Lockton spotlights market shift to higher-quality carbon credits

Lockton has highlighted significant developments in voluntary carbon markets, particularly how credits are being assessed and valued.

David Briscoe, head of special projects P&C specialties at Lockton, pointed to a growing focus on the quality of carbon credits, even as overall prices have dropped due to market challenges.

Voluntary carbon markets provide a way for organisations to offset unavoidable greenhouse gas emissions by purchasing certified credits. Each credit typically represents one metric ton of CO2 or equivalent gases either reduced or removed from the atmosphere.

However, recent scrutiny has revealed concerns over the reliability of certain credits, particularly those generated through nature-based projects.

Credibility issues in nature-based credits 

Briscoe noted several recent studies that have raised questions about the effectiveness of nature-based carbon credits.

In January 2023, an analysis of forestry credits certified by Verra suggested that over 90% of the credits failed to represent actual emissions reductions.

A separate report published in August 2023 indicated that some forest conservation programs had overestimated their ability to prevent deforestation.

These findings have undermined confidence in the market. Organisations purchasing these credits have faced accusations of greenwashing, which has led to reputational risks and financial losses.

The market has also seen a sharp decline in demand for lower-quality credits, creating an oversupply and driving down prices.

Market reforms and international collaboration 

Briscoe outlined several initiatives aiming to address the integrity issues in voluntary carbon markets: 

• Voluntary Carbon Markets Integrity Initiative (VCMI): Established in 2021, this program develops guidelines to support high-quality carbon credit trading.
• Integrity Council for the Voluntary Carbon Market (ICVCM): Also launched in 2021, this council seeks to improve market standards and increase transparency.
• Global Carbon Market Utility (GCMU): Created at COP27 in 2022, the utility focuses on raising credit quality and scaling the market.
• International Sustainability Standards Board (ISSB): The ISSB introduced climate disclosure standards in 2023 to improve corporate reporting and accountability.

At COP28, six leading carbon credit certifiers, including Verra and Gold Standard, announced plans to collaborate on standardization efforts. Aligning methodologies across organisations is expected to enhance trust and efficiency in credit validation.

Meanwhile, governments are taking a more active role in shaping voluntary carbon markets, using them as tools to meet national emissions reduction targets.

Regulatory measures, such as the Commodity Futures Trading Commission’s guidance on carbon credit derivatives, also aim to improve market oversight.

Quality factors for carbon credits 

Briscoe explained that the value of a carbon credit increasingly depends on several key quality indicators. These include:

• the reliability of emissions reductions
• realistic baseline assumptions
• measures to prevent double counting

The ICVCM’s Core Carbon Principles provide a framework for evaluating these attributes.

Higher-quality credits typically exhibit the following traits:

• Monitoring and verification: Projects that incorporate advanced monitoring systems and independent verification processes
• Co-benefits: Credits that provide additional social, environmental, or biodiversity benefits beyond emissions reductions
• Project type: Removal-based projects, such as direct air capture or reforestation, are often valued more highly than avoidance projects
• Transparency: Clear documentation and adherence to internationally recognised certification standards, such as those set by Verra or Gold Standard

Role of insurance in mitigating risks

Briscoe explained that insurance is increasingly viewed as a tool for managing risks associated with carbon credit investments.

Coverage can address a range of risks, including natural disasters, regulatory changes, and project failures. Policies may also offer replacement credits in cases where projects fail to deliver the promised reductions.

Premiums for such insurance are typically influenced by project characteristics, including quality indicators and the developer’s track record.

Briscoe noted that insurers are also developing new products to support a wider range of stakeholders, including project developers, lenders, and traders.

Lockton’s analysis underscored the growing emphasis on quality in voluntary carbon markets, driven by efforts to align with global climate goals. As standards evolve, organisations may gain greater confidence in the reliability of these instruments.