A Green Lie: The Fallacy of Carbon Credits

Among myriads of contemporary human issues, environmental degradation is arguably one of the most pressing problems. Throughout the previous century, we have witnessed the detrimental rise of tetraethyl lead, Feron, smog, and many other toxic and atmospherically polluting substances, followed by their irreversible health impacts and the policies that desperately attempt to reverse their effects. Yet, among all these environmental problems, the damage of global warming is unparalleled: global warming induces a vast range of disasters including droughts, floods, freezes, and severe storms (Climate change impacts 2022). According to the National Centers for Environmental Information (NCEI), the annual inflation-adjusted costs due to these global-warming-induced disasters have increased drastically by 433% from $17.8B in the 1980s to $95B in 2020. A commonly acknowledged driver of global warming, greenhouse gas emissions including carbon dioxide, methane, and nitrous oxide have tripled from 1980 to 2022 (State of the climate 2020). To mitigate global warming, multiple governments have imposed regulations on corporate carbon emissions and set specific thresholds on net-carbon emissions, giving rise to the creation of carbon credit markets. In short, carbon credits are financially traded certificates that allow the owner to offset a specified amount of carbon emissions. With transactions from carbon markets, it is theoretically possible for companies to make carbon-neutral claims without actually adjusting their underlying emissions. Carbon credits are mainly produced by projects of two types: the traditional forest carbon credits that are generated from forest preservation, and the more novel improved cookstove credits generated from providing fuel-efficient burners to developing countries to reduce log consumption. Nevertheless, globally, the current system of carbon offset is merely an inefficient and even counterproductive solution to reducing carbon footprints, in which carbon credit markets incentivize superficial projects with minimal impacts while hampering genuine efforts to reduce carbon emissions in a self-reinforcing cycle.

The problem of carbon credits begins with forest preservation projects: as forest carbon credit necessities a baseline for comparison, the subjectivity in these baselines is often exploited to produce faulty and overstated estimates. Typically, the logic for forest carbon credits is simple. Entities purchase forests and set up preservation areas, use a model to estimate the hypothetical consumptions of logs without preservation, and gain carbon credits that are the net of reality and the hypothetical situation. Although this logic is viable under a rational and genuine model of the hypothetical scenarios, problems arise as the entities creating preservation areas themselves are allowed to make that estimate. Apparently, there is a natural incentive for projects to exploit the subjectivity in modeling hypothetical scenarios to inflate the carbon credits obtained, even for non-profit companies. Verra, for instance, is a non-profit globally leading standard for the carbon credit markets. In rainforest projects alone, Verra has claimed 94.9 million carbon credits where each credit is equal to one metric ton of carbon emissions. However, multiple independent studies (Guizar Coutiño et al. 2022, West et al. 2020, and West et al. 2023) suggest that only a handful of Verra’s projects showed evidence of deforestation; that is, the hypothetical scenarios Verra suggests are too extreme, and, effectively, Verra is only preserving remote rainforests that are not expected to be deforested. Overall, the analysis suggests that 94% percents of carbon credits (Totaling 89.4 Million metric tons of carbon emissions) generated by Verra have no benefits to reducing greenhouse gas emissions. In more extreme cases, the Nature Conservancy of Pennsylvania begin selling carbon credits in 2019 even though the land was already preserved starting in 1999. Indeed, there are many more examples of inflating carbon credits around the world, and overreporting will not stop as long as the incentives remain. Therefore, the global system of forest preservation carbon credits is built on superficial façades and is extremely limited in their actual capabilities to offset carbon emissions. Yet, as corporates can claim carbon credits from projected future reductions in emissions, even the 6% of actual effective carbon credits are not guaranteed to fully convert.

