Carbon Credits or Credibility? Implications for the AEC Industry

We find ourselves in an interesting position with carbon credits and offsetting. It's the new divisive topic for those of us in the sustainability world - quick to send us into a tailspin of contradictory ideas, disappointment, and perhaps for some of us, hope. To understand the current state of problems, we can go back to the beginning.  

An origin story 

The term “carbon credit” entered sustainability vernacular with the Kyoto Protocol in 1997, the first international treaty to set legally binding targets for reducing greenhouse gas (GHG) emissions in developed countries. Carbon credits were presented as a cooperative strategy for GHG reduction: if some groups or projects reduced or sequestered carbon emissions, those reductions “offset” the emissions produced by others. The first formal trading of carbon credits began in 2005 with the European Union Emissions Trading System, which became the largest carbon market.  

If the Kyoto Protocol was the carbon credit’s entry point, the Paris Agreement was its big break. The Paris Agreement included commitments from both developed and developing nations, aiming to limit global warming to 1.5 degrees Celsius and well below 2 degrees Celsius, with emission reductions to net zero by 2050. Broader inclusion, clear targets, and demand for transparency brought an influx of participation by corporate companies, who sought to align their operations with the new targets. Companies began to voluntarily purchase credits to offset the emissions they struggled to reduce, and with this infusion of private money, the Voluntary Carbon Market boomed. In 2023, an estimated $1.7 billion was spent on the Voluntary Carbon Market globally.  

The Challenge of Integrity 

This surge in activity may have outpaced the market's readiness. With more corporations in the mix, demand for carbon credits exceeded the supply, and analyses of the integrity of credits for sale on the market have raised deep concerns. A January 2024 study in Nature Sustainability found that Gold Standard and Verra-certified carbon credits from cookstove projects were overestimated by an average of 9.2 times. The projects they assessed were a meaningful sample – 40 per cent of the total carbon credits from cookstove projects on the Voluntary Carbon Market. This result is reminiscent of the Guardian’s 2023 exposé of over-crediting in rainforest protection projects (Redd+) certified by Verra. The article shared results from three research studies that found that 94 per cent of these carbon credits did not account for true GHG reductions.  

These results are so poignant because they suggest real problems of measurement in sets of verified carbon credits. Credits verified by groups like Verra’s Verified Carbon Standard, or the Gold Standard, are calculated using best practice methodologies with criteria in place that are meant to provide additionality, permanence, and verifiability. If these investigations continue to show that even verified carbon credits are overestimated, where does that leave us?  

These examples point to two deep-seated challenges: first, measuring emission reductions is inherently difficult, and second, despite this difficulty, the carbon credit market cannot tolerate inaccuracies. 

A measurement problem  

To understand the challenges with measurement, we can dig deeper into cookstove projects as an example. Cookstove projects identify populations in developing countries that use GHG-intensive methods to cook, such as coal, firewood, poor quality charcoal, or various mixes of these fuels, and provide a more efficient stove to reduce emissions and create co-benefits like improved air quality. To calculate emission reductions, a project must understand two things: the total emissions that would be released over time if the population continued using inefficient cooking methods without a new cook stove (the baseline), and the total emissions released over the same period with a new, more-efficient cook stove (the new scenario). The difference in emissions between the two scenarios can be sold as carbon credits.  

While simple in theory, accurately calculating emission reductions is very challenging. For example, measuring emissions from the new stoves requires understanding how many people use the new stove (the adoption rate), how often they use them (the usage rate), and to what extent they stop using the old stoves (stacking), all of which are highly variable factors. Currently, verifying agencies allow flexibility for project groups to supply their own metrics which leads to challenges in integrity; the Nature Sustainability article found that cookstove projects overestimated the adoption and usage rate of new stoves while underestimating the emissions at baseline, therefore inflating the number of credits.  

These measurement challenges exist for every type of project the Voluntary Carbon Market, highlighting the need for continuous engagement from independent scientific researchers who can validate measurement methodologies and provide guidance on realistic estimation factors.   

Corporate approaches to offsetting  

Industries with heavy carbon footprints like construction, engineering, and aviation continue to rely significantly on purchasing carbon credits to meet environmental goals. However, sustainability professionals must be cognizant of the risk that verified credits purchased on the Voluntary Carbon Market may be overvalued and may not reliably reflect true emissions reductions.  

This is important from both an ESG risk perspective—where exposure to inaccurate credits poses legal liabilities and reputational damage—and, as importantly, from an intention perspective. At the core of sustainability plans is the commitment to reduce emissions to mitigate climate change, so sustainability professionals and their organizations who choose to use offsets, must be comfortable that offsets help to do this.  

What does this look like in practice? Just as organizations are developing social procurement policies to guide purchasing decisions, they might also consider creating internal offsetting policies to formalize an approach for selecting high integrity carbon credits. These strategies could include preferentially selecting specific types of carbon credits, focusing on projects that use the most validated measurement techniques, and engaging independent carbon credit experts to help inform decision-making. Sustainability teams should always rely on the best available peer-reviewed scientific literature to inform these strategies.  

What’s Next? Regulation, Mistrust, and the Path Forward  

Currently we see a dynamic push and pull as corporations and other participants drive market activity, while scientists and the media raise flags to highlight flaws and inaccuracies. We see efforts to correct the market with regulation and standardization through collaborations between six of the largest independent crediting programs announced at COP28, the Biden administration’s new guideline to regulate the Voluntary Carbon Market released in May, and more conversations to improve carbon crediting methodologies ahead of COP29. On the other hand, we also see the level of mistrust in carbon credits laid bare in the drama that ensued after the Science Based Target Initiative (SBTI) announced that they may consider allowing signees to apply carbon credits to offset Scope 3 emissions. Employees wrote an open letter threatening resignation, called for the CEO to step down, and wrote that if not reversed, allowing carbon credits would ‘strip SBTI of its science-based nature’.  

Ultimately, it’s unclear what the future holds for carbon credits. In many ways, all the attention its receiving and the transparency about the problems that exist are good signs that the market will be kept accountable. Ongoing regulation suggest that the market’s end is not imminent, but as we know from carbon offset projects themselves, the future is uncertain and difficult to predict.