Article by Joachim Klement, Investment Strategist at Liberum
I have some issues with sensationalist newspaper articles like the one published in The Guardian [1] and similar press articles. The article claims that 94% of voluntary carbon emission reductions verified by Verra [2], the world’s largest issuer of voluntary carbon credits should not have been approved because they did not reduce carbon emissions. This claim is based on two factors.
First, Verra may have overstated the estimated reduction in carbon emissions from deforestation by 400% or more. This resulted in Verra selling too many carbon offsets that are in reality not backed by existing forest protection projects. That is a serious claim and if true, Verra has a lot of explaining to do. But I have so far not seen any data that confirms this claim. And while I think the journalists making these claims have this data, I would appreciate it if it could be made available to investors like me to check what is going on there. Again, if Verra or other carbon credit certification organisations sell too many certificates that is a major issue and needs to be addressed urgently.
The second factor that drives the claim that most carbon credits are not really reducing carbon emissions is based on three academic studies on the effectiveness of emissions reduction projects.
All three studies tried to do the same thing but with different methodologies. They looked at the forestation of a series of conservation projects over time and compared it with the forestation (or deforestation) of a suitable control area. If the deforestation in conservation areas is lower than in control areas, the project is considered successful in creating a contribution to reducing climate change. The more trees are protected from deforestation the more carbon credits can be issued against them.
Now, there is an argument to be had if nature conservation should be counted as a positive contribution to reducing greenhouse gas emissions or whether only newly planted trees that would not have been planted otherwise should be counted. But that discussion is beyond the scope of this post.
Instead, let’s focus on these three studies and their results. I read through the two studies of the research group around Thales West published in 2020 and 2022. Both these studies claim that the conservation projects examined (12 Brazilian projects in the 2020 study and 27 projects globally in the 2022 study) did not reduce deforestation compared to a synthetic control group.
Meanwhile, a third study published in 2022 of 40 projects in nine countries came to the conclusion that deforestation was reduced by 47% in the first five years of the projects and degradation of forests was reduced by 58%.
The two studies use different methodologies to estimate deforestation in the control group. The group that found a material impact on deforestation used a comparison of satellite images. In essence, they defined a similar area close to the conservation project with a similar degree of forestation and natural conditions. Importantly, the conservation project and the control groups were selected so that they were at a similar distance to recently deforested areas. Then they looked at the pixels in satellite images that showed trees vs. no trees. If trees in satellite images disappeared faster in the control area than in the conservation area, the project was considered a success in reducing deforestation.
The group that found no impact on deforestation instead focused on demarcated land areas as defined by the local land registry. These land areas typically are a mix of protected and unprotected land, and the control groups were designed in such a way that the mix of protected and unprotected land was similar to the mix in the area that contains conservation projects.
