Carbon credits are seen by several organisations as a crucial element towards achieving global net zero emissions by 2050, but despite earning a billion-dollar valuation from global companies, carbon credits have long struggled to inspire confidence. Some environmental groups approach carbon markets with scepticism, claiming that they allow companies to appear as though they are leading on climate action, when in fact they are not. In fact, the Science Based Targets initiative (SBTi) does not allow achieving short-term carbon reduction targets using carbon credits and by 2050 only up to 10% is allowed to be achieved through removal credits. Recently, the European Union also banned advertising of products and services as “carbon neutral” if the neutrality was achieved using carbon credits.

On the other hand, the philosophy behind carbon credits is sound. They are meant to fund projects that avoid, reduce or remove carbon emissions that are additional and would not pay back without the revenue from carbon credit sales. These projects include nature-based solutions or clean cookstoves for communities, all the way to direct air capture. Even if the ability for companies to offset their carbon savings was to be stripped, these projects may be worth funding for broader sustainability reasons to ensure the wellbeing of those communities in need of such projects but cannot afford them.

The credits we are talking about here are called “voluntary”, which companies are not obligated to invest in unless they want to bolster their sustainability practices. It is important to differentiate those from “regulated” carbon markets such as the EU Emissions Trading Scheme. The credits between these two markets are not compatible and whereas one could expect average prices of $5-15 per tonne of CO2 on the voluntary market, EU ETS prices over the past years have been in excess of $80 per tonne. There are no external projects such as nature-based solutions that can be done to offset the carbon in a regulated market. The only permissible solution is to target the source of the regulated emissions – for example if the ETS is applied in the electricity generation sector, companies must invest in renewable energy capacities, otherwise face the necessity to buy credits within the regulated market at high prices.

An important topic within the carbon markets space is the “Article 6” of COP agreements, which countries failed to agree on since COP26 in Glasgow in 2021. Progress in this area could enable international carbon trading market and interoperability, however the details are still to be agreed between parties.

The complex dynamics of carbon markets will continue to evolve, as they can have a pivotal role in driving global decarbonisation if done right

The complex dynamics of carbon markets will continue to evolve, as they can have a pivotal role in driving global decarbonisation if done right. In the meantime, companies must ensure proper due diligence around their carbon market activities to reduce financial risks as well as reputational risks associated with greenwashing. 

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