Carbon credits explain the hyper-financialization of climate policy.
Carbon offsets are suddenly everywhere. Long the domain of airlines and unimaginative bureaucrats, firms selling offsets have proliferated, promising a way for ordinary people and organizations in wealthy countries to fight climate change with the click of a button. These companies claim that emissions in the rich world can be canceled out by buying credits from projects that sequester carbon, often in poorer parts of the world.
Some of these projects plant trees. Others simply pay those who own trees not to cut them down. Others go further, investing in technologies that decarbonize everyday life, like renewable energy and landfill gas capture. What links them all is the claim that, by paying (usually small) sums of money, consumers are counteracting the emissions their activities generate, chalking up a minus on the global carbon ledger.
The ease and affordability with which carbon credits can now be bought can feel out of step with the urgency of climate change, and in the last couple years, concerns have been mounting that offsetting is little more than a sugar hit for the conscience. Some critics claim that the whole thing is a fraud, amounting to a “license to pollute” with no real bearing on the health of the planet.
As economists who care deeply about the climate crisis, we wanted to understand what customers actually get when they buy a carbon credit. We set out to follow the journey of a carbon credit purchased from the buzzy startup Ecologi by Al Dix, a retiree from Yorkshire, England, who wants to take practical climate action.
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The rapidly growing “financialized carbon” market
SALTAIRE, Yorkshire, England —
Al Dix is a conscientious man. Born in the shadow of World War II, the son of a well-known trade unionist, he was thinking politically from childhood. “Some kids go and play in the street when they are little. I folded Labour Party leaflets,” he says with a laugh.
Dix shows us photos of a theatrical performance he produced early in the 1980s, lamenting the polar ice caps. He says he began feeling “helpless” about climate change in the 1990s. Now 75, he still sees little that he likes in policy or corporate behavior to address the crisis. But resignation is not his style. About a year ago he began researching ways to mitigate the carbon emissions his lifestyle generates, and started paying Ecologi $15 per month to offset them.
On Ecologi’s website, lush imagery of trees, rivers, wind turbines, and solar panels is paired with cute animations of the personal “forest” your money has planted. Each month, Dix receives a personalized statement outlining where his payment has been spent, usually in the Global South. This past January and February, it says, he planted eight trees, and through carbon credits purchased on his behalf, offset 0.75 metric tons of CO2 — about the monthly carbon footprint of the average Brit.
In the absence of adequate regulation limiting climate-warming emissions in affluent countries, personalized offsets of this nature have become big business. They form what is known as the voluntary carbon market (VCM): a decentralized space where people and businesses can choose to buy credits to offset their emissions. The market for these offsets, which is largely unregulated, could hit $50 billion as soon as 2030 and grow 100-fold by 2050, according to McKinsey.
Ecologi, since launching in 2019, has described itself as the “Spotify of sustainability” and received financial backing from the same venture capitalists who launched Airbnb and Stripe. Last year, it recorded annual revenue growth of over 200 percent.
Carbon offsets are traded in marketplaces like US-based Xpansiv, which offer real-time prices for different kinds of offsets — or, as they call them, “fungible environmental products.” These marketplaces facilitated the movement of 500 million metric tons of financialized carbon in 2021. Carbon is becoming high finance, with the likes of Xpansiv and Ecologi potentially set to become the Bloombergs and Wells Fargos of the climate economy — if financial industry incumbents don’t crowd them out first.
Early this year, JP Morgan’s Timberland fund plowed $500 million into carbon offsetting in pine forests in the US South. HSBC has been recruiting carbon traders since May 2022. Hedge funds are also expected to pile in as carbon prices rise and offset markets mature.
Recent revelations have cast doubt on these schemes. In January, a high-profile investigation by the Guardian, German newspaper Die Zeit, and journalism nonprofit SourceMaterial asserted that over 90 percent of rainforest carbon credits issued by Verra, the world’s leading carbon credit certifier, claimed reductions in deforestation that didn’t actually exist. As a result, they said, the credits were “worthless,” provoking painstaking rebuttals from the industry.
With climate change nearing a point of no return, carbon trading is not something we can afford to get wrong. The Intergovernmental Panel on Climate Change recently warned that the 2020s were a critical decade to limit warming. If carbon offsets are going to be a centerpiece of global emissions mitigation efforts, it is important that consumers understand what they’re actually getting when they buy one — something that is, it turns out, easier said than done.
The journey of a carbon credit
Al Dix, for his part, doesn’t care much for financial speculation. He wants transparency. That’s why he chose to offset with Ecologi. Their friendly website, clear, direct impact on the ground, and openness about the inherent limitations of carbon offsetting appealed to him. “At Ecologi,” the website reads, “we believe that funding climate solutions is vital, but it doesn’t diminish your own carbon emissions — and should therefore be carried out alongside steps you take to reduce your own footprint.” But like many people, Dix worries that the whole thing might be smoke and mirrors.
