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What's Wrong with Carbon Credits?

Updated: Jun 29, 2022

And a proposal to improve them

Today’s carbon market standards fail to incent uniform quality, urgency, and access. We propose the adoption of tonne-year accounting into international carbon standards to rectify these issues and accelerate climate action.

Published June 26th, 2022


Climate progress is constrained by carbon credit markets

Carbon credit markets have the potential to halt and reverse the human impact on climate change. But buyers lack the assurance that the credits they’re buying are a credible commodity, and there is no excuse for not laying the appropriate framework right now for a commodity carbon credit marketplace. There are three constraints in these markets that we need to alleviate for them to fulfill that potential and reverse climate change:

  1. Uniform quality – We need uniform quality standards across all credits that we can trust. It doesn’t suffice that some credits remove emissions for 20 years and are potentially reversible while others are irreversible for 10,000 years; some have high-fidelity baselines while others do not.

  2. Urgency – This is a timed game, and the clock is ticking. According to the IPCC, we have 28 years to reach Net Zero[1]. Tick. Tock.

  3. Access – Stopping climate change is a stretch goal, and we need everyone capable of positive climate action to have access to carbon markets and an incentive to act

Fortunately, we have a tool that uniquely enables all three of these goals. Meet Tonne-Year Accounting. Tonne-year accounting is a Rosetta Stone for carbon projects, translating impact of varying durations, volumes, and time periods into a common, comparable language called “tonne-years.”


A tonne-year is a single tonne of carbon stored for one year. One tonne for one year equals one tonne-year. Every carbon project can be denominated in tonne-years. For example, a typical forestry credit that protects one tonne of carbon in a forest for 100 years is creating a carbon credit made up of 100 tonne-years. In this example, the “exchange rate” is 1 carbon credit per 100 tonne-years.


Quality

Herein lies the problem: not all carbon credit standards or protocols use the same exchange rates across credits. In fact, most have not adopted tonne-year accounting and thus use none, creating incentives for project developers to manipulate the system. With varying exchange rates or no exchange rates at all, the quality of carbon credits varies widely. That’s a barrier to uniform quality.


Beyond standardizing this variability, tonne-year accounting improves quality in other ways as well, such as delivering ex-post (rather than ex-ante) impact, eliminating non-permanence risk, and increasing access to carbon markets for a greater variety of projects and participants.


With the exception of Climate Action Reserve, our global standards bodies have not yet adopted tonne-year accounting. Most recently, Verra, the largest such body, deferred a decision to adopt tonne-year accounting that it had previously proposed.[2]


This instead places the onus on market participants to individually educate themselves on each credit’s quality and determine its value (and price) accordingly. This is causing higher transaction costs, greater levels of confusion, more market manipulation, lower credibility, and ultimately less climate benefit.


Without uniform quality, carbon credits are no longer the commodity they were intended to be, and markets become less liquid and less efficient at solving climate change.


For more on improving quality see The Broken Yardstick of Carbon Markets.


Urgency

Tonne-year accounting also enables greater urgency. In the US, we can pay with a one-dollar-bill or with 100 pennies. Either way, we have a dollar. With tonne-year accounting we can create a credit over 100 years with one tonne of carbon, as the traditional protocols contemplate, and we can also create an equivalent carbon credit with impact entirely from next year! This is done by simply increasing the tonnage based on the exchange rate. 100 pennies, 20 nickels, 10 dimes, 4 quarters — it’s all the same.


A popular critique framed by carbonplan.org[3] is that tonne-year accounting measures carbon’s effect on rising temperatures[4], instead of the volume of physical carbon molecules in the atmosphere. The argument is correct, but which is the more appropriate outcome to measure: the environmental and societal costs of rising temperatures or the number of carbon dioxide molecules physically in the atmosphere (which happen to have a diminishing effect on temperatures over time[4])? We think the former.


We are in a timed race to minimize the impacts of climate change, and therefore allowing developers to substitute increased near-term volume for far-off climate benefits is a tradeoff we should gladly welcome.


We can go further to properly incent urgency by adopting an improved mechanism to determine the time-value of carbon. Ultimately, a true yardstick that measures the environmental and societal cost of rising temperatures requires the marriage of tonne-year accounting and discounting (again, see The Broken Yardstick of Carbon Markets).


Access

Access and inclusion strengthen the fabric of communities anywhere. And nowhere is that truer than in the global community and its enormous effort to stop rising temperatures. We need all hands on deck. All hands.


Tonne-year accounting unlocks a broader variety of projects and a decentralization of projects – think crowdsourcing and grassroots campaigns versus institutional capital and lobbying firms.


Project size is one barrier to participation. For example, one million landowners with 20 acres of forests can have the same impact as ten landowners with 2 million acres of forests if we create the right access to carbon incentives. What’s more: it’s not exclusive, so we get 40 million acres of forests at work to reverse global warming.


Another barrier is project duration. More landowners are willing to commit for shorter project durations that don’t shackle their great-grandchildren with liabilities if we could create access for them to participate.


Tonne-year accounting creates access for large and small landowners, long-term and short-term projects to participate in carbon markets. If the need is to open access to all channels for contribution – and it is – then tonne-year accounting again furthers the cause of climate.


The need for relevant, forward-looking standards

Verra’s recent decision to defer the adoption of tonne-year accounting highlights the complex and often slow nature of change. Verra postponed other decisions until Q4 2024 – which is 9% of the remaining time before the buzzer sounds in 2050.


We need standards that standardize quality, reward urgency, and increase access to carbon markets. And we need standards bodies that are agile, forward-looking, and can keep pace with the change of climate innovation.


Specifically, we propose global carbon standards adopt two mechanisms: (1) tonne-year accounting and (2) a uniform discount rate representing the social cost of carbon. This powerful marriage of mechanisms is a Rosetta Stone that unlocks the ability to equate true impact across any project, of any volume, for any duration, across any time period.


Carbon credit markets – whether the voluntary carbon market or the compliance markets – are our best bet to halt rising temperatures. Let’s advocate standards that enable them.



Sky Harvest is a carbon project developer committed to seeking sensible solutions to climate change.

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