The carbon market is a complex and often convoluted industry that has emerged in recent years amid the ESG and sustainability boom that has rocked the financial services sector.

Numerous new carbon accounting start-ups have emerged that have contributed to the carbon market, which calculate the carbon emissions that a company is making and advise on what they can do to reduce their carbon footprint and offset their emissions with sustainable initiatives and investments.

What is carbon accounting?

Carbon accounting organisations analyse a business’ climate impact. They calculate greenhouse gas emissions, set goals for carbon reduction, and create plans to reduce a company’s negative environmental impact to become overall more sustainable.

Carbon accounting has become increasingly significant due to ESG protocols put into action and sustainability standards now required by most major regulators. Financial institutions are being held responsible for the amount of transparency in their operations, requiring more companies to act responsibly.

A new carbon credit network, Carbonplace has seen funding from major banks such as NatWest, BNP Paribas, UBS, Standard Chartered, National Austrailia Bank, BBVA, and more. The move marks an increased interest in decarbonisation practices by incumbents.

What are carbon credits and how do they work?

Where it gets complicated is the decarbonisation space. As more and more companies move to realign their company values and operations to become more sustainable and reduce their carbon emissions, there is a greater demand than ever to decarbonise. To decarbonise, these companies purchase carbon credits which are generated from a wide array of companies to reduce the amount of carbon in the atmosphere. The price of carbon credits can vary from very low to up to hundreds of pounds.

Carbon credits come in multiple forms, reduction, removal, and avoidance. These credits are categorised thus based on their emissions impact. Carbon avoidance credits prevent carbon emission activity, carbon removal credits remove carbon from the atmosphere and lock it away, and carbon reduction credits decrease the greenhouse gas emissions into the atmosphere from previous carbon emissions activity.

According to Carbon Direct, carbon credits are assessed according to the level of net greenhouse gas emissions that a business emits – a baseline to draw the emissions impacts from and assess how many and what kind of credits should be purchased to offset emissions.

An example of carbon reduction credits is making a program more carbon neutral, such as reducing waste production or fossil-fuel usage. The most popularly purchased credits are carbon avoidance credits, an example of which is avoiding damaging carbon-emitting activity such as deforestation.

Carbon removal credits are mostly accomplished by nature-based projects, such as reforestation, however carbon can re-enter the atmosphere due to natural catastrophes such as wildfires and therefore duration of carbon storage can be variable.

Are carbon credits a reliable form of decarbonisation?

The challenge when it comes to the carbon credit market is the influx of numerous middle-men and intermediaries that work between companies that sell carbon credits and the actually actioning of the projects that decarbonise. The complexity and lack of immediacy in the process leads to a lack of transparency and clarity if the credits are in fact completed and fulfilled.

With carbon standard companies like the Gold Standard and Verra, there are external auditors and verifiers that can approve the carbon credits and issue them accordingly. Another layer to the complexity is that financial institutions can hold on to carbon credits and sell to someone in the future, so there is space for credits to circulate before they are retired. The time between issuance and retirement can be a long process due to lack of transparency and a time lag within the operating of the carbon credit.

However, realisations of carbon credits falling through the cracks have occurred with major companies such as American airline Delta Air Lines, which was charged with a lawsuit in Los Angeles federal court earlier this year for advertising as carbon neutral thanks to offset purchases, which were not verified. 

Earlier this year, The Guardian revealed that 90% of rainforest carbon offsets actioned by major companies such as Disney, Shell, and Gucci through Verra, were worthless and more damaging the environment. These “phantom credits” raised worrying concerns on the reliability of the carbon credit market. REDD+ is an organisation that protects forests and other nature-related projects through decarbonisation, and this organisation’s operations were discredited.

What is being done to improve upon the current operations of the carbon market in financial services?

There are a number of start-ups and fintechs that are working on new solutions to increase clarity in the movement of carbon credits and set up more layers of verification in the process to ensure carbon offsets are reliable and actually actioned. An increase in forest management assessments and operations have made strides for the carbon market, and blockchain-based carbon accounting companies such as Thallo aim to remove intermediaries in the voluntary carbon market.

The carbon market has a great deal of cleaning up to do, but meanwhile financial services is still a major contributor to its development.