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July 19, 2023

Voluntary Carbon Markets: We Need Due Diligence, Not Just Cheers

Mark Trexler

Citi has come out with a long, in-depth report on voluntary carbon markets (VCM). Having been in the market since working on the first VCM project in 1988, I'm always interested in such "primers." But before you rely on the report in your decision-making, there are several things to be aware of.

  1. 1
    By starting out with the premise that net zero is key to tackling climate change and that the VCM is critical to net zero objectives, the report's ultimate conclusions are pretty obvious.
  2. 2
    By never getting into the history of the VCM, calling it "nascent," the report ignores 35 years of efforts to get the VCM up and running, as well as the many hurdles it has encountered. The report doesn't mention the prevalence of gaming when it comes to offsets, and how hard it has been to design market rules that can't be gamed.
  3. 3
    By not mentioning the literature attempting to evaluate carbon market — including studies concluding that more than 60% of Clean Development Mechanism projects probably weren't additional — the report doesn't accurately report the risks facing offsets and carbon markets.
  4. 4
    By focusing on the message that things are changing and improving, the report fails to mention that this message is now 25 years old — and has not yet been effectively delivered upon.
  5. 5
    By telling companies to only buy "high quality" offsets, the report inherently suggests that anyone can do that if only you follow the report's six recommendations. Yet the fundamental conclusion of 30 years of VCM analysis is that it's VERY hard for buyers to figure out which offsets might actually be high quality. (Yes, I agree with report's suggestion that buyers pay attention to the new ratings organizations).
  6. 6
    By failing to discuss the topic of "contribution claims," the report fails to point out that the VCM appears to be (at least might be) moving away from the idea that offsets can be counted directly against emissions as a way of reducing one's footprint. That has BIG potential implications for offsets as a tool to get to net zero.

Overall, the report is something I'd expect to see a carbon markets firm authoring, as opposed to a firm that is providing, in effect, investment advice when it comes to corporate climate change mitigation. This is NOT a due diligence assessment for investing in the VCM, and shouldn't be taken as such. It cheerleads as opposed to identifying, much less objectively assessing, VCM market risks and opportunities.



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