Sustainability

Carbonomics 101: ‘Buyer beware’ – key risks associated with carbon credits and how to avoid them

We take a closer look at key risks that companies should consider when using carbon credits to offset carbon emissions.

In the last Carbonomics 101 article, we reviewed the three factors companies should consider when buying carbon credits. And earlier in the series, we stressed that understanding a carbon credit’s usage, credibility, and eventual retirement will be paramount to their successful use.

In this article, we take a closer look at the projects underlying carbon credits. Most of the projects underpinning carbon credits that are certified to a high standard carry a very low level of risk. However, some do carry inherent and emerging risks that should be carefully considered. Companies that either plan to develop their own projects to underpin carbon credits or execute due diligence on credits they plan to buy, should aim to address these risks early on. 

To that end, we’ve compiled a list of what we see as the top risks to be avoided.

Be wary of project-level risks

The long-term nature of projects underscores the need to really understand the risks inherent to the projects that underpin credits. Some projects often span three to four years while others can span three to four decades, and each project carries a nature-based risk that should be monitored.

Not all projects will be exposed to the risks below – each project will have its own unique attributes – but these are some of the most important ones to bear in mind:

  • Natural disturbance and physical risks: fire damage; wind or water damage; animal encroachments; pest and disease outbreaks; extreme temperature; seasonal variability of rainfall patterns; geological instability; robustness of a project’s “buffer” strategy.
  • Political risks: interventions, wars, riots, civil unrest; corruption; community resistance; irregular resettlement of persons and communities; exploitation of natural resources; presence of sanctions.
  • Community-Company-Project Owner misalignment risks: project owners, companies buying the carbon credits, and the communities where projects are located all must have their interests aligned – communities must feel they are benefiting from the project.
  • Financial risks: late achievement of projects based on cash flows; lack of consistent secured financial resources; lack of transparency over capital or cashflow.
  • Market risks: price variations due to availability of commodities, machines, taxed goods, chemicals; competing infrastructure; timely transportation.
  • Project management risks: dependency on continuous external technical support; lack of technical equipment; insufficient business, legal and administrative functions; fluctuation of seasonal worker availability; developer track-record or reputation.
  • Implementation and assurance risks: monoculture and biodiversity risk; third-party auditor potential violations; conflict of interests; insufficient review and approval process.
  • Regulatory risk: ineffective and insufficient requirements for reporting and disclosures, variance of regions and geographies’ complex legal and regulatory mandates, improper, infrequent, or corrupt enforcement, lack of improved legal infrastructure.
  • Sustainable Development Goals (SDG)-washing risk: like greenwashing, the risk of SDG-washing should be a red alert for companies – impact or additionality claims of projects will increasingly become scrutinized.

Long-term risk management considerations and reporting provided by certified providers and auditors should be implemented in accordance and applicability with the relevant risks listed here.

Companies should ensure that project developers and carbon credit providers have a robust mechanism for assessing and managing risks, as well as measuring and reporting the impact at the project level to ensure credibility and effective SDG mapping towards the 2030 Agenda. Apart from reducing greenwashing or SDG-washing risk, this cam help contextualize companies’ unique climate transition journeys and communicate them to interested stakeholders.

Concluding thoughts: take the plunge, but with eyes wide open

The risks inherent to carbon credits may seem daunting, but with careful consideration and planning – and the help of a growing network of specialists – they can be navigated with relative ease. The urgency of the climate crisis means now is the time to seriously consider how to offset emissions that can’t be eliminated or reduced through other activities; carbon credits can play a pivotal role in that regard, but buyers should be aware of the risks before taking the plunge.

Follow our Carbonomics 101 series to stay informed on the development of the carbon markets and learn about the role they could play in your sustainability strategy. Access forthcoming articles in this series the moment they’re published by following us on social media, and visit our Carbon Hub for essential tools & insights to help you on your climate transition journey.

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