Carbon (dis-)credit(ed)

Handprint’s response to the recent investigation by The Guardian on carbon offsets.

A recent investigation, conducted by various scientists in collaboration with The Guardian, Die Zeit, and SourceMaterial, came to a thorny conclusion: “more than 90% of rainforest carbon offsets by biggest provider are worthless”.

Companies like Disney, Shell, Gucci, and Delta are key buyers of the rainforest Redd+ credits certified by Verra. Buying those credits enables companies to make carbon neutrality claims. Hence, if the carbon credits are worthless, this undermines the already tenuous credibility of these corporate claims even further. 

Verra, through its portfolio of Verified Carbon Standards (VCS) certifies about 75% of the world’s voluntary carbon credits and about 40% comes from its rainforest protection programme which is now under attack. Does this mean the entire system is a scam and companies should stop supporting nature-based solutions? I do not think so. 

How do carbon credits work? 

A carbon credit is a claim that one ton of CO2 has been (1) removed from the atmosphere or that (2) one ton of CO2 emissions has been avoided. 

Carbon dioxide removals can happen through nature-based solutions such as reforestation coastal carbon capture into olivine as done by Project Vesta or through complex technological processes such as direct air capture and carbon capture and storage. By removing CO2, the carbon concentration in the atmosphere goes down, reducing the greenhouse effect.

Carbon dioxide avoidance can happen through activities that ensure that CO2 that would normally be emitted is not emitted. Typical examples are financing clean cooking stoves that replace burning oil or wood in developing nations, renewable energy that replaces (planned) dirty energy sources, or improving forest conservation that reduces the deforestation rate in a specific area. 

There are many challenges in terms of how we measure removal and quantify avoidance and I won’t go into those right now. The key challenge The Guardian’s article highlights is focused on CO2 avoidance.

What’s the issue with carbon avoidance?

To quantify avoidance,  we need to estimate what would happen if a specific carbon-credit generating project would not happen. This is not an easy task!  The main factors that influence the quantity of carbon credits based on avoided emissions in the reforestation space are the following: 1) Project area,  2) Reference area,  3) Historical deforestation rate, and 4) Additionality 

Let’s explore these four factors in detail:

1. The project area is the geographical area in which the conservation and afforestation takes place. It is the area in which a project manager (often an NGO) intervenes in order to improve conservation and reduce the risk of deforestation. 
2. The reference area is the area used to compare what happens in the project area versus what happens elsewhere. A good reference area needs to be similar to the project area to make the comparison fair. If the reference area is exposed to different social or economic challenges (e.g. there are many more roads in the reference area making it easier for (illegal) loggers to cut down trees. Any possible difference between the project area and the reference area need not be caused by the intervention of the project manager. It can simply be a consequence of the fact that it is easier to cut trees in the reference area than in the project area.
3. The historical deforestation rate measures the rate of deforestation in recent history (5-10-20 years). This matters because carbon credits are awarded based on avoided emissions, remember? If the deforestation historically was high, and the conservation project manages to eliminate all deforestation in the project area, then the carbon credits awarded on an annual basis are roughly equal to the historical deforestation rate multiplied by the carbon stock (the total carbon sequestered in the project area) in the project area. So if the historical deforestation rate is 5% per year and the carbon stock is 1,000 tons per hectare then a 1,000 hectare conservation project will seek to avoid the carbon emissions of 1,000,000 tons. If it is very successful (deforestation = 0%), then it can receive 50,000 tons of carbon credits per year.
4. Additionality means that the conservation effort done by the project manager would not be able to happen without the issuance (and thus selling) of carbon credits. Put simply, a project that could happen without carbon credit financing is not additional. This is for instance why many of the renewable energy carbon credits are being severely devalued at the moment. As the price of renewable energy has reached price parity with fossil fuels in many countries, there is no real need anymore to reward additional carbon credits. If the conservation of a forest was going to happen anyway or if there is no threat to deforestation (e.g., because the forest is virtually inaccessible to loggers and is not at risk), then there is no additionality. 

To a certain extent, these 4 factors are more art than science, and this is exactly where the problem lies according to the recent report published by The Guardian.

The analysis finds that 94% of the rainforest carbon credits should not have been approved. In some of the investigated projects, deforestation was not halted (or even reduced) and in cases where deforestation was reduced, the reduction was not more impressive than in reference areas. In other projects, the historical baseline deforestation rate was overstated by up to 400%. While that sounds bad already, the study found that three fantastic projects in Madagascar actually skewed this number downward. Removing those three projects led to an overestimation of the reforestation rate by 950%. Put simply, that means that 9.5 times more carbon credits can be issued than should have been. 

What’s different about Handprint?

Pretty much everything.

Our approach has always been that positive and negative impact accounting should be two entirely separate processes, and that the idea of achieving balance through offsetting is scientifically questionable. 

This is especially true when we look at carbon credits for avoided emissions. If a company emits 1,000 tons of CO2 and then buys avoided emissions carbon credits, the net impact is still 1,000 tons of CO2 more in the atmosphere. If the avoided emission carbon credit is of high quality (i.e. the four factors are accurately determined), then the purchase does prevent another 1,000 tons of CO2 from entering the atmosphere, which is great, but it does not lead to a balanced carbon book. 