“I’m aware of the fact that carbon offsetting is a scam in a lot of ways, for a lot of people,” he says. “It’s quite obvious that buying and selling carbon doesn’t really, actually, make much difference to the state of the f------ planet. Quite obviously. Because it hasn’t, has it?”
Still, he figures that it’s better than nothing: “I’d like to think that I give Ecologi my money, they contract people to plant trees, and that’s it.”
We leave Dix’s Yorkshire home on an unseasonably warm March day. A storm darkens the top of the valley where he lives, peppered with smokestacks and coal turbines left over from the region’s industrial heyday. Armed with Dix’s most recent carbon offset certificate, we are off to track the journey of a carbon credit.
Cooking for credits in Kenya
ABERDARE RANGE, Central Province, Kenya —
Here, between 2010 and 2017, a company called Carbon Zero Kenya, a subsidiary of CO2Balance, distributed 55,000 new cooking stoves to villagers. The Somerset, England-based company funds projects that create carbon credits, and then sells them to offset brokers like Ecologi.
By replacing traditional open fires with more efficient metal-and-concrete stoves, CO2Balance estimates it can halve the amount of wood required for a household. Under the rules of carbon accounting, this halves the emissions entering the atmosphere from cooking for every Kenyan villager who switched to the stove.
This kind of “carbon avoidance” is the crux of the carbon trade. It means that CO2Balance can create and sell carbon credits, representing tons of greenhouse gases that would otherwise enter the atmosphere, as long as they can distribute stoves and prove that they are being used.
The same logic applies to all carbon credit projects, such as renewable energy plants, forest conservation, and waste-to-energy projects. Companies account for these projects in different ways, but common to all is the idea of “additionality”: that they would not have otherwise gone ahead without the sale of carbon credits. In the Aberdare project, Ecologi says, carbon finance plugged a key affordability gap; the villagers wouldn’t have been able to afford the stoves without it. But it’s worth noting that, from looking at all of the project’s documentation, it wasn’t clear to us whether or how it accounted for other sources of emissions, like, for example, those produced in manufacturing and shipping the stoves.
In mid-2019, Ecologi bought a total of 535 credits from CO2Balance’s Aberdare project. In February 2023, they allocated about one-third of one Aberdare credit to Dix. He now owns the right to say he stopped one-third of a metric ton of greenhouse gases from being emitted.
But emissions reductions on the ground in Kenya don’t just become carbon credits in Yorkshire. To be bought by retailers like Ecologi, and sold to people like Dix, they first need to go through the Swiss Alps.
The certification game
GENEVA, Switzerland —
The Gold Standard Foundation offices occupy part of a squat white block, hemmed in by an overpass and drab apartments characteristic of Geneva’s northern suburbs. It’s an unremarkable but powerful location; the UN headquarters at the sprawling Palais des Nations is 10 minutes away by car.
It’s here that the Aberdare carbon credits were actually created, after Gold Standard received documentation from CO2Balance’s external auditor, Bureau Veritas, that the project was doing what it claimed.
Gold Standard’s certification requirements read like a mantra: certified, real, additional, independently verified, unique, traceable. They are backed by complex mathematics. The documentation for the Aberdare project contains several dense pages of equations, quantifying different kinds of gases over different time periods and under different conditions, all revised and updated each year by the verification teams sent out to ensure the project is still working as intended. Documentation for larger projects can run into the hundreds of pages. It’s all necessary, says Sarah Leugers, Gold Standard’s Chief Growth Officer, to ensure credits represent actual, tangible change.
She acknowledges the limitations. Carbon crediting is hard, complicated, and feels abstract, requiring a leap of faith that the equations and reports represent something real and all actors are working in good faith. When you really get down to it, it’s often an exercise in trust. Leugers echoes something we hear from practically every industry figure we talk to: “We can’t offset our way to a solution.” But she insists that carbon credits, properly and transparently administered, remain a vital tool in the fight against climate change.
“Let’s be honest. The voluntary carbon market only exists because there isn’t the political will to introduce a carbon tax economy-wide,” she said. If there were, “we wouldn’t need to exist. It’s frustrating that such energy is being used to criticize people doing something, when the people doing nothing are often let off the hook.”
As important as what Gold Standard does is what it doesn’t do. It has decided not to engage in what it sees as the murkier waters of carbon trading, where projects might have large downside risks or prolong fossil fuel use. Geoengineering is out, as is fossil fuel switching — when dirtier fossil fuels like coal are replaced with slightly less-emitting ones, like gas. Renewable energy, too, is now so cheap to provide that it’s unlikely renewables projects need to sell carbon credits to be viable. Most renewables projects, then, do not meet Gold Standard’s requirements for additionality.
