- Carbon credits have faced intense criticism around quality and their actual impact on emissions.
- But the industry has set about bringing its Wild West era to an end — and there are signs it's working.
- A record-breaking 37 million credits were traded in December, and that momentum continued into 2024.
Carbon credits have been through a tough time.
Investors couldn't get enough of them three years ago as they promised to help businesses meet the increasingly intense environmental obligations that had been hoisted upon them.
But since then, the voluntary carbon market (VCM), where carbon credits are traded, has faced intense criticism for the actual emission reduction the credits provided.
Credits are supposed to represent one metric tonne of CO2 removed from or prevented from entering the atmosphere, but a Guardian investigation exposed forest carbon credits certified by leading standard Verra as "largely worthless." Verra's CEO resigned in the following months. In parallel, businesses retreated from the VCM to avoid greenwashing accusations.
Meanwhile, conventional offsets like solar, cookstoves, and some tree-planting credits have also faced criticism for overstated benefits and lack of additionality, meaning the emissions savings would have happened anyway.
"So, definitely, it was a bumpy ride," said Allister Furey, cofounder and CEO of carbon credit rating and data provider Sylvera. The Guardian coverage "dampened demand" for conventional credits and prices collapsed as demand "fell off a cliff," he said.
But the market, which shifted focus to credit quality, integrity, and transparency to ensure credits reflect genuine carbon savings, is finally showing signs of life once more.
"By the end of the year, issuances rebounded, indicating renewed corporate interest in carbon credits," said VCMI executive director Mark Kenber, whose organization aims to increase VCM integrity through voluntary codes of practice. Credits are typically issued only when there's a buyer lined up to retire them, he added.
From January to November 2023, 127 million credits were retired, meaning they were redeemed and can't be used again, per BloombergNEF data. This figure is compared to 129 million credits retired during the same period in 2022.
Indeed, December 2023 saw record activity with companies retiring 37 million credits, which BloombergNEF notes is a 43% surge on the previous monthly record of 25.9 million in December 2021.
Retirements remained strong in January 2024 at 21 million credits, compared with 6.6 in January the previous year, according to commodity reporting agency Quantum data provided to BI by Sylvera.
An end to the "Wild West"
Part of the slowdown was due to COP28 — VCM buyers waited for rules, guidelines, and methodologies for new carbon projects to be agreed on by state leaders before backing additional projects, but no agreement was reached.
In lieu of official policy, organizations such as the VCMI are vying for self-regulation. It released its code of conduct for what green claims can be made using credits last year, which helped distill some confidence in the market, insiders said.
In parallel, buyers realized "there's literally no other option" but to use credits to achieve net zero, Sylvera's Furey said. "The 'net' part of net zero is always going to use some kind of credit."
However, critics argue that credits allow companies to continue business as normal without reducing their emissions.
"Carbon credits can be a beneficial additional step for companies that have done all the other work beforehand," said Lubomila Jordanova, cofounder and CEO of emissions and ESG accounting company Plan A, which advises its customers to focus on decarbonization first.
"The only truth at the end of the story is the mathematics that shows whether a business is good to the planet or not."
It was actually the companies buying cheaper, older credits that pulled back from the VCM last year, according to analysis by startup Ceezer, which provides a data and platform service for managing carbon credit portfolios and announced a $11.2 million funding round last month.
Customers remain bullish on high-quality carbon removal credits but buy them at a lower volume, preferring to build portfolios over time due to price, technological risk, and net zero timelines, said Magnus Drewelies, Ceezer cofounder and CEO.
There are calls for carbon removal credits, which include enhanced rock weathering, direct air capture, and ocean-based carbon removal, to be further distinguished from other offsets, added Ben Rubin, executive director of industry group Carbon Business Council.
In a vote of confidence from venture capitalists, January also saw carbon credit insurer CarbonPool secure $12 million, carbon credit investment platform Cultivo raise $14 million, and carbon project developers platform BlueLayer come out of stealth with $10 million.
In all, it signals the start to the end of the carbon credit "wild west," Sylvera's Furey said.