Does that mean carbon credits from avoided emissions are useless?

It’s just not as simple as that. Support for forest conservation (which can lead to carbon credits for avoided emissions in the current paradigm) is extremely important and together with industrial decarbonization and further investment in solutions that remove carbon from the atmosphere efficiently, probably the best thing we can do for the planet. We need to halt deforestation globally and hence financing mechanisms need to be developed that support conservation at massive scale. Without such support, we risk creating perverse incentives. An existing forest that is not under threat can currently not receive funding from the carbon market. This creates an incentive to announce a major urbanization project or a large agricultural development that would see the forest reduced to ash. Only if that threat is considered to be real, which typically means a few years into the logging activities, can the remaining forest be considered for financing through the carbon market. This is a critical problem. The last thing we want is to misalign incentives for conservation. 

It will be very hard to remove those perverse incentives as long as companies and governments remain committed to measuring carbon neutrality as a combination of positive impact creation and negative impact avoidance.  

At Handprint we provide three solutions.

1. We support direct conservation work and direct regeneration work and empower the NGOs in our ecosystem with high quality reporting tools that enable them to provide accurate, auditable, and transparent information on what is going on in the project. We focus on degraded forests and know that the money we send our impact partners is used transparently to create the impact they committed to. We make all this information easily accessible through our enterprise dashboard. Hence, because we know for sure that our reforestation partners could not do their amazing work without the tree purchases routed through our platform, we are confident our work meets the additionality criteria.
2. The focus of our work is not on enabling claims of neutrality but on enabling credible claims to nature benefits. Our focus is on measuring that nature improves in our project reference area, irrespective of historical deforestation rates. We simply do not consider this and thus in practical terms for us historical deforestation is equated to zero. We only consider increases in the carbon stock. We also work closely with all our reforestation partners to avoid negative spillovers into other areas. This can happen when a specific reforestation project area becomes well protected but simply leads to the displacement of logging work to other areas. I.e., loggers realize they cannot log as easily anymore in the protected area and thus move their, often illegal, operations to another place in the vicinity. Soon, we will start tracking the evolution of areas way larger than the project area using satellite images, so that we can be sure that relevant reference areas are explicitly considered. There is a notable difference here. For a carbon crediting project, it is, in a perverse way, good news if the reference area further degrades because that warrants the issuance of the carbon credits and improves the value of the project. For us, this is not the case. The claims we sell on Handprint only focus on the additional work that is done by the reforestation partner in the project area, and we strongly encourage our clients to refrain from making claims around carbon neutrality. 
3. Yet, the market is what it is and a growing number of companies are looking for high quality carbon credits. That’s why Handprint partnered with the Global Mangrove Trust (GMT). Our approach is that we join projects in the development stage and provide our reporting tools to the project partners on the ground to improve financial transparency and impact accounting. The carbon crediting standard championed by GMT in collaboration with Kumi Analytics and financially backed by commodity broker Marex has been adopted as the first approved approach of OxCarbon, an Oxford-based carbon crediting agency that focuses on super high quality carbon credits that are validated and verified through space-based intelligence and machine learning. OxCarbon’s approach to establishing the four critical factors relies on similar (arguably even more advanced) tools than the ones used by the Verra detractors. The standard infuses internationally recognized data on historical deforestation (e.g. provided by FAO) with locally relevant information and historical high resolution satellite mapping to make a conservative estimate of the historical deforestation rate. OxCarbon also exercises great caution with its issuances and deliberately issues a more conservative volume of carbon credits than the estimation methodology suggests. Moreover, because the methodology is rooted in machine learning, we know it will become better over time. Every time more ground data are collected, the model can train on a larger dataset, further increasing the accuracy of its estimates. It is a testament to the success of this approach that after the Indonesian government halted all carbon credit issuance for Indonesian projects as part of its attempt to nationalize the carbon credit market for tax purposes (an initiative we support), that the project by Global Mangrove Trust and its partners is being favourably reviewed by the Indonesian government to be registered in its newly developed National Registry System 

At Handprint, we believe that data-backed, science-based regeneration is the way forward for a better planet and we are confident that projects like the Global Mangrove Trust's will receive increased attention and support. The carbon credit market is flawed and it is riddled with opportunism, nascent science, and a lot of good intentions. We follow the science closely and rely on in-depth knowledge about how forests evolve and conservative forecasts. When we see some of our friends in the space make claims that we know are inaccurate, we do not out them publicly, but we engage in private consultation, and ask them to explain how their claims seem to deviate from what we know to be true. A rising tide lifts all boats…

The importance of the nature-based solutions requires Nature Tech ventures like ours to work together and establish the credibility of the space, else companies and governments will rightfully question the credibility of us all. 

As George Carlin famously said, the planet does not care about climate change (nor biodiversity loss). The planet will survive, it’s us humans that are f***ed. So it’s on us to make sure that our commitments and claims are credible. That’s why we place such high value on Auditability, Reporting, and Transparency. Turning ART into science…