Policy consultation response: UK Climate Change Committee Carbon Offsets

The United Kingdom (UK) Government's Climate Change Committee is planning to publish a report on the role of carbon credits in the UK's net zero strategy. Sylvera's response aimed to highlight the potential positive impacts of voluntary carbon markets (VCMs).

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What is the role of your organization and what is your role within this organization?

Sylvera is a British technology startup producing carbon credit quality ratings, as well as state-of-the-art carbon accounting data for forests and other natural systems. Ultimately Sylvera exists to bring trust and transparency to carbon markets so that they can increase both the quality and the quantity of climate finance flows, increasing the world’s chances of meeting the goals of the Paris Agreement.

Our data is collected using machine learning (ML) algorithms, calibrated by state-of-the-art ground truth data gathered by our field team, to interpret multi-modal satellite data. We have developed a multi-scale lidar methodology to reduce the uncertainty and biases of biomass carbon estimates associated with legacy allometric methodologies. 

The current application of our technology is to rate nature-based projects issuing carbon credits on VCMs. Sylvera has developed methodologies that utilize deep spatial analysis driven by its advanced ML capabilities, combined with desk-based analysis of project documentation and publicly available data, to consistently measure the effectiveness of nature-based projects issuing carbon credits on VCMs. Ratings are calculated based on the project’s performance in three areas: carbon score, emissions reductions or removals achieved compared to the credits permitted, additionality, the extent that results would not have occurred without the project, and permanence, the risk of reversals. The project is also rated for its community and biodiversity co-benefits. Sylvera counts as customers some of the largest buyers of offsets globally, and its ratings have been embedded into CBL and CIX, two of the world's largest and most liquid carbon exchanges.

We have partnerships with multilateral organizations such as the World Bank, through which we are developing a national forestry map for a large African country as part of the Forest Carbon Partnership Facility. At COP 26 we were selected as a winner of the World Economic Forum’s recent UpLink carbon markets competition. We have technical partnerships with NASA and a number of leading universities, including UCLA, UCL and Imperial College London. 

Sylvera’s policy team is responsible for understanding the policy landscape surrounding carbon markets, and for scoping new applications for our technology and data. This exposes us to a uniquely wide range of insights and perspectives on the role of carbon markets, carbon pricing, and carbon offsets.

1. What are the main risks and opportunities presented by voluntary carbon offsets?

Opportunities: by connecting buyers and sellers of high-quality carbon credits, carbon markets can be an invaluable mechanism to reduce emissions at least cost, and hence at the greatest scale. This will accelerate overall ambition and maximize progress towards net zero as quickly as possible, allowing time for harder-to-abate emissions to be tackled and the necessary new technologies to be developed and implemented. 

Risks: low-quality credits, or the perception of low quality, will erode trust in the market and reduce its impact. Our analysis of nature-based crediting projects demonstrates that while most new projects are relatively high-quality, some have fundamental problems with additionality, baselines, permanence or other types of carbon accounting issues. 

We plan to assess the quality of various voluntary carbon offsets bought by UK companies, or "produced" in the UK. A range of activities is considered part of voluntary carbon offsetting, from shorter-term emissions reduction measures to long-term removals of carbon.

2. What data or evidence is there on the scale, range, pricing and quality of offset activities that are being purchased in the UK, and are being produced in the UK? How can we expect this to change in future? What are the data gaps?

Regarding UK projects, the WCC and the Peatland Code offer a limited volume of certified UK-based projects. Allied offsets is a reasonably comprehensive directory of credits on the market with details on pricing, location and type of project. Only two projects in the UK are listed. 

In terms of UK companies purchasing offsets from international projects, we can expect transactions to increase in line with net zero commitments. Information on the number of credits purchased can be found in the public access corporate climate disclosures of companies. 

Carbon credit rating platforms are beginning to provide data on the quality of credits on the market. Coverage is not yet universal and has started mainly from the largest projects, and is often prioritized by sector, for example, Sylvera’s ratings have focused on nature-based projects listed on Verra, starting with Reducing emissions from deforestation and forest degradation (REDD+) and moving onto afforestation, reforestation and revegetation (ARR) and improved forest management (IFM). The Carbon Credit Quality Initiative, from World Wildlife Fund (WWF), Oko Institute and Environmental Defense Fund (EDF), is an initiative to develop a methodology to score crediting projects. 

