Researchers at the Cambridge Centre for Carbon Credits have developed a new way to price carbon credits, which they hope will encourage investment in forest preservation and boost progress towards net zero.
- The valuation methods for forest conservation projects have come under heavy scrutiny, leading to a loss of trust in the carbon markets.
- The new approach works similarly to a lease agreement and is based on a dynamic accounting method.
- It is hoped it will restore buyers’ trust in the market by enabling comparison between projects and boosting overall transparency.
The new approach, published in Nature, is intended to help restore faith in offset schemes by enabling investors to directly compare pricing across various projects.
“Nature-based carbon solutions are highly undervalued right now because the market doesn’t know how to account for the fact that forests aren’t a permanent carbon storage solution. Our method takes away a lot of the uncertainties,” said Anil Madhavapeddy, a Professor at the University of Cambridge who was involved in the study.
Losing confidence in the carbon markets
The valuation methods for forest conservation projects have come under heavy scrutiny, leading to a loss of trust in the carbon markets. Buyers are often confused about the various options available and may struggle to differentiate between low- and high-quality credits, ending up buying the cheapest ones. This opens up the issue of greenwashing, as companies may get away with offsetting polluting activities at a very low cost – although it has been found that firms engaging in the carbon markets are more likely to invest in emissions reduction strategies.
Other buyers do not believe that the projects they are buying credits for are additional, meaning that they deliver climate benefits that would have not been generated in their absence. Amid this lack of trust, large corporations are resorting to insetting, which involves implementing their own nature-based solutions instead of buying external credits – often at the expense of transparency.
While holding carbon market participants accountable is hugely important to ensure projects have the desired effect, this credibility crisis is slowing down crucial climate action. Carbon credits can help offset unavoidable carbon footprints, mitigate climate change, and scale up investment in tropical forest conservation.
Indeed, the current rate of investment is only one-third of the level needed to deliver the volume of credits required by 2030 to meet the Paris Agreement goals. The world also needs an additional $90 billion of capital to achieve the required volume of credits.
The issues with REDD+
The most traded carbon credits are from nature-based solutions projects, for example REDD+, which stands for Reducing Emissions from Deforestation and Forest Degradation. REDD+ accounts for almost a quarter of carbon credits on the market, but the methodology presents some challenges in measuring their value.
Previous research by Cambridge University found that as little as 6% of carbon credits from voluntary REDD+ schemes result in preserved forests. Assessing additionality involves comparing changes in carbon storage in a project to historical trends in reference areas identified by the project proponents themselves, but researchers have found these approaches result in biased estimates of project performance, which tend to be much smaller than calculated.
Moreover, the occurrence of fires, deforestation, disease or severe weather events limits the impermanence of carbon storage, as it may end up being released into the atmosphere. The most used approach is to allocate a fraction of the additional carbon sequestered (or not emitted) to a not-for-sale buffer pool. In the event of reversal, credits are drawn from this pool, but the Cambridge researchers said this is “intrinsically flawed” as “it assumes that future stakeholders will not allow releases from past credits in excess of the pool yet provides them with no incentive to do so”.
Another approach is to account for tonnes per year, which the researchers said has only very short-term releases and “does not correctly model climate change physics”, assuming, for instance, that the climate impact of one tonne of sequestration for five years is the same as that of five tonnes of sequestration for one year.
What is the study proposing?
The researchers came up with a new dynamic accounting method, based on the social cost of carbon, for quantifying the long-run social benefits of impermanent carbon credits derived from nature-based solutions. The Permanent Additional Carbon Tonne (PACT) framework works similarly to a lease agreement: the credits are issued to tropical forest projects that store carbon for a predicted amount of time, with a front-loaded valuation and allowing different types of projects to be compared in a like-for-like manner.
It involves deliberately pessimistic predictions of when stored carbon might be released, in order to issue a conservative number of credits. By monitoring forests with remote sensing, if projects do better than expected they can issue further credits.
The payments encourage local people to protect forests, according to the research. The carbon finance they receive can provide alternative livelihoods that do not involve deforestation.
By allowing for future payments, the new method generates incentives for safeguarding forests long after credits have been issued. This contrasts with the current approach, which passes on a burden for conservation to future generations without compensation for lost livelihoods.
There is no question that the carbon markets need to regain credibility, and fast, if we are to meet global sustainability goals. Reviewing pricing mechanisms can help address existing concerns and support buyers in choosing the most effective credits.