Carbon offsets primer

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Key points:

  • Carbon offsetting refers to the use of a carbon credit – equivalent to one tonne of CO2 or equivalent gases avoided, reduced or removed – by a country, company or individual to “cancel out” their emissions elsewhere. 
  • As offsets don’t cause a net reduction in emissions, their use is not aligned with limiting warming to 1.5°C or 2°C and instead further delays emission cuts. 
  • Instead of providing an economically efficient way to spur mitigation, academic and investigative reports have shown that projects used for carbon offsetting have not delivered emissions reductions, causing emissions to increase overall. 
  • This is because most carbon offsets come from projects that aim to reduce or avoid emissions compared to if no project was put in place – which is very difficult to prove. Projects often overstate the quantity of offsets and there are risks that emission reductions are reversed or leak to other areas. 
  • Emissions avoidance and reduction offsets have no place in ambitious climate policies.
  • In addition, carbon offset projects have often been linked to fraud and human rights abuse. Companies’ use of carbon offsets carries reputational and litigation risks.
  • While carbon offset schemes have often been promoted as a means to channel climate finance to developing countries and nations with large forested areas, there are viable alternatives. For example, companies can make climate contributions without claiming credits and revenue from taxes on wealth and fossil fuels could be directed towards climate action.
  • On top of rapid and sustained mitigation efforts, the IPCC outlines a theoretical need for durable carbon removals to offset a very small amount of residual emissions and to balance out historical emissions after we reach net zero if we are to achieve climate targets. However, carbon removal faces various feasibility challenges and relying on its future use at scale is extremely risky and uncertain. 
  • Mitigation should always be the first priority. There are a broad range of cost-effective options for reducing emissions that have more potential once fully utilised. 

What are carbon offsets?

Offsetting refers to the use of a credit – equivalent to one tonne of CO2 or equivalent gases avoided, reduced or removed – by a country, company or individual to “cancel out” their emissions elsewhere. Once credits are used to counterbalance emissions they are retired and cannot be used again.

Carbon credits can be traded on two types of carbon markets: compliance and voluntary. 

  • Compliance markets are regulated by governments and involve emissions reductions that are mandated by law. Examples include cap-and-trade or emissions trading schemes (ETS), such as the EU ETS. Some of these compliance schemes allow restricted use of offsets to meet emissions reduction obligations. 
  • The voluntary carbon market (VCM) is largely unregulated and enables companies or individuals to use offsets to make emissions cuts where there is no legal obligation to do so. In 2023, the voluntary carbon market was reported to have a transaction volume equivalent to trading 110.8 million tonnes of CO2 equivalent (CO2e), worth USD 723 million. 

As of the end of 2024, the majority of carbon credits issued were for forestry and land use projects (34.6%) and renewable energy projects (31.8%), followed by household and community projects, such as clean cookstove projects (12.4%).

A brief history of carbon offsetting

Carbon offsetting was first developed as a purely “philanthropic exercise”, according to Dr Mark Trexler, who the World Resources Institute hired to oversee the first land-based carbon offset scheme in 1988. “No one ever thought that carbon offsets were going to save the world”, Trexler told Carbon Brief in 2023. 

Carbon offsetting was then introduced for use by countries under the Kyoto Protocol, to give them flexibility in meeting their binding emission reduction targets. Emissions could be traded under three mechanisms: International Emissions Trading, the Clean Development Mechanism (CDM) and Joint Implementation. 

In 2012, the Kyoto Protocol and associated carbon trading started to fall apart, after which carbon offsets moved over to the largely unregulated VCM. Since then, a number of countries and regions have set out their own mechanisms for carbon trading and offsets. 

The use of carbon offsetting is allowed under Article 6 of the Paris Agreement, which relates to carbon trading. Countries are able to trade carbon credits bilaterally (Article 6.2) or via a new international carbon trading platform (Article 6.4). However, as there are minimal transparency requirements and no real repercussions for countries if they fail to abide by the rules, there is a risk Article 6 will result in the trading of low integrity credits and contribute to increased emissions. 



The rationale behind offsetting does not align with the science

In theory, carbon offset schemes are assumed to be economically efficient, as they enable emissions reductions to occur where they are cheapest. 

For example, countries or companies struggling to meet their climate goals can pay for emissions reductions elsewhere where it is cheaper to do so. This could also channel financing for mitigation towards developing countries, where much of the ‘low-hanging fruit’ is located.

This means offsetting is at best a zero-sum game and by design does not reduce emissions. Done properly, offsets merely compensate for emissions growth in one setting by reducing emissions elsewhere. But research has shown that many offsets have not been carried out properly. 

When a project used to offset emissions elsewhere lacks environmental integrity (i.e. does not represent real emission reductions), it leads to an overall increase in emissions. Indeed, assessments of past carbon offset projects over decades have shown that many projects have failed to deliver the emissions reductions they promised.

Offsetting is not a valid solution as countries and companies need to achieve deep emission reductions now. Keeping warming to 1.5°C requires achieving net zero emissions by 2050, meaning CO2 emissions must fall steeply from the 41.6 billion tonnes estimated in 2024. 