Globally, forest preservation initiatives often breach long-term contracts and do not achieve the desired carbon reduction initially claimed. One of the most striking and large-scale, nevertheless not sufficiently publicized, examples of failed contracts is the carbon off-setting scheme of the Brazilian world cup. Initially praised as an “excellent way to show leadership” and “win-win situation for the environment” by the united nation (Brazil Scored Zero Emissions at World Cup 2014), the Surui Forest Carbon Project promised to offset all greenhouse gas emissions incurred by the 2014 FIFA world cup. Despite initially having five successful years where illegal logging was greatly reduced, the discovery of gold and diamond in the region eventually led to the project being succumbed to illegal deforestation and was subsequently terminated in 2019. Given the original duration of the project is 30 years, only 16% of the promised carbon reduction was delivered. Although with good intent, many long-term projects are not equipped with sufficient resources and infrastructures to deliver what was promised, and even many government-backed forests carbon credit projects are not sustained. The Oddar Meanchey Preservation is another long-term UN-backed REDD project launched by the government of Cambodia. Since the launch of the project, independent analysis (Brewster, 2014) has revealed that the preservation coverage of the area dropped to 46% as state-sanctioned logging initiatives accelerated deforestation of the area. The conflicts of interest between local governments and the preservation project are deeply rooted in Cambodia’s fast-growing economic development. These failed projects are manifestations of their underlying difficulty: Regardless of genuine or disingenuous intents, long-term preservation projects are extremely difficult to maintain, and failures are common even when projects are backed by the full faith of the government, further demonstrating the ineffectiveness of preservation projects in reducing carbon footprints. Now, for the 6% of the carbon that is actually effective and assuming the project survives its full duration, their positive impacts on aggregate carbon emissions remain inconclusive.

Although forest preservation projects claim a reduction in local carbon emission, the aggregate global effects of these projects are difficult to study, in which local forest preservation may give rise to more logging in other areas, yielding an overall negative effect. According to Food and Agriculture, half of the wood harvested annually is consumed to make pulp and paper, and 18 percent is used for furniture. Simple demand theory suggests that the preservation of forests (i.e decreasing supply of logs) would only imply two things — the price of paper and wooden furniture would go up and its demand would decrease subsequently. Nevertheless, since both commodities are necessities for living, their inelastic demands would not yield fewer quantities consumed, but rather higher prices. This phenomenon is reflected from 2006 to 2009 when the production of lumber decreased by 40% but the market value for paper products increased. This analysis is only for the optimistic scenario where purchasing forest carbon credits would lead to a reduction in lumber supply. However, in reality, forest preservation projects have not led to a decrease in lumber production in the U.S. According to statista, U.S annual lumber production increased over 50% from 30,461 million boards in 2010 to 45,423 million boards in 2019, during which the voluntary carbon market exploded and grew by 100 times. Carbon credit projects exist because of its assumption that without preservation forests would be removed to harvest lumber, and the protection of forests results in fewer trees harvested and thus less carbon eventually released to our atmosphere. Yet, the above data suggests the preservation of local forests would not reduce the lumber harvested on a national level, and thus aggregated effect of forest preservation carbon credits remains at best inconclusive, lest beneficial.

Admittedly, the abovementioned problems are only for forest preservation carbon credits, while many people have been contending for a supposedly better alternative — improved cookstoves that provide higher fuel efficiency in developing countries that consumes wood for cooking. Despite the idea of improved stoves being theoretically sound, it exhibits significant problems in practice.

Although improved cookstove credits are hailed among genuine environmental activists and politicians as an effective way of carbon reduction, several studies have revealed concerns over its efficacy. Globally, it has been shown that over 25% of black carbon emissions stem from bio-mass (wood) fueled cooking (Amann et all 2011), while the majority of households using bio-mass as a main source of fuel rely on three-stone fires, where three rocks are used to elevate the cookware. It is both reasonable and scientifically shown that three stone fires have only roughly 10% of thermal efficiency while the typical electric cookstoves have 75% (Adria & Bethge, 2013). Thus the rationale for improved cookstoves is simple: If improved cookstoves increase fuel efficiency, then less bio-fuel will be consumed and thus fewer carbon emissions. This scheme became so popular that both the UN and Hilary Clinton have directed multiple funds in subsidizing improved cookstoves in developing regions; in total, there have been more than 100 projects to distribute improved cookstoves. However, the effects of most of these programs are unsatisfactory. Multiple studies (Adane et al., 2020, Khandelwal et al., 2017, and Regala, 2021) have pointed out that adopting improved cookstoves actually facilitated greenhouse gas emissions and worsened the issue. Instead of eliminating the three-stoned stoves, communities that received improved stoves used them concurrently, this is known as stove-stacking and may lead to higher levels of air pollution (Regala, 2021). Also, improved cookstoves are vastly unused as people preferred their traditional method of cooking. Furthermore, recent studies have shown that, although improved cookstoves are more fuel-efficient, the overall energy and bio-fuel consumed for improved stoves in cooking designated dishes are comparable to that of traditional stoves, and in some cases, improved stoves are less efficient (Hafner et al., 2020). Therefore, even the highly praised and seemingly scientific form of alternative (improve cookstove) carbon credits are subjected to subtle, yet fatal, problems that render them inefficient and even counterproductive. Having shown the environmental limits and inefficiencies of carbon credits, we will further demonstrate its problems and inefficacy from an corporate perspective.

