Why carbon markets are heating up again
Carbon credits are heating up again as an investment proposition. With the growing emphasis on cost-effective decarbonization, it's critical that companies understand why — and why now.
Carbon credits are increasingly an important part of many corporate climate strategies. The carbon credit market is growing to meet this demand, but some projects do not deliver the promised results. Picking carbon credit projects that are not credible can damage a company's reputation and waste money.
Unfortunately, too many companies still end up in this situation due to a lack of internal expertise or the time to sift through the thousands of available carbon credit projects. A careful selection process is paramount to ensure the use of carbon credits does not become a counterproductive experience.
ERM’s Carbon Credit Portal, launched in 2024, contains current, high-quality carbon credit projects that have passed our rigorous selection process. Here's how we selected them, and what trends we have seen among the projects that didn’t pass our test.
What makes a good carbon credit?
Carbon credit projects must meet three criteria for ERM to consider a project high-quality and worthy of purchase: additionality, proper crediting, and permanence. These criteria determine if a carbon credit truly avoids or removes one ton of CO2 from the atmosphere, so companies can use it confidently to compensate for emissions they can’t eliminate.
Additionally going beyond what would have happened anyway
The premise of carbon credits is that buyers are funding an activity that helps the climate. But sometimes, carbon credit projects are created and sold even though their activities would have occurred without the incentive of carbon finance. For example, projects that conserve forested land in areas not at risk of development do not change real-world outcomes and do not truly create additional climate benefits. Similarly, projects that reduce emissions but are already financially attractive compared to the business-as-usual scenario could have happened without carbon finance.
Proper crediting: accurately forecasting climate impact
Some projects issue more credits than the actual climate benefit delivered. Over-crediting can occur when developers use overly optimistic assumptions, flawed baselines, or inaccurately measure emissions reductions. For example, if a forest conservation project claims it prevented one million tons of CO₂ emissions but actually avoided only 500,000 tons, the credits sold represent reductions that never occurred. Properly credited projects will use realistic assumptions, well-evidenced (and often dynamic) baselines, and careful measurement of emissions reductions.
Permanence: achieving outcomes that can’t be reversed
Carbon credit buyers should have reasonable assurance that carbon removed from the atmosphere by a project will not be released back prematurely. (Integrity frameworks often adopt a 100-year benchmark.) For example, a tree planting project might sequester carbon today, but if that forest burns down or is logged in the future, the stored carbon is released back into the atmosphere. Non-permanence is a major concern for nature-based solutions, which are vulnerable to fires, pests, and land-use changes. To address this, registries often require buffer pools or insurance mechanisms to compensate for potential reversals.
More generally, ERM considers alignment with internationally recognised integrity frameworks such as the Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles and the goals of the Paris Agreement.
What we’ve found in the carbon credit market
To determine the quality of carbon credits, ERM conducts its own technical analyses, interprets ratings from carbon credit rating agencies, and reviews publicly available information.
So far, our carbon credit portal team has evaluated projects . Just over half have met our high-quality standards. Among these projects, there is roughly an equal mix of avoidance and removal credits, and a total of 43 methodologies, while still providing geographic spread across 34 countries.
Interestingly, we found no correlation between carbon credit quality and geographic location.
Sixty percent of the projects we rejected were considered of “investible quality” by other parties—proving the importance of examining projects through multiple lenses.
Among projects that did not meet our standards, we observed some recurring themes.
Over-crediting in early vintage Improved Forestry Management (IFM)
Forestry management projects often assume that without the project, the forest would be rapidly cut down, which may not be true. This assumption, therefore, often incorrectly inflates the real CO2-reduction impact of the project.
Inappropriate reference regions for Reducing Emissions from Deforestation and Forest Degradation (REDD) projects
The reference region is supposed to be like the project area in terms of environmental and socio-economic characteristics. Data from this region, such as deforestation rates, spatial patterns of land use, and changing land cover, are used to construct the baseline scenario for the project area. However, sometimes, projects use a reference region that is not representative of the project area, which can result in over-crediting.
Inaccurate measurement of Soil Organic Carbon (SOC)
Some projects claim climate impact by increasing the stored carbon in soils. These projects include land management activities such as no-till farming or planting cover crops, which ideally sequester more carbon in the soil than the baseline. However, monitoring SOC change is difficult because soil organic carbon (SOC) accumulates slowly and its content is spatially variable. This requires a robust and costly sampling plan. To overcome this, many projects model soil organic carbon accumulation (for example, with RothC or DayCent models). This introduces additional uncertainties, which, combined with inadequate sampling protocols, can lead to overestimation of carbon removals.
Conclusion
High-integrity credits remain an important tool for mitigating hard-to-abate emissions and are important within many private-sector decarbonization strategies. However, without a robust selection approach, carbon credits can be counterproductive, wasting money and causing reputational damage. In a market of more than 10,000 carbon credit projects, careful analysis and a clear understanding of how they truly work are required to help companies buy high-quality credits they can trust.