The use of carbon credits not only delays emission cuts, but can cause continued investment into non-1.5°C aligned technologies and business models, which could lock in those practices for decades. The UK Climate Change Committee, which advises the UK on climate change policy, writes that the purchase of offsets to enable the use of high-emitting technology “would in the long run lead to higher emissions than if funds used for ‘offsetting’ were used to invest in low-carbon technology.”

Current reliance on offsets has increased emissions

A systematic review of carbon offset projects comprising a fifth of all carbon offsets issued to date, published in November 2024, estimates that “that less than 16% of the carbon credits issued to the investigated projects constitute real emission reductions.” The remaining 84% did not constitute real emissions reductions – thereby instead resulting in the release of 812 million tonnes of emissions, equivalent to “more than annual German CO2 emissions”.

Another investigation conducted by The Guardian and Corporate Accountability in 2023 found that 39 of the 50 offset projects that have sold the most credits likely did not result in the emissions reductions they claimed, and the others were either problematic or could not be assessed due to lack of information. 

In addition, a 2024 assessment of over 4,000 carbon credit projects conducted by US investment company MSCI rated 47% as low-integrity, meaning they did not meet most environmental and social criteria.

Offsets used under compliance mechanisms have shown similar results. A 2015 study by the Stockholm Environment Institute on the environmental integrity of offsets issued under the Kyoto Protocol’s Joint Implementation mechanism suggests that they enabled global GHG emissions to be about 600 million tonnes CO2e higher than they would have been if countries had met their emissions targets domestically.

Similarly, a 2016 study found that 73% of the potential supply of 2013-2020 credits used under the Clean Development Mechanism (CDM) offered a low likelihood that emission reductions are additional and not overestimated. A separate assessment of clean cookstove projects under the CDM, which replaced traditional stoves with more efficient ones, suggests that these may “fail to realize expected carbon reductions or anticipated health and climate cobenefits”.

Government offset schemes have also shown limited emissions reductions. For example, a review of 182 projects focused on native forest regeneration, from which the Australian government has purchased USD 204 million worth of credits, were found to have negligible impact.

Few offsets are truly additional

Almost all carbon credits issued to date have been for the avoidance or reduction of carbon emissions. Only around 3% of credits in the VCM in 2023 were for the removal of carbon emissions. The additionality of emissions avoidance or reduction projects is difficult to verify as it requires the development of counterfactual scenarios to demonstrate that emissions reductions only took place due to the incentive from the carbon credit revenue generated.

Research has shown that it is likely that many projects would have occurred without carbon credit revenue. For example, given that renewable energy technologies are now cheaper than fossil fuels in most countries, hundreds of millions of tonnes of credits from renewable energy projects that are currently traded are likely not additional. A review of 1,350 wind farms across India found 52% of these projects would have been built without additional income from CDM credits, misallocating scarce resources and likely leading to increased global emissions. 

Renewable energy projects are now so unlikely to be additional that many of the largest VCM registries, like Verra and Gold Standard, no longer allow these projects. However, it is still possible to purchase renewable energy credits: A Bloomberg report found that in 2021 “one third of the carbon offsets purchased from the 100 highest-selling projects were tied to renewable energy”.  

As of February 2025, all grid-connected renewable energy project methodologies assessed by the carbon offset governance body, the Integrity Council for the Voluntary Carbon Market (ICVCM), had their applications for the Core Carbon Principles label rejected because they lacked additionality. 

Offset quantities are frequently overestimated 

Similarly, projects that issue credits based on reducing or avoiding deforestation or forest degradation are challenging to verify, as these require demonstrating that existing forests would have been cut down or degraded at higher rates if the project was not funded. Forestry offset credits have been continuously exposed for fraudulent business practices, such as inflating the baseline rates of how much deforestation would have occurred in the absence of the project to generate more credits, taking credit for trees that were already planted and selling offsets for preserving forests that were not in danger of being harvested. 

One of the world’s leading carbon credit certifiers, Verra, overstated the threat of deforestation by 400% on average, according to one analysis. As a result, more than 90% of its carbon forest offsets “do not represent genuine carbon reductions”. A 2023 investigation into an avoided deforestation project in Zimbabwe that generated 42 million carbon credits found that only 15 million of these generated a legitimate avoided emission due to inflated baselines. EU countries have also been exposed for overstating logging targets in order to pocket additional carbon credits, worth 120 million tonnes of CO2e. 

Academic papers highlight that emissions reduction efforts from deforestation and forest degradation (REDD) projects and California’s forest offset programmes have not reduced deforestation. A review into a type of credit called Improved Forest Management offsets, which have produced 11% of all voluntary offsets to date, found that issuance of these credits deviates from scientific understanding and risks significantly overestimating the amount of carbon removed.