The carbon credits market allows companies to cheaply meet their sustainability goals and make misleading claims about carbon neutrality without really changing their practices. Among the largest ten buyers of carbon credits (Based on Verra data), over 70% of them are unrenewable energy companies and 10% are environmental activist organizations. In terms of production emissions (excluding customer emissions), energy companies are, surprisingly, not as polluting as most heavy manufacturing industries. Nevertheless, energy companies seem to be the most radical environment proponents: big names like Shell, BP, Exxon Mobile, and DPDgroup all have made targets to become carbon-neutral before 2050. A closer examination of their financial reports reveals the ulterior purposes and goals of their claim. Since 2019, the carbo carbon credit purchase by Shell soared 130 percent to reach 5.1 million tons. At this rate of increase, Shell will not need to make any adjustments to their actual operation to claim carbon neutrality. Using today’s carbon market spot price, Shell only needs to spend 128 million dollars on carbon credits to become carbon-neutral, accounting for an almost non-existent 0.0000267 percent of their operating revenue in 2022. This phenomenon coined the term ‘greenwashing’ and has been affecting not only the energy sector. Disney, for example, also claimed carbon neutrality by 2030 and is a big client of Verra, although Disney’s carbon emission is almost insignificant compared to industrial firms. Yet, Disney gets to publicly gloat about their effort in saving the environment just by purchasing a tiny amount of carbon credit that is worth 6 million dollars annually, where 95 percent of these credits were, as previously discussed, ineffective. Thus, the concept of carbon neutrality itself is highly valuable in marketing, and large conglomerates only need to pay an insignificant amount of their revenue to make such a claim. Gradually, the rise of ‘greenwashing’ gives rise to the compromise of genuine effort to save our environment.

Under a free market economic model, only cheap carbon credits would survive in the long run and quality carbon credit initiatives would get substituted by their ineffective counterparts in a self-reinforcing cycle. With the explosion of carbon markets, there are more than 230 pure trading institutions participating in the carbon markets. The rise in popularity lead to pre-mature standardization: the Chicago Mercantile (CME) Exchange created the standardized ‘CBL Global Emissions Offset (GEOZ3)’ carbon credit futures contract, where different sources of carbon credits are indistinguishably treated. From the most basic economic demand theory, only the cheapest suppliers of an identical product have pricing power and will drive out other participants in the long run. That is, genuine projects that are more costly to initiate, maintain, and with scientifically proven results will be driven out of carbon markets, and projects would need to be increasingly cost-effective in a market environment deeming best to be the worst. Direct evidence of this phenomenon is found in the prevalence of forest carbon credits over others — it is not only the easiest credit to claim but also the cheapest carbon credit that can be purchased. This rooted conflict in the financial market’s desire to standardize and the environmentally optimal practice to diversify is at the center of the carbon market fallacy. Not surprisingly, competition for pricing power will not save our planet.

To sum up, the fallacy of carbon credits manifests itself in several ways: The inaccurate and inflated measure of forest preservation baselines, the failed promise of long-term forest preservation, the intricate dynamics of forest preservation yielding suboptimal impacts, the counter-productive effects of improved cookstoves, and the superficial ‘greenwashing’ culture that hampers the more expensive genuine efforts to reduce pollution. Indeed, although carbon credits seem like an innovative approach to facilitate environmental preservation, this system must be heeded for the abovementioned reasons before adopting it on a more global scale in the name of environmental sustainability.

References

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