In the future, we expect a clearer focus on credit quality to emerge. This is being driven both by regulators, who are starting to look at the issue in the context of potential greenwashing, as well as by the media and public opinion, which increasingly expects a robust focus on environmental integrity. 

The data gaps currently concern exactly which entities are retiring, in other words, canceling, credits and for what purpose. More transparency on this information, and what claims are made on the basis of this, would be valuable.

Voluntary offset market regulation and standards

We plan to assess how well current standards and policies are working and to evaluate different options for how current standards or policies can be improved. In some of the following questions, we mention several existing standards as illustrative examples. This is done to clarify what kind of standard we are referring to and does not indicate any preference for certain standards over others. 

3. What is your assessment of the various standards relating to offsets (including UK specific standards such as the Peatland Code, and international verification standards such as Gold Standard and Verified Carbon Standard), including those in development (including UK specific standards such as the UK Farm Soil Carbon Code, and international standards/principles such as the Core Carbon Principle)? What more is needed?

The standards listed in this question face an unenviable task: to produce high-integrity methodologies while not being so prescriptive as to tie the hands of project developers and unintentionally exclude high-integrity projects. Our view, having conducted in-depth reviews of a number of the most popular, reputable methodologies, is that they do a fairly good job, and are constantly improving — as evidenced by the recent Verra consultations on their methodology for Afforestation, Reforestation and Revegetation. 

However, our granular assessments of the highest-issuing projects on the biggest registry have shown that there remains a wide range in carbon credit quality. Broadly, credit quality is distributed on a bell curve: most projects are around the middle, with a small minority severely underperforming, and a similar-sized group significantly exceeding expectations. It is not feasible for the registries to conduct this depth of analysis on every crediting project, and arguably would not be desirable. This is why Sylvera was created as the first independent, conflict-of-interest-free carbon credit ratings agency. 

The methodologies developed by Sylvera to assess carbon projects are standards agnostic, meaning that we do not favor any standard above another when assessing a project. 

We welcome the development of soil organic carbon methodologies. However, we are cautious as the risk of reversibility for such projects is high and adequate measures must be taken into account for potential reversals in the long term. We welcome the introduction and implementation of long-term monitoring approaches, for example, using satellite imagery, to accurately assess reversals in near real-time (e.g. Verra’s long-term reversals monitoring system).

4. What are the strengths and weaknesses of monitoring, verification and reporting (MVR) for offsets produced in the UK and globally? What more is needed?

We have recently participated in a World Bank report on digital MRV (D-MRV) due to be published in March or April 2022. This lays out best practices and case studies for applying new digital technologies to MRV. We would recommend this as a relevant resource to be considered, alongside this 2021 WB report on the application of remote sensing technology to forest MRV.

Our expertise is on monitoring nature-based projects, particularly forests. Key challenges we have addressed through our application of machine learning to interpret satellite Earth observation (EO) data are:

•  Timing: regularity of monitoring. EO data is collected every time a satellite passes over an area, which is far more frequent than the cadence of any in-situ MRV.
  

• Coverage: using EO data allows a whole area to be monitored, rather than just small sample areas to be extrapolated.
  

• Estimating carbon in a forest: this was traditionally done by estimating biomass using allometric methods based on tape measurements and basic models. We have developed an innovative multi-scale lidar methodology to scan forests and produce 3D volumetric models, allowing a 10x reduction in uncertainty and 4x improvement in accuracy. 
  

Ongoing challenges:

• Strength of baselines: according to our analyses, the largest single source of error in carbon accounting of REDD+ projects is poor baselines. This can be due to inappropriate selection of reference and leakage areas, inaccurate measurements of past deforestation or incorrect projections of future deforestation without the project.
  

• Degradation: the resolution of EO data limits the ability to accurately detect small-scale forest disturbance and degradation, or interpret this into carbon impacts.
  

• Carbon not in above-ground biomass: up to 80% of ecosystem carbon is stored in soils. Using any kind of technology to measure this, especially remotely, results in significant uncertainties. Technology has not yet developed to accurately estimate soil in wider ecosystems such as mangroves, grasslands and marine and coastal sites.
  

5. What does the evidence indicate are the key areas of voluntary offset markets that could benefit from regulation or intervention?