Nature-based offsets pose risk of reversal and leakage

Another key issue for nature-based offsets lies in the foundational – and incorrect – assumption of offsetting: that all emissions are equivalent and fungible – meaning they are mutually interchangeable. However, releasing a tonne of carbon from fossil fuels cannot be exactly offset by taking up one tonne of carbon by planting a forest. The carbon released from fossil fuels was stored for millions of years under the earth in a stable form – while the carbon taken up in the forest will – at best – be stored for decades, until the trees begin to degrade. So while storing carbon in nature could help to delay warming in the near term, nature-based carbon credits should not be treated as equivalent to fossil fuel emissions.

Some types of carbon credits, particularly those that are nature-based, also lack permanence. They risk the premature release of carbon back into the atmosphere due to natural or human-caused events, for example via wildfires or clearing of forests. A report on avoided deforestation projects in Cambodia used satellite imagery to show that four years later, half of these areas had been cleared. In 2021, the Los Angeles Times reported that a forest carbon offset project in California continued to sell credits even after many trees burnt down in wildfires.

Additionally, offset projects that aim to reduce or avoid emissions in one area may instead simply cause emissions to increase or ‘leak’ to another area to compensate. A 2023 review of nature-based offsets shows that “leakage is vastly underestimated in practice and argue[s] that current efforts to improve accounting methods are unlikely to deliver the accuracy required.”

Poor quality credits are oversupplied

So many credits with a low likelihood of achieving actual emissions reductions have been issued that there is an oversupply in the market. According to the Berkley Carbon Trading Project, there is currently a surplus of 829 million credits on the VCM, just counting those from the four top carbon registries. As a result of being oversupplied, credits are priced far too low to reflect the true cost of carbon,1Offsets on the VCM are currently priced at USD 1-10 (as of February 2025) The 2017 Report of the High-Level Commission on Carbon Prices estimated that carbon prices should be USD 40-80 by 2020 and USD 50-100 by 2030 to be consistent with achieving Paris Agreement temperature goals. Other studies estimate that the real cost of carbon is much higher – around USD 185 per tonne of CO2. which means it is much cheaper for companies and countries to purchase ‘junk’ credits than to reduce their emissions.

For example, the 20 companies retiring the most offsets from the VCM over 2020-2023 predominantly sourced low-quality, cheap offsets, 87% of which “carry a high risk of not providing real and additional emissions reductions”, according to researchers analysing VCM activity. Most of these offsets came from forest conservation and renewable energy projects. Purchasers come from a range of sectors, including automotive, aviation, oil and gas, consumer goods, and transport and logistics firms, all of which have access to meaningful – albeit more expensive – decarbonisation activities within their own supply chains.

Offset projects have resulted in fraud and human rights abuse

In addition to not delivering promised emissions reductions, offset projects have been linked to human rights abuse and land conflicts that can push Indigenous People and local communities off their land. Often offset projects are purportedly designed to benefit local communities, however, at times this money is pocketed by intermediaries and project developers, many of which commit fraud, for example by exaggerating the baseline risk of deforestation, to entitle themselves to more funding. 

Due to the complicated way in which carbon emissions are accounted for, there are ways for countries and companies to misuse accounting tricks to their benefit. A large concern is that misalignment of carbon accounting schemes could mean that carbon credits are double counted, i.e. emission reductions are used by the country that developed the credit as well as the country that purchased the credit. This is being discussed as part of negotiations for the use of carbon trading under the Paris Agreement.

Offsetting claims have resulted in litigation risks

Misleading claims about the outcomes of using carbon offsets are increasingly leading to reputational and legal risks for companies, reflecting that courts agree that carbon offsets fail to act as a climate solution. For example, in 2023, a regional German court ruled that advertising claims of climate neutrality from the use of offsets by airline company Eurowings were misleading and breached German law. Similar lawsuits have been taking place around the world, causing companies to abandon carbon neutrality and net zero claims associated with the use of offsets.

There are alternative ways to fund climate action

Despite often providing little funding for project implementers on the ground, carbon crediting schemes have been promoted as a means to channel much needed climate financing towards developing countries, particularly for the protection of nature which is critically underfunded. However, there are other channels better suited to delivering  climate finance.

Businesses can contribute to emissions reductions and other climate projects without claiming carbon credits. NewClimate Institute suggests that companies can do this by setting an internal carbon price and using this to support climate initiatives outside their own value chains. This resulting ‘climate contribution’ represents “a financial commitment that is a complement – and in no way an alternative – to directly reducing one’s own climate footprint.”

The offsetting industry has helped shape a narrative around the scarcity of funding. In reality, the issue is less about the amount of money available and more about how it is distributed and who decides. In 2022, Global North countries spent almost 80 times more on fossil fuel subsidies than the USD 31.5 billion they provided in grant-based climate finance in the Global South. Research by Oil Change International suggests that over USD 5.3 trillion a year could be generated by rich countries ending public finance for fossil fuels and implementing fossil fuel and higher weather taxes, among other approaches.

