Carbon credits, the tree that hides the forest?

Tin Fischer

Journalist based in Berlin, Germany

The worth of a felled tree is easy to quantify; currently, lumber is worth about US$350. But what is the value of a standing tree? It is obviously valuable for biodiversity, for the climate, for humans and agriculture: a forest provides habitat for birds, stores carbon, casts shadow and regulates rainfall. But these are not financial values, therefore leaving forests vulnerable for clearance. So a new idea emerged.

During the 2005 UN Climate Conference in Montreal, a proposal by Papua New Guinea and Costa Rica made the rounds. It stated that developing nations had “little incentive to prevent deforestation”, because of “the absence of revenue streams from standing forests”. As a solution it suggested ”a more complete market valuation” for such standing forests.

To put more simply, a price tag for standing trees. 

There is no market for shadow or bird nests. But the Kyoto Protocol in 1997 had created a market for carbon emissions that countries could trade among themselves in the form of so-called carbon credits. CO2 emissions could be compensated by supporting others to avoid the same amount of emissions, for example by building a renewable energy power plant.

The idea was to use the same market mechanism for forests. It was controversial from the start. Existing standing forests do not absorb additional carbon; they receive credits for avoiding emissions by not being cleared. So you have to measure what would have happened to a forest without your protection. And you have to guarantee that a forest keeps standing and storing this compensated carbon for decades like a solar or wind farm does.

Up until today important certification bodies like Gold Standard do not certify “avoided deforestation” carbon credits. Countries often avoid them too. They never made it to the market of the Kyoto Protocol. But in 2006 an organization called Verra, backed by players of the private sector, decided to establish a standard for such forest credits – a set of rules to statistically predict what would happen to a forest without protection. In addition, Verra established an “insurance system” to address the issue of permanence. Say, for example, a protected forest, which has already generated carbon credits, gets destroyed in a wildfire. All carbon that the forest has stored is back in the atmosphere. But it too