Finance & Investment

How to Ensure Better Offsets and Save the Carbon Market

Newer players Climate Vault and Covalent are banking on their unique approaches — along with the dreaded “R” word, regulation — to salvage the credibility and efficacy of carbon markets.

By Christian Yonkers | Published 1 year ago | About a 7 minute read

Image: Anja

Numerous recent studies have decimated the validity of the voluntary carbon market (VCM). A recent University of Cambridge-VU Amsterdam study shows a mere six percent of REDD+ offsets certified by Verra — the world’s leading carbon standard — are valid. And even more recent analyses by the Guardian and The New Yorker present mounting evidence that many offset schemes exaggerate climate benefits and underestimate potential harms.

Chris Neufeld — Head of Development at the recently launched Climate Vault, a platform leveraging compliance markets to produce higher-quality offsets — isn’t surprised.

The VCM has been built on four independent registries and thousands of independent project developers left to self-regulate. Based on the growing amount of findings invalidating their claims, self-regulation isn’t working very well.

“The voluntary market, frankly, is a reaction to the lack of government oversight in this area,” Neufeld told Sustainable Brands® (SB). “Ultimately, everything has to come together to make one unified market if we’re ever going to have success with this challenge.”

The structure of the VCM lends itself to bad actors and mistakes, blemishing the entire industry. The biggest structural flaw in the VCM, Neufeld explained, is misaligned incentives favoring profits over progress: The more credits that get approved, the more money accrediting organizations make.

Fixing the VCM

Climate Vault is using the compliance market as a mechanism for organizations to reduce emission today with credible solutions while using the value of the allowances to support nascent carbon-dioxide-removal (CDR) technologies necessary to prevent catastrophic climate change. Up until now, standards have not existed for CDR. That’s where Covalent comes in.

Covalent is a new, forward-crediting platform for CDR projects that ensure at least 1,000 years of permanence — connecting CDR innovators with financing needed to scale. As Covalent CEO and co-founder Onur Eren explained, the issue of permanence is the most important factor in the carbon-removal domain: Without a guarantee that carbon captured from the atmosphere won’t be reemitted, carbon-removal activities — and any offsets generated from them — are a farce.

Covalent rules out offsets generated from nature-based offset projects, point-source capture and renewable energy. But companies relying on permanent storage solutions are not nearly as developed as nature-based credit generators, which is why Covalent is building the infrastructure for these companies to receive the funding, access to markets and scale they need to remove excess carbon from the atmosphere. Covalent’s inaugural project issued one million forward-carbon-removal credits for Carbon Limit — a Florida-based firm producing a cement additive enabling concrete to actively absorb CO2. Covalent’s Certification Standard — which has been adopted by carbon verifier Bureau Veritas — requires a minimum 1,000-year permanence and limits leakage to no more than 0.01 percent.

While shorter-term carbon-storage solutions are essential to safeguard biodiversity, promote wellbeing and provide short-term climate benefits, they do relatively little to guarantee carbon will stay locked up indefinitely. Offsets from nature-based carbon sinks readily give up carbon to the carbon cycle in a century’s or even decade’s time; a millennial timescale is needed for a permanent solution. The only guarantee against the Anthropocene is permanence.

“If we only focus on nature-based solutions, then we are passing the problem on to future generations,” Covalent’s COO and co-founder, Göker Avci, told SB. “If we just keep investing in avoidance projects and renewable energy projects, it is simply impossible to reverse climate change.”

To receive Covalent forward crediting, projects must remove intended emissions from the atmosphere within five years of forward crediting. Covalent only allows companies to claim forward credits (to sell on the voluntary market) if they have achieved net negative emissions. There are plenty of criticisms for forward crediting, and Covalent is attempting to build an integral standard to make forward credits a trustworthy carbon-removal mechanism.

“Forward-crediting claims must be more than hypothetical claims,” Eren said. “This is necessary for carbon-removal companies to build trust with prospective buyers.”

Whether in compliance or voluntary markets, carbon-mitigation projects will need to build confidence in their technologies and secure funding, Eren continued.

“The most project-friendly method for these projects to come to life is through forward-credit sales,” he said. “Therefore, we see the future of the market largely centered around forward crediting.”

Covalent’s forward credits are tangible and live on the blockchain, ensuring transparency and traceability — key for ensuring emissions reductions stated in forward credits are actually realized.

“Once we build a market based on transparency and visibility, we believe this will also promote transparency and traceability in other parts of the market, too,” Eren continued.

Covalent only originates credits on its platform. It does not sell them; so, Covalent-originated credits have to go to third-party marketplaces for purchase. Companies wishing to mint offsets with Covalent need to have their projects verified by a third party (such as Bureau Veritas) to ensure they meet Covalent’s standards.

Neufeld foresees independent accrediting organizations such as Covalent as contributing a much-needed push for standardization in the CDR space. But again, regulations must bring this reality into play — ultimately, standardization and enforcement must happen one way or another. He foresees voluntary and compliance markets converging into a single unit as both work independently to create better offsets.

“That’s partly why we launched Climate Vault: an alternative to sidestep all of this and tap into the compliance markets as an alternative to the challenges of traditional offsets,” Neufeld said.

Though challenging right now, he thinks it’s inevitable that the market will eventually get there. A requisite is putting a universally agreed upon price on carbon.

“Just one single carbon market that everyone can tap into, where you have the same price per tonne no matter where you are in the market,” Neufeld said. “Without a price associated with [carbon], I don’t see how you can make progress or enforce that.”

The compliance market is worth $851 billion across the globe’s 30 markets, compared to the $2 billion voluntary market. Unlike voluntary markets (which are based on projects including afforestation and renewable energy), compliance markets set a cap on emissions within a jurisdiction and then rely on market forces to drive emissions reductions. Usually, companies take the cheapest option toward decarbonization, which almost always means real emissions reductions and avoidance. It’s always easier to keep something from going into the atmosphere than it is to pull emissions out, the latter being an essential function that VCMs are attempting to do.

“[Compliance markets] are a much more efficient mechanism than a more project-based approach,” Neufeld said.

But compliance markets do little to address the CO2 that’s already in the atmosphere, Neufeld warned. That’s why Climate Vault uses profits generated from compliance-market offsets to scale CDR projects. Right now, CDR isn’t incorporated into compliance markets; but Neufeld believes that will likely change in the short term as CDR technologies reach economies of scale. To get there, will require political buy-in and commitment. Establishing a national carbon market would do this.

“There needs to be more and continued commitment of establishing guidelines and political will to make these changes,” Neufeld said. “As that happens, I think the importance of the voluntary market will start to fall away.”

Because the basis of the VCM is to invest in climate-friendly projects in need of financing, Eren believes VCMs are still an essential part of the equation to help scale needed technologies — even amidst a growing need for universal language and compliance markets.

“It's unrealistic for a single mechanism to meet all requirements,” he said. “Therefore, the differing scopes of certification mechanisms allow projects engaging in emission-reduction/removal activities to proceed with mechanisms that cater to them the most — thereby paving the way for advanced standardization.”

Christian Yonkers

Christian is a writer, photographer, filmmaker, and outdoor junkie obsessed with the intersectionality between people and planet. He partners with brands and organizations with social and environmental impact at their core, assisting them in telling stories that change the world.

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