Removals may play a very small role in limiting warming

Alongside emissions reduction and avoidance, offset projects also include a very small proportion of carbon removals  – around 3% of offsets in the VCM in 2023. As we have already emitted too much, all modelled pathways limiting warming to 1.5°C or 2°C in the most recent Intergovernmental Panel on Climate Change (IPCC) reports include the removal and storage of some level of carbon from the atmosphere – highlighting a theoretical need for carbon removal in the future.2The IPCC sets out two purposes for which removals should be reserved: to cancel out the residual emissions of very few ‘hard-to-abate’ activities and to remove some of the excess CO2 we have emitted historically to improve our chances of staying within the carbon budget, which research suggests will be exceeded in 6-10 years. Like emissions avoidance and reduction offsets, carbon removals have no place in company strategies as a lever to compensate for their own avoidable emissions.

However, in reality, carbon removal implementation faces a number of issues and relying on the feasibility of future large-scale carbon removal is incredibly risky and uncertain.  Scientists caution that it may be impossible to remove carbon at the billions-of-tonnes scale outlined in modelling pathways to return warming to 1.5°C or 2°C. Technological approaches to removals are currently unproven at scale and face significant implementation challenges. These approaches are, and will likely remain, very expensive (currently much higher than the cost of most mitigation options). 

Similar technology used predominantly by oil and gas companies to capture carbon from the source of emissions (carbon capture and storage) has been slow to develop, with a history of “unmet expectations”, according to a 2023 International Energy Agency report. Even if it can be made to work at scale, this technology perpetuates the burning of fossil fuels.3While the technology used is very similar, carbon removal captures differs in that it captures diffuse CO2 emissions from the atmosphere, while carbon capture and storage (CCS) is used to capture emissions from the point source of an emitting process.

This reiterates the need to implement readily available mitigation approaches and pursue deep, rapid emissions cuts now.

The way forward: untangling offsets from the science

The use of offsets is not aligned with the scientific need to lower emissions and avert warming beyond safe levels. They do not durably remove carbon and instead provide a cheap way to allow companies and countries to continue emitting in line with business as usual instead of investing in meaningful mitigation measures. 

Based on an analysis of 20 voluntary carbon offset registries for credits retired between January 2020 and December 2022, the top users of carbon offsets were fossil-fuel producers, car makers and tech firms. Companies such as Shell, Volkswagen and Chevron – the three largest purchasers of carbon credits – have routes to decarbonisation. A study that examined how carbon offsetting was used in four major oil companies’ net zero strategies found that none had plans to transition away from fossil fuels. 

Ultimately, offsetting has done more harm than good for overall emissions reductions. The VCM has failed to deliver real impact and continues to have integrity issues. The use of carbon offsets by companies and countries should continue to be closely scrutinised. Emissions avoidance and reduction offsets have no place in ambitious climate policies. 

Mitigation should always be the first course of action – and should always be prioritised over carbon removal. These tested routes to limiting warming (for example, the implementation of solar, wind, battery storage and energy efficiency improvements) are also more cost-effective. There are a broad range of mitigation options that are not yet fully utilised. 

Support for the restoration of degraded ecosystems and the protection of biodiversity, alongside other mitigation efforts and the theoretical need to incentivise real, permanent carbon removal, does not have to be serviced by a market mechanism in the buying and selling of carbon credits. Instead, funding can be sourced outside of carbon offset revenue, such as via public financing, including revenue generated from wealth and fossil fuel taxation, and company climate contributions. Direct and targeted support should, in particular, be provided for countries with high forest cover and developing countries. 

  • 1
    Offsets on the VCM are currently priced at USD 1-10 (as of February 2025) The 2017 Report of the High-Level Commission on Carbon Prices estimated that carbon prices should be USD 40-80 by 2020 and USD 50-100 by 2030 to be consistent with achieving Paris Agreement temperature goals. Other studies estimate that the real cost of carbon is much higher – around USD 185 per tonne of CO2.
  • 2
    The IPCC sets out two purposes for which removals should be reserved: to cancel out the residual emissions of very few ‘hard-to-abate’ activities and to remove some of the excess CO2 we have emitted historically to improve our chances of staying within the carbon budget, which research suggests will be exceeded in 6-10 years. Like emissions avoidance and reduction offsets, carbon removals have no place in company strategies as a lever to compensate for their own avoidable emissions.
  • 3
    While the technology used is very similar, carbon removal captures differs in that it captures diffuse CO2 emissions from the atmosphere, while carbon capture and storage (CCS) is used to capture emissions from the point source of an emitting process.

Biodiversity offsetting and biocredits

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Key points:

  • Biodiversity offsets are a way of mitigating the impact of new infrastructure developments, compensating for biodiversity loss by protecting or restoring similar habitat elsewhere. Their use is often mandatory.
  • Biodiversity credits, or biocredits, are investments, typically voluntary, in projects that support biodiversity conservation, but which do not imply biodiversity loss elsewhere.
  • There is concern that companies could use biodiversity offsets to meet their environmental targets without making any meaningful changes to their unsustainable practices.
  • As biodiversity losses arising from development cannot be properly quantified, it is impossible to know what needs to be compensated for. So, offsets are unlikely to compensate properly for these losses.
  • Increased focus on trading biodiversity credits could draw attention away from more effective conservation actions and may provide further opportunity for greenwashing.
  • Biocredits may contribute meaningfully to conservation if strict accountability guidelines are followed.
  • The UK, France, Australia and the EU are actively promoting global biodiversity credit initiatives.