In order for VCMs to achieve their full potential impact, integrity of both the credits and the claims made by corporate buyers must be ensured. These points are closely linked: regulators play a key role in defining the requirements for credits that can be used to make certain claims, and ensuring that these standards are comprehensive, high-integrity and evidence-informed. For example, we do see a role for credits in net-zero claims: to offset the hardest to abate value chain emissions, to ensure the fastest possible emissions reductions at a global scale. However, these credits should only be used once all abatement possibilities have been thoroughly considered, and alongside research and investment in value-chain emissions reductions. Nevertheless, there is an extensive opportunity to use credits during the emissions reductions phase of a company’s supply chain towards net-zero. Indeed, credits can be used temporarily to offset the emissions which are not yet abated. This requires, however, regulations to ensure those offsets do not slow down the reduction of emissions and are not used to replace the abatement of emissions. Extensive due diligence should also be conducted to ensure the credits deliver the carbon impacts, and are additional and permanent.

Furthermore, regulators have a role in ensuring the transparency of carbon markets. Information on who is buying, selling and retiring which credits and for what purpose should be disclosed and that information should be easily accessible. Any environmental claims, for example, "carbon neutral" products should be backed up by a disclosure of how many of which credits were retired to compensate for the relevant emissions. 

Harnessing Financial Flows

The growing market for voluntary carbon offsets, and appetite from businesses to support climate objectives, may present an opportunity for significant financial flows to be directed towards priority sustainability outcomes such as biodiversity, nature-based solutions and scaling technologies for carbon removals. We plan to assess this potential opportunity, as well as the associated risks.

6. What is the scale and potential impact of voluntary offset activity on land use and on wider social, environmental and development outcomes, both positive and negative? How would this differ between UK-based and international projects?

There is an annual $700 billion funding gap for nature conservation, that could be addressed, at least to some extent, by VCMs. VCMs topped $1 billion in 2021 and are upscaling at a rapid rate. 

VCMs have huge potential to fund green development, as shown by this report on the successes of the UNFCCC Clean Development Mechanism. Carbon credits, particularly nature-based credits, have huge potential co-benefits to both nature, biodiversity and ecosystems services. For example, this report outlines the key co-benefits of topical forest credits, and best practices to ensure these are achieved.

There are risks of unintended consequences from focusing solely on pricing carbon, for example, incentivizing fast-growing monocultures for ARR over biodiverse native forest restoration, or increasing demand for land use, therefore, driving deforestation by overproducing biofuel. Another risk is that, by being too narrow, the methodologies restrict important activities, for example, forest conservation in high forest low deforestation (HFLD) jurisdictions. They may even create perverse incentives to carry our high emitting activities, for example, to create more favorable deforestation baselines. By identifying these risks, standards and regulations can ensure that they guard against them, and credit buyers can conduct their own due diligence to avoid them.

7. Are there specific activities or regions where directing funds for offsetting might have a particularly positive impact? Please consider the UK and/or the international context, depending on experience.

Preserving intact forests should be a priority. Currently, natural climate solutions receive only 3% of climate finance, despite natural ecosystems containing over 100Gt of irrecoverable carbon. Not only did the Stern Review identify tropical forest conservation as a particularly cost-effective approach to reducing emissions but, as discussed above, preserving these ecosystems is associated with huge co-benefits for communities, biodiversity, and ecosystem services. This was echoed in a 2021 paper in Nature which provided both economic and scientific arguments to prioritize the conservation of standing forests. 

8. What could help concentrate private investment in offsets towards the most effective activities? What role, if any, is there for public funding?

Public funding can play an essential role in facilitating research and development, for example of technological solutions to overcome current barriers to developing high-quality projects, and ongoing MRV to ensure credits are high quality, for example, this World Bank report. 

Company Transparency and Targets

We plan to assess the role voluntary offsets play in company and financial institution emissions reduction targets, and in consumer and investor decisions.  

9. What do UK companies, financial institutions and/or other institutions (or specifically, your company or institution) consider when making purchasing decisions about offsets? What evidence/information do they/you draw on, and what more information would be useful?

The quality of carbon offsets should be a key determinant of demand. Sylvera’s ratings determine quality on the basis of three broad considerations:

• Carbon score: Sylvera calculates the metric tons of CO2 emissions avoided or removed from the atmosphere, and compares this to the number of credits the project has been permitted. This is done by assessing both the baseline scenario, and the performance of the project, for example, for a REDD+ project, how much forest cover has changed over the project.
  