This purist approach has limited Gold Standard’s market share. For Leugers, most critical is Gold Standard’s refusal to certify credits linked to UN-REDD+ (Reducing Emissions from Deforestation and Forest Degradation), the UN’s flagship climate change program, which supports almost half of all carbon credits issued globally. While Dix’s statements don’t include any such credits, REDD+ is such a huge part of the industry that it’s almost impossible not to talk about it.
The REDD+ program anchoring the carbon offset market
REDD+ works by encouraging developing nations to conserve or restore carbon-sequestering forests through financial incentives. This approach to carbon offsetting has been the subject of controversy in the industry because it relies on hard-to-verify assumptions that a particular stretch of forestland would be cut down if it wasn’t being protected by a paid-for carbon credit. UN-REDD+, along with Verra, the world’s biggest carbon credit certifier, was the focus of the Guardian’s damning reporting earlier this year.
This is why Gold Standard refuses to issue credits for REDD+ products, Leugers told us. They can’t be sure that the forests “protected” by the program would otherwise be logged. If a certifier gets this wrong, it would mean the carbon offsets sold to consumers, or to polluting companies like oil producers or airlines, are meaningless.
Mario Boccucci, head of the UN-REDD+ Programme Secretariat in Geneva, who shares the same office block as Leugers in this small, intense world, sees things differently. “I don’t look at them as controversies,” he says. “They are legitimate questions that have to be put into the right context.” He is frustrated that there hasn’t been more of an effort to comprehend what he sees as the benefits, emphasizing to us the acres of forests rescued by REDD+.
Verra, which certifies offsets generated by REDD+ projects and issues two-thirds of credits in circulation, sits at the center of the contentious rhetoric leveled at carbon trading from all sides. In response to allegations that offsets amount to greenwashing or are outright fraudulent, Verra’s then-CEO David Antonioli told us in March, much like others in the industry have, that carbon trading is just one small piece of the climate mitigation puzzle.
Antonioli insists that the Guardian’s investigation got it wrong — that the methods it used to discredit Verra’s credits, he says, “are comparing apples and oranges.” He’s probably right about the difficulty of evaluating such complex data. But if it is so difficult to explain that carbon credits have integrity, it’s equally hard to feel much confidence that these abstract instruments are shifting the climate dial.
This is obviously not an ideal situation — but the failure of politicians and the success of lobbyists on climate mitigation has gotten us here. If governments, particularly the US, had not balked at robust carbon pricing regimes in the mid-2000s, and if more schemes like the European Union’s Emissions Trading System or Uruguay’s new carbon tax had been implemented sooner, there would be no need for the private market, Antonioli said. He thinks new initiatives to create regulatory momentum in the private carbon market, such as the Integrity Council for the Voluntary Carbon Market, an independent industry effort to codify best practices, have come about five years too late. What is left is a patchwork of poorly regulated voluntary carbon markets.
Into the void created by government, corporate, and social inaction have rushed myriad players. Some are motivated by environmental concerns. Others, sniffing a quick, green buck, may not be. One large forestry corporation, which spoke to us on condition of anonymity, said it was considering developing a REDD-conforming carbon credit project on a piece of land it owned, but had never planted or logged. It was just sitting there, they said, and they realized they could get paid to keep doing what they’d been doing already. With a few consultants, some hefty reports, and a few years of back and forth with Verra, the credits could start flowing. The incentives, in this case, would be working precisely as designed. But it’s not most people’s idea of transformative climate action.
A humbler vision for carbon offsets
So, Dix in Yorkshire bought offsets from Ecologi in Bristol, who bought them from CO2Balance in Somerset, which paid Bureau Veritas in London to convince Gold Standard in Geneva to issue credits for emissions reductions achieved by Carbon Zero’s Kenyan stoves. The journey of a carbon credit is a long chain of financialization — of nature, of communities, of solutions. A price has been set for the air that we breathe. It feels like a rather abstract, roundabout way to save the planet, and Dix, at home on the muddy moors of Yorkshire, may not like it. Yet he does it anyway, and it makes him feel a little better. An imperfect response to a perfect storm.
Everyone we spoke to is adamant: offsets can never be the total solution or a get-out-of-climate-regulation-free card. But even this may be thinking about it in the wrong way. John Holler, a climate expert at the World Wildlife Fund, who used to work at Verra, says carbon trading isn’t really about offsetting at all. Instead, it’s simply a tool for routing money toward good things: low-carbon stoves, forests, community solar energy. “You’re purchasing carbon credits to contribute to global decarbonization,” he says, “not making a claim against your own emissions.”
A humbler, less satisfying goal. But perhaps a more honest one.