What is biodiversity offsetting?

The negative biodiversity impacts of some developments cannot be avoided, minimised or restored. Biodiversity offsetting is a form of impact mitigation that aims to compensate for these negative biodiversity impacts – at least in theory – by protecting, enhancing or restoring similar habitat elsewhere. These biodiversity offsets are based on a ‘no net loss’ policy – in other words, overall biodiversity is left no worse off than if the development had not happened.

For example, a developer clears land to build a mine and then compensates for the resulting loss of biodiversity by either purchasing degraded land and restoring the ecosystem on it, or by purchasing land that has a natural ecosystem on it and protecting it – under the assumption that it is likely to become degraded in the future.

Biodiversity offsetting is now widely used to compensate for biodiversity losses from developments and is part of planning and decision-making processes. For example, as a component of mandated Environmental Impact Assessments for developments.

But, as a conservation practice, biodiversity offsetting is highly controversial. Critics are concerned that offsets may be used by companies to meet their environmental targets without making any meaningful changes to their unsustainable practices. Parallels can be drawn with carbon offsets: For example, a fossil fuel company offsets its carbon emissions by planting a forest to remove CO2 from the atmosphere, rather than actually reducing its emissions, thereby “trading a known amount of emissions with an uncertain amount of emissions reductions”, the consequence of which could be a net increase in emissions.

Similarly, the consequences of biodiversity offsetting are, ultimately, increased biodiversity loss. This is in part because most offset projects compensate for a lost ecosystem by protecting land that might be lost in the future. Offset policies mostly define ‘no net loss’ against a baseline of what would have happened without the project and its offset. If the biodiversity loss from future degradation is overestimated, then the positive contribution of the offset will also be overestimated, giving the developer more scope to have a negative impact on biodiversity. While this may be defined as ‘no net loss’ within the current framework, the outcome would be less biodiversity than if the project had not happened.

What are biodiversity credits?

In response to these criticisms, biodiversity credits, or biocredits, which are typically purchased voluntarily, have emerged to direct money “towards meaningful and well-designed biodiversity conservation and management”. Biodiversity credits are investments in projects that support biodiversity conservation, but which do not imply biodiversity loss elsewhere. A 2022 report from the International Institute for Environment and Development (IIED) and the United Nations Development Programme (UNDP) endorses biocredits, arguing that because biocredits, unlike biodiversity offsetting, do not imply biodiversity loss elsewhere, they represent a “positive investment in biodiversity” that companies or other entities – such as philanthropists – can choose to make.

However, whether biocredits would realistically be used for non-offsetting purposes is a point of contention. There is also concern that policies may weaken over time under increasing pressure from developers, and that frameworks are being redefined to include financial and other non-environmental metrics, which could facilitate claims of success when the environmental contribution is, in fact, weak. Some also argue that without enforcement, there will not be sufficient investment in biocredit projects.

But the IIED and UNDP report is clear that, if used correctly, biocredits can contribute meaningfully to nature conservation and restoration. To ensure this, “buyers should be screened to ensure they are not using the credit to offset damage elsewhere” and “the investment in the purchase of the biocredits [should] maximise the social and biological impact compared to other potential investments”. The report also recommends that the metrics used to define a unit of biodiversity should include its cultural and social value.

Issues with trading units of biodiversity

The concept of ‘no net loss’ does not sit well with ecologists because it fails to recognise that biodiversity exists within complex ecosystems and cannot easily be isolated from its social, historical and evolutionary context. Because of this complexity, the losses arising from development cannot be properly quantified, and so it is impossible to know what needs to be compensated for. In fact, a 2021 study found “no evidence that biodiversity gains from offsets actually compensate for development-associated losses, because losses were never estimated”.

Moreover, as the ecological circumstances of two areas will never be identical, offsetting the impacts to one area by restoring or conserving another will always result in some degree of biodiversity loss.

Though a development may only be impacting a small area of land, the land required for compensating for this development may be much bigger – indeed, policy often requires that at least twice the area of biodiversity loss must be protected. Conservationists worry that there is simply not enough land available to compensate for expected biodiversity losses from future development.

There is also concern that increased focus on the trading of biodiversity credits will draw attention away from other, more robust, conservation actions. It could create even more scope for greenwashing – tricking consumers into thinking that their choice is sustainable through a false claim – if badly designed offsets or biocredits are marketed as supporting biodiversity or social equality.

As biocredit schemes are aimed at providing both economic and environmental benefits, this may also allow financial markets and short-term speculators to determine the price of conservation, thereby framing the value of conservation purely in terms of its profitability. But, assigning monetary value to nature does not always promote the conservation of biodiversity and may, in fact, result in the opposite. This also creates a “dangerous and misleading illusion of the substitutability” of critical ecosystem services that may actually be irreplaceable.