• Additionality: We assess whether the claimed benefits would have occurred without the project. This includes assessments of financial and policy additionality, as well as looking at the activities conducted by the project and an assessment of whether the baseline scenario is a realistic assumption of what would have happened without the project funding. 
  

• Permanence: We consider the risk of reversals, or whether the emissions avoided or removed will stay out of the atmosphere. For forestry projects, this involves assessing natural risks, for example, climate change and fire, as well as human risks, for example, deforestation. 
  

Price is also a consideration. Current market analysis suggests that pricing does not yet reflect quality, although now that high-quality data is available this could start to change. 

Many buyers also select credits on the basis of co-benefits, alongside carbon. For example, corporations may want to focus on protecting biodiversity in countries that they have links to and in which they are active.

10. What is the evidence on the scale of reliance on offsets for Net Zero targets, for businesses, financial institutions, and/or other institutions and the role that offsets play in affecting emissions reduction ambition? If you are a business/financial institution/other institution with a Net Zero target, what role do voluntary carbon offsets play in your Net Zero target and emissions reduction ambition?

We see increasing levels of carbon credit retirements year on year — as set out in our recent carbon credit crunch report — while also seeing a growing recognition that the use of carbon credits must be a complement to, not an alternative to, in-house decarbonization. 

Under the SBTi’s net zero targets, credits can only be used for residual emissions and beyond value chain mitigation (BVCM), guidance for which is still pending. We believe there is valuable potential to use carbon credits on the pathway to achieve net zero and not solely once all emissions reductions are achieved. We set out some ideas on this topic in a recent blog post.

11. What would be the strengths/weaknesses/considerations of:

1. Regulation, guidance and/or incentives which could encourage and/or require businesses to only use offsets where emitting activities cannot currently be reduced?
2. Consumer protection standards for low-carbon products and offset purchases that accompany products?
3. Regulation on business Net Zero targets’ reliance on offsets? 
4. Including specification of offset use for investment product labeling? 
5. Any other interventions?
   

11.1 Regulation, guidance and market incentives would be optimized for 1.5 degrees if they incentivized a more dynamic, situation-specific approach to balancing in-house decarbonization with the use of carbon credits. This should be based on the marginal cost of abatement (MCOA). Where the MCOA for a given company, activity or industry is particularly high, for example, $50/tCO2, then buying multiple high-quality carbon credits, which currently trade at roughly $10 to 20/tCO2, would have a significantly greater impact on global emissions. However, in this scenario, the use of credits, with a significant discount factor, for example, 3 credits per metric ton, must be accompanied by a comprehensive investment plan to ensure each individual company, activity or industry can reach (in-house) net zero on schedule. With this dynamic approach, the use of VCMs can help ensure maximum emissions reductions in both the short-term and within the net zero timeframes, in many cases, by 2050, both of which are essential in order to keep 1.5 degrees in reach.

11.2 and 11.4 In order for consumers and the wider public to have full confidence in the offset-related claims companies making those claims would disclose full details of the credits they are canceling to make those claims: the quantity of credits listed by project ID numbers and vintages. 

Article 6 and GHG accounting 

At COP26, guidelines were agreed for an international carbon market for carbon credits, under Article 6. As we set out on page 8 of our COP26 briefing, this included new guidance for how to avoid double counting through "corresponding adjustments". We will analyze the risks and opportunities the new guidelines pose to the role of voluntary carbon offsets in reducing global emissions and assess what role UK policy and company action can play in navigating this. 

12. What is the evidence on the key risks and opportunities to sustainability and development outcomes that the updated guidance for voluntary offsetting in relation to Article 6 presents to Net Zero?

Currently, the market is facing some uncertainty which may discourage activity and investment, or the development of new projects. For example, the prospect of corresponding adjustments and the challenges this presents to host countries meeting their NDCs.

There is good evidence in the history of previous mechanisms e.g. the Kyoto Protocol’s CDM, which presented many valuable opportunities for emissions reductions and climate finance flows to the Global South but also huge challenges around quality. There is a risk that with the new replacement mechanisms, we overcorrect this lack of focus on quality and the room to game the system. A very careful balance must be struck, as if we shut down too much we lose the urgent opportunities presented, but if the methodologies are too loose then there will be problems with credit quality.