High-quality voluntary carbon credits: Nature-based solutions are the future of climate actions

As the global voluntary carbon market emerges, sources of carbon credits available to buyers become diversified. According to the widely used carbon verification standards such as the Verified Carbon Standard (VCS), Gold Standard (GS), American Carbon Registry (ACR), and the Climate Action Reserve (CAR), retired carbon credits come mostly from eight sources: energy efficiency improvements, fuel switching, industrial emissions reduction, nature-based solutions, renewable energy, waste treatment, household appliances, and coalbed methane. Among all, renewable energy and nature-based solutions are the two largest sources, accounting for 30% to 40% respectively. The two will be discussed in the following section.
 

Renewables no longer dominate carbon market

The number of renewable energy projects has always been the highest among all (as shown in Figure 1 below). In the early 2010s, voluntary carbon credits served as a way to ensure the operation of wind, solar, and hydro power projects, as the costs of these projects were much higher than those of coal and natural gas. However, dramatic reduction in the cost of renewable energy and the rapid growth in the number of renewable energy projects in countries such as India, Brazil and China make voluntary carbon credits no longer just a financing tool, but projects that can generate additional profits. This undermines the very premise of voluntary carbon credits: they must fulfill additionality, namely the project must contribute to actual emissions reduction.

In these countries, renewable energy projects are created anyway, and therefore no longer hold additionality. Both the VCS and GS took note of this situation. Therefore, the GS announced in 2019 that starting from 2020, any grid-connected renewable energy project in an upper-middle- or high-income (as defined by the World Bank) country or region will be considered ineligible for GS-VER^[1] or GS-CER^[2], and will not be able to obtain carbon credits; while the VCS also issued a similar announcement. Given the actions of the world's two largest project certification bodies, it is foreseeable that the number of carbon credit applications from renewable energy projects will be drastically reduced in the future, in favor of unbundled renewable energy certificates (RECs) or power purchase agreements (PPAs).


Figure 1. Share of voluntary carbon projects (by project type)

Nature-based solutions gain momentum

There are five common nature-based solutions, including improved forest management (IFM), afforestation/reforestation/revegetation (ARR), reducing emissions from deforestation and forest degradation in developing countries, and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks in developing countries (REDD+), regenerative agriculture^[3], and blue carbon^[4]. As can be seen in Figure 1 and 2, while renewable energy projects are still the majority, forest and land use projects lead the way in terms of the total trading value, as the amount of carbon credits that can be generated from a single renewable energy project is limited and the price per unit is low.

Some may ask why does nature-based solutions account for only 17% of the carbon credits in Figure 1, given that renewable energy and nature-based solutions were previously mentioned as the main sources. This is because nature-based solutions can generate more carbon credits, often up to 10 times more than other projects, despite a smaller number of cases. Therefore, to avoid the suspicion of greenwashing and the risk of rejection by downstream brands, companies prefer to invest in carbon credits of better quality, while developers also perceive this opportunity and are now actively investing in afforestation and reforestation projects in Central and South America (e.g., Nicaragua and Costa Rica) and Southeast Asia (e.g., Indonesia and Malaysia), taking into account the price trend and the efficiency of carbon credits generation.


Figure 2. Total trading value in the voluntary market by project type^[5] (2017-2021)


Figure 3. Carbon credit prices of various types

Greenwashing highlights the importance of carbon credit quality

Voluntary carbon credits have been controversial in terms of project type and methodology, with the recognition of additionality open to question. However, with the expansion of the market, the relevant regulations and methodologies are becoming more stringent. The scope of recognition of carbon credits in Europe has significantly narrowed, shifting focus to the development of nature-based projects, while new renewable energy projects will no longer be acknowledged.

Due to differences in the integrity of methodologies, even nature-based projects may face validity issues. For example, REDD+ projects before 2017 are considered poorer quality. Although they are cheaper, they are more likely to fail in offsetting, while carbon credits generated after 2020 are generally more affordable and accepted by the market because they are more closely tied to the Sustainable Development Goals (SDGs).

Overall, the rapid growth of the voluntary carbon market has attracted many developers, brokers, investors, and buyers, making it important to consider the quality of carbon credits rather than just the price. It would be futile to buy cheap carbon credits for the purpose of greenwashing if there is no actual offset benefit.