COP 15 and the Global Biodiversity Framework

In December 2022, the United Nations Biodiversity Conference (COP 15) concluded with the establishment of the Kunming-Montreal Global Biodiversity Framework (GBF). The core aim of this framework is to tackle the alarming decline in biodiversity, facilitate the restoration of ecosystems, and safeguard the rights of indigenous communities. It garnered widespread recognition for its progress in connecting human rights with biodiversity, encompassing concrete measures to stop and reverse the decline of natural ecosystems.

A pivotal target of the GBF is the commitment to safeguard 30% of the earth’s surface and 30% of degraded ecosystems by 2030. It also includes provisions for increased financial assistance to support developing nations in their conservation efforts.

However, a component of the GBF called Target 19 remained unchanged, despite reservations expressed prior to COP 15 by a group of 119 experts. The target underscores the importance of “increas[ing] the levels of financial resources made available from all sources… towards nature-positive economies” and “stimulating innovative schemes… such as biodiversity offsets [and] carbon credits”. Concerns revolved around the potential for the monetisation of nature, the creation of a global market for trading biodiversity credits, and the promotion of biodiversity offsetting without the requisite rigor to ensure a comprehensive reduction and reversal of biodiversity loss within the prescribed time frame.

Nations championing biodiversity credits

The GBF has rapidly propelled global initiatives forward. The UK, France, Australia and the EU are at the forefront of promoting “nature markets”.

UK and France

In March 2023, the UK government unveiled plans to launch three separate nature markets, one for biodiversity offsets, another for flood mitigation and one for clean water. These are to be integral to the UK’s Environmental Improvement Plan 2023, with the goal of increasing private financing for nature to a minimum of GBP 500 million annually by 2027 and GBP 1 billion cumulatively by 2030.

The UK and France are taking the lead in advocating for a global biodiversity credit market. They jointly introduced the Global Biodiversity Credits Roadmap in June 2023, which aligns with the GBF and outlines a strategy to expand worldwide efforts to support companies in procuring biodiversity credits. Working towards COP 16 in 2024, the two countries have committed to bringing together global expertise on biodiversity credits and establishing working groups to explore best practices, ranging from credit funding governance to monitoring frameworks. The Roadmap also intends to address the equitable distribution of income from biodiversity credits.

Australia

Australia has a well-established presence in biodiversity offsetting markets, with both existing and new initiatives in development. All six Australian states have implemented compliance-based biodiversity offsetting schemes, alongside a federal biodiversity offset scheme. Recently, the Northern Territory introduced a new policy framework for biodiversity offsets. The determination of offsets typically takes place on a case-by-case basis, with assessments considering the impact on critical species or habitats.  

In addition to the existing offsetting schemes, Australia’s government is working on establishing a Nature Repair market, a controversial initiative aimed at addressing the funding gap for nature conservation and restoration in Australia. This initiative seeks to stimulate private investment in biodiversity efforts by rewarding landholders who actively engage in nature preservation. The Australia’s Minister of the Environment, Tanya Plibersek, stated that the initiative aims to turn Australia into the “Green Wall Street”.

The proposal faced significant backlash from members of the opposition bench, due to concerns about integrity and its potential for actual impact. Additionally, think tank The Australia Institute criticised the government’s insufficient environmental and economic justification for the scheme, stating that it cited unsubstantiated financial projections from a PwC report. As a result, the Committees have extended their deliberation period without a specified end date.

EU

In its most recent update to the EU Taxonomy for sustainable activities, the EU has chosen to include an element of biodiversity offsetting. This decision ignores the recommendation provided by the Platform on Sustainable Finance, a group of advisors to the EU’s executive branch, which had called for the removal of it from the list of economic activities related to biodiversity protection and nature restoration due to potential interpretational issues. Nonetheless, the EU decided to include it, albeit with slightly altered phrasing, leading to confusion over its precise meaning.

The decision has faced significant criticism from NGOs and civil society groups. In an open letter, they called for the removal of biodiversity offsetting, claiming that “offsetting is only compensating significant harm elsewhere and thus cannot represent a substantial contribution” to meeting the EU’s biodiversity objectives.

If not biodiversity offsetting and credits, then what?

The most straightforward solution is to avoid biodiversity losses as much as possible, with offsetting only used as a last resort.

Biocredits can encourage positive investment in biodiversity if strict accountability guidelines are followed and governance is transparent, and if a holistic approach that considers social, cultural and biological value is used.

Another potential solution is target-based ecological compensation, a new policy framework that offers an alternative to traditional biodiversity offsetting. It requires that compensation for biodiversity loss is linked to broader conservation goals to ensure that overarching targets for biodiversity are met, thereby enhancing compensation beyond an ad-hoc, reactive response.

