Evaluating a carbon offset project - what do you need to know?

Knowing how to evaluate carbon offset projects is a crucial step in understanding the best options for investing in carbon. Whether you are a private investor, government, non-governmental organisation or a business looking to either invest early capital in a new carbon venture or determining which project’s carbon offsets you want to purchase to retire against your own emissions or to trade, you need to have a fundamental understanding of how to evaluate a carbon project. There are many considerations that can help differentiate between existing carbon projects, each helping to paint a picture of a project’s quality.

Vintage. A carbon credits’ vintage is referring to the particular year that a projects associated credits were issued. Similarly, it can also refer to the year that greenhouse gas emission reductions occurred. Carbon offsetting projects are subject to stringent third-party validation and verification phases to ensure a project is achieving the GHG emission reductions it is claiming. It is only after third-party verification that carbon credits are issued. Depending on the project, credits are usually issued in annual tranches or issued every few years. Generally speaking, most organisations globally seek projects with carbon offsets with vintages between 1-3 years, which tends to suit their offsetting needs.

At a high level an offsets vintage could be indicative of a project’s quality and subsequently its price. The perception being that projects with older vintage credits may have struggled to sell its credits in the past due to project quality concerns. As such, it is common to see older vintage credits selling for discounted prices, averaging 24%. Microsoft have a policy for purchasing carbon credits issued in more recent vintages, as a result. This is a rule of thumb and does not pertain to every project or vintage. For example, Gold Standard states ‘as long as it meets the criteria of a reputable standard – it shouldn’t matter whether the emission reduction happened this year of five years ago’.

Leakage. It can often be the case that, though a project was successful in reducing GHG emissions as a direct cause of that project’s activities, that as an unexpected consequence GHG emissions are caused elsewhere as a result. This phenomenon is called leakage. For example, a REDD+ project implementing strategies to combat deforestation and forest degradation with forest edge communities may successfully protect one area of forest, but fail to realise that the have just shifted the problem to a different forest elsewhere. Therefore, any carbon emission reductions that have occurred have been nullified due to leakage. As such it is important to make sure you study a project’s monitoring reports and make sure that they are actually achieving the carbon sequestration they are claiming, before you end up buying credits from a fraudulent project. The easiest way around this however, is to make sure you source your credits from a reputable carbon standard.

Standard. There are many carbon standards around the world with many more organisations emerging, also wanting to enter the market as a carbon accreditation body. Only a few are globally recognised as carbon standard leaders. Carbon standards are groups that verify carbon offsetting projects of all types. Carbon standards, through rigorous monitoring, verification, validation, and auditing processes, ensure that all carbon offsetting projects that they engage with verifiably achieve all of the positive environmental impacts that the said projects claim. In doing so, they then officially issue carbon credits to the project based on either annual issuance or periodic issuance, according to the project type.

Two of the most globally recognised carbon standards are:

• VERRA – Verified Carbon Standard. VERRA, a not-for-profit organisation, is the world’s largest carbon accreditation standard. VERRA has 1,786 projects officially registered and has verified and issued over 880 million carbon credits to date.
• The Gold Standard. GS is an offsetting standard that focuses on environmental and social benefits. The foundation has launched a new generation of standards, with climate action and the fulfillment of SDGs being their core objectives. GS is working with 2,300 projects over 98 countries and to-date has issued 191 million carbon credits.

There are any more standards such as Plan Vivo, Climate Action Reserve, CORSIA and the American Carbon Registry to name a few.

Additionality. There can be two meanings attributed to additionality when dealing with carbon offsetting. The first relates to whether or not a carbon credits associated GHG reductions are in fact additional to a projects baseline scenario; if the reductions would have happened anyway, without the intervention of a project’s activities, then a credit is not additional. It is incredibly unlikely that a reputable carbon standard would have issued credits to any project that does not reduce emissions beyond the baseline scenario and is therefore a good indicator of a poor-quality standard and therefore a poor-quality carbon credit. If you come across projects and credits such as this, you would do well to steer clear of them as purchasing credits like this, in lieu of reducing any additional emissions, does more harm to the environment.

The second meaning to additionality refers to all the additional benefits and activities a carbon project achieves beyond the base case of offsetting carbon emissions. Additionality can refer to a wide variety of benefits a project can bring, from social, environmental to economic. A forest conservation project could help to protect rare and endangered species of flora and fauna, for example. A cookstove project, providing families with more efficient fuel consumption rates and a cleaner burn could lead to a healthier home environment as well as a reduced demand on family members having to spend as much time collecting fuelwood, meaning less deforestation and more time for activities such as education. In today’s market, there is a direct correlation between the value of a carbon credit and that projects additionality.

Project Type and Location. Carbon offsetting projects are located all over the world. Finding a project to invest in, or to purchase credits from will fundamentally come down to what is important to you and your needs. If you are buying on behalf of a business that wishes to purchase credits with significant additionality so that you are directly contributing to socio-economic and environmental impact in developing parts of the world, then you may want to find projects that are further afield than the US, or Europe, for example. Understanding a projects location and local impacts can help drive your decision making and refine your carbon requirements. Location can be a factor in project type and alter your evaluation considerations. Let’s look at a few.

Carbon sequestration

• REDD+ projects help to maintain global forest stocks whilst also helping to preserve rich biodiversity and ecosystems. They also deliver strong socio-economic impacts to rural communities.
• Regenerative agriculture captures carbon through improving soil management. This can deliver a range of additional benefits across the agricultural landscape.

Methane destruction

• Methane projects look to negate the more harmful impact of methane escaping to the atmosphere (compared to CO2). However, these projects could potentially create disincentives to regulate landfill and agricultural emissions.

Clean water and clean cookstoves

• These projects help prevent unregulated harvesting and burning of wood from local forest stands by offering alternatives for communities to boiled water by and wood-fired cooking. There are many additionalities to this beyond just the prevention of carbon emissions, such as community health and enabling families more time for attending school or work. Typically, these projects would be found in developing nations.

Renewable energy

• Solar, wind, biogas, hydro, landfill gas to energy. There are many options that fall under renewable energy, and it can come down to your preference. For example, Hydro projects involves negative environmental impacts associated with the creation of the dam. In other examples, bringing renewable energy to rural communities can bring incredible socio-economic change and lead to meaningful community development.

Transportation

• Switching fuel from a high carbon fuel to a low carbon fuel.

Price. Valuing a carbon credit can be a perceptually difficult task as there are many contributing factors in determining price, as we have explored. Everyone will enter the market with their own ideas and priorities for selecting carbon offset projects to evaluate and will have an idea of their budget. By looking at all of the above factors you will be able to paint a picture of the quality and value of a project and its offsets. You will be able to then use this information as a guide to find the best projects to fit your budget and requirements. You may also find that by diversifying and creating a carbon portfolio that blends higher priced, more additional credits, alongside lower priced projects, that you may be able to achieve your additionality goals as well as your offsetting goals.