8 Tips to De-Risk Your Carbon Credit Purchase

We’ve all heard the stories: A climate investment that was unexpectedly reversed in a catastrophic fire, releasing CO₂ back into the air. A developer who sold credits to protect a forest supposedly in danger of being logged when it was already protected. A well-intentioned project that never got off the ground. Unfortunately, these and other low-quality carbon credit purchases can result in a tangled mess of environmental, financial and reputational consequences.

"Every company wants to buy high-quality carbon credits. The problem is that there is a significant difference in the quality levels between credits and the opacity of the market makes it difficult to ascertain the quality of an individual credit that a buyer may purchase,” says Casey Leist, Senior Director of Carbon Finance at CarbonCure Technologies. “Given this, it's important that carbon credits are not treated as equal or fungible commodities."

Casey is part of the team behind our methodology for measuring, reporting and verifying the CO₂ removed through our carbon mineralization technology and submitted it to Verra for approval.  We know the characteristics of high-quality carbon removal credits and we’ve gleaned knowledge from working closely with leading companies that have had a wide range of experiences in the voluntary market. It’s from that experience that we’ve compiled the following list to protect the integrity of your climate commitments. While there’s no way to completely eliminate all risks, here are eight steps your company can take to help de-risk your carbon credit purchase. 

1. Manage your internal risk. Be clear on your company’s climate goals, values and risk tolerance so you can align your purchases to match. Does your company want technology or nature-based solutions? What co-benefits are important? Are you willing to invest in riskier R&D projects or do you need the certainty of high-quality, permanent credits?

2. Look for verified or verifiable credits. Independent, third-party verification ensures a certain threshold quality of carbon credits. It includes auditing at the initial approval of a project to ensure the methodology for measuring the CO₂ avoided or removed is scientifically sound and robust. It assesses for additionality, negative impacts, risk of reversal and leakage. Once validated, it provides verification with ongoing monitoring of emission reductions/removal.

3. Focus on higher-quality credits. If your company needs to reduce risk as much as possible, focus on these verifiable attributes to make the greatest impact:

• Additionality. Validated projects and certified credits will already be assessed for this criterion, demonstrating that offset revenues are key to a project’s financial viability. This may include demonstrating: 
  1) it is not required by law or regulations
  2) the project’s technology is not in common practice 
  3) the project faces substantial barriers.

• Measurability/Verifiability. Look for projects that can precisely measure the amount of carbon reduced or removed, thus enabling the carbon reductions and removals to be verified. These are technology-based solutions that eliminate the risk of overestimating.
  
• Permanence. The longer the carbon removal is guaranteed against the risk of reversal, the higher the relative quality of the offset. Credits for projects that store carbon for hundreds of years (such as biochar) or thousands of years (such as carbon mineralization) have the lowest risk for their asset classes.

4. Research The Developer. How long have they been in business and selling carbon credits? Who are their customers and what are they saying? When and how do they deliver the carbon credits? If technology-based, is their technology in R&D or up and running? How do they measure and track carbon credits? Is their project vulnerable to regulatory or operational changes that could put their credit delivery at risk? Do they have a wide distribution of projects to provide a stable inventory of credits?

5. Take a portfolio approach. Avoid deals that are “too good to be true” and diversify. Buy a range of carbon credits from different projects and asset classes. Understand the asset class—its pros and cons—and buy the highest-quality/lowest-risk carbon credits you can afford for the asset class. If your company has a low risk tolerance, buy a higher proportion of verified, low-risk credits that are highly durable and precisely measured.

6. Create a buffer. You can create a buffer against the risks of non-delivery or reversal by purchasing more credits than you need, ideally from projects that don’t have a reversal risk. One option is to buffer your portfolio with technology-based carbon removal credits that are very durable, that have wide distribution and are in current production.

7. Keep an eye on the market. New technologies emerge, scientific standards evolve, regulations change. Certain types of credits become more attractive, while others decline in desirability for any number of reasons. If your company doesn’t have the time or expertise to watch market trends, you can research what other companies you trust are doing, or seek advice from trusted consultants, platforms or brokers.

8. Seek Clarity in Contracts. Buyers often contract directly with developers to purchase carbon credits. The contract will set out the quantity, price and time frame for delivery, roles and responsibilities, consequences if expectations aren’t met, how any identified risks are being addressed, and in what cases the developer is liable. You may want to stipulate having removal credits priced and tracked separately from credits for avoidance.

If you prefer, you can work with a broker or consultant with experience in negotiating these types of contracts. 

De-risking your carbon credits is important to protect the environmental integrity of your company’s carbon removal/reduction commitments, your financial investment and your reputation. Considering the urgent need to keep global temperatures from rising beyond 1.5°C, it’s certainly worth the effort to find quality carbon credits from trustworthy sources.

For more details, download CarbonCure’s eBook on How to De-risk Your Carbon Credit Investment.