An alternative proposal by the research center Enterprise for Society Centre (E4S) involves a centralised private sector biodiversity fund. According to E4S, this approach could enhance and simplify financing, allowing for direct allocation of funds to critical conservation areas, where they would contribute towards global restoration targets. The centrally-managed fund could also accommodate both current and historical compensation, particularly where local biodiversity offsetting is not mandated. However, transforming this into reality relies on the availability of comprehensive ecosystem data and transparent cost information.

Asia’s booming voluntary carbon market

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Key points:

  • Asian governments and companies are trying to keep up with the global trend of developing voluntary carbon markets (VCM) by scaling up local versions. New initiatives have been set up to make buying and selling voluntary carbon credits in the region easier.
  • While there is no money to be made yet, market players are hoping that building the infrastructure for carbon trading will increase the size of the VCM, attracting foreign investment to the region.
  • However, there are a number of issues with the current VCM, including a lack of standardisation, poor quality credits, transparency and low pricing, as well as increasing scrutiny over the wider use of carbon offsets. These issues are hampering progress in the existing global markets. If they are not overcome, those looking to benefit from the booming Asian markets risk wasting resources on projects that are unproven to benefit local communities or the environment. 
  • While initiatives are starting to address these concerns, the future of the VCM remains unpredictable.

The global VCM

Carbon markets enable the trading of carbon credits – each equivalent to one tonne of carbon dioxide (CO2) emissions – and now cover close to a fifth of global emissions. While the majority of carbon markets are compliance markets – in which governments allow the trading of emissions to meet mandatory targets – the VCM, where companies and individuals can choose to buy carbon credits to offset their carbon footprint, has exploded in recent years. Between 2020 and 2021, the value of the global VCM grew fourfold, reaching almost USD 2 billion, with some analysts estimating the market could grow to USD 50 billion by 2050. This growth is driven mainly by rising demand from companies as they face increasing pressure to develop and meet net-zero goals. Between 2021 and 2022, the number of global corporations with net-zero goals increased by 150%.

However, there are a number of issues that prevent the VCM from providing a considerable source of finance for project developers while having real climate impact. Growing scrutiny over the use of carbon offsets, uncertain regulations and global economic slowdown have seen the purchase of credits dry up in recent months, making the future of the VCM unclear.

Recent developments in the Asian VCM

While the majority of the projects that sell carbon credits are located in Asia, South America and Africa, historically the majority of trading has taken place in Europe and the US. Now market players are taking the first steps to scale up the VCM in Asia. In theory, this would increase funding for the protection of nature and low carbon technologies in the region and enable companies to offset emissions and meet net-zero goals through buying credits. 

There is no money to be made yet, but companies are eager to tap into the anticipated financing opportunities. The potential funds raised by offsets generated in Asia is estimated at USD 10 billion annually by 2030. Asia is already the world’s largest producer of carbon offsets, producing 44% of global credits, and is home to some of the world’s most valuable investable carbon stock. Additionally, of the more than 1,600 companies that have committed to net-zero targets globally, nearly a quarter are from Asia, potentially increasing regional demand for credits. 

Main players in the offset boom

Carbon trading platforms and voluntary domestic initiatives to facilitate the buying and selling of carbon credits have recently been set up in Singapore, Thailand, Hong Kong and Malaysia, with others planned in Japan, Indonesia, India and South Korea.

Key players and new developments in Asian carbon markets

Singapore currently dominates the Asian VCM, hosting platforms Aircarbon Exchange and the newly-launched Climate Impact X (CIX), which was founded by state investment fund Temasek and others to position Singapore as a carbon trading hub. These platforms are anticipating increased demand for credits after Singapore announced that, from 2024, companies can use VCM carbon credits to offset up to 5% of their taxable emissions. This is the first time a carbon tax scheme has allowed the use of VCM credits, and highlights the increasing overlap between voluntary and compliance markets, particularly in Asia. 

Other platforms are hoping to expand investment in Asia’s VCM. For example, Hong Kong’s Core Climate is the only exchange to offer settlement for the trading of international voluntary carbon credits in Chinese currency, opening up the VCM for mainland China’s participation. Meanwhile, Malaysia’s Bursa Carbon Exchange is the first Shariah-compliant carbon exchange in the world, potentially attracting foreign Islamic finance. 

Carbon exchanges in Thailand and Malaysia also aim to help companies meet import requirements and improve national industry competitiveness, especially in the face of tariffs on high-carbon imports, such as the EU’s upcoming carbon border adjustment mechanism. Both countries allow domestic offsets to be traded internationally. However, other countries, including Indonesia and India, have recently imposed restrictions on the exports of carbon credits generated from their territories to prioritise the domestic use of credits for meetingnational climate targets. While more clarity is needed on these regulations, this is raising concern among buyers.

Risks of a poorly regulated VCM

While the VCM has strong ambitions globally and in Asia, a lack of regulation and transparency means the market is currently overrun with cheap, low-quality offsets that are not funding genuine climate solutions, which is increasing the reputational risks for both sellers and buyers. 

