even in cases where emissions impact is difficult to prove, it's important to remember that some projects are beneficial in other ways. REDD+ projects, for example, may have a positive impact on conservation and biodiversity, and cookstove projects may offer clear human health and social welfare benefits. However, these benefits should be assessed separately from the carbon benefits.