Lack of standards: The VCM is largely unregulated and lacks a standardised approach, with carbon registries, such as Verra and Gold Standard, issuing credits in line with their own standards, resulting in a highly-fragmented market in which the type and quality of credits offered vary wildly (see below). Alongside unreliable verification of credit quality and lack of transparency, this makes it difficult for buyers to determine which credits are high quality, especially as quality is not necessarily linked to price. The extensive range of private and public schemes for certifying and trading credits in Asia complicates efforts to standardise, and contrary to their goal of streamlining VCM trading, new carbon exchanges have so far created more division in the market. For example, CCER credits issued under China’s voluntary emission reduction programme and traded via domestic emissions trading schemes can also be traded internationally on the VCM, however low quality and transparency has limited this so far. 

Low-quality credits: The current VCM is dominated by low-quality credits, with around 80% generated from projects that avoid emissions, rather than reduce or remove them. If a project is not actually removing CO2 from the atmosphere, it is not offsetting emissions. Determining ‘additionality’, which refers to whether or not the project would have gone ahead without the carbon credit revenue, is also difficult. Investigations have found that most renewable energy projects are not additional, making the credits worthless from a climate perspective, and that over 90% of rainforest carbon offsets issued by Verra (which is currently working with carbon exchanges in Singapore, Thailand and Malaysia to facilitate use of their standards) did not result in emissions reductions. As a result, price and demand for Verra’s rainforest credits dropped and Verra is currently revising its methodologies to verify rainforest credits, which may limit their issuance in Asia. Asian carbon credit projects are likely to be made up of forestry projects that face these same additionality concerns, as well as issues regarding the permanence of carbon stored due to land use changes and wildfire risks. Renewable energy credits are also still issued in some Asian schemes, such as via China’s CCER scheme. CIX is taking this a step further and promoting the use of a new type of credit for the protection of forests, even when there is no to low risk of deforestation. While protecting forests is important, it does not remove CO2 and should not produce credits that allow companies to continue to emit. 

Consequences for local communities: Carbon offset projects have often come at the cost of local communities and indigenous peoples, who are frequently not consulted and, at times, forced off their land. This is particularly concerning as many of the carbon sinks targeted by offsetting schemes are located in areas without indigenous or local land rights – especially in Asia. Increased interest in carbon markets may drive government officials to bypass consultations and fast-track potentially harmful projects in order to capture financial benefits. For example, in 2021, Malaysian officials signed over USD 76.5 billion of carbon credits and natural capital from a state forest to a small Singaporean company without involving local communities and indigenous leaders in the decision-making process.

Cheap offsets: In part due to their low quality and oversupply, offsets have historically been very cheap. The average price of global VCM credits was USD 4 per tonne of CO2 in 2021 and fell as low as USD 1.7 per tonne in January 2023 as purchases stalled. And prices from projects based in Asia generally receive below average prices. Such low prices tempt companies to purchase credits rather than decarbonise their practices , with the World Bank estimating that, by 2030, a price of USD 50-100 per tonne is needed to limit warming to below 2oC. While some predict that VCM pricing issues will be resolved as a preference for high-quality offsets will create a more expensive sub-market, this has not happened in practice.

Indeed a number of factors suggest supply will continue to outstrip demand:

  • Reputational risk: As questions grow around the legitimacy of offsets, companies are increasingly at reputational risk from the purchase of carbon credits 
  • Article 6 uncertainty: Discussions on Article 6 of the Paris Agreement, which sets out rules for international trading of carbon credits, have so far been inconclusive, stalling progress on new carbon trading plans for both government and industry 
  • Recession fears: Traders and analysts anticipate that polluters will reduce buying amid soaring inflation, rising energy prices and economic instability.

Firms bought 4% fewer credits in 2022 compared to 2021 and retirements of renewable energy and forestry credits declined in two consecutive quarters for the first time due to falling demand. In addition, the VCM is currently oversupplied, with a current reserve of over 683 million tonnes – over four times the total amount of credits traded in 2022. There are concerns that diminishing demand and oversupply will flood the market, further lowering the price and integrity of credits and threatening the overall functioning of the VCM. 

Improving market integrity and transparency

Following calls to increase the integrity and transparency of the VCM, new initiatives have been established to develop guidelines and restore confidence in the market. The Integrity Council for the Voluntary Carbon Market (ICVCM) aims to create industry-backed standards and guidelines to establish a quality baseline for carbon credit generation and trading that is credible and transparent, while the Voluntary Carbon Markets Integrity (VCMI) Initiative has developed a code of conduct with stakeholders to ensure that standards are implemented correctly. While the guidelines released by both initiatives last year were criticised by some for being too stringent and overbearing (and by others for not being strict enough), they present a starting point for moving forward. 
Additional guidance from the UN high-level expert group (HLEG) on net-zero emissions has reiterated that offsets cannot be used at the expense of genuine emissions reductions. The VCM should emphasise quality over quantity, with companies only using carbon offsets as a last resort for emissions that are very difficult to avoid, especially because, due to limited available land and resources, high-quality carbon offsets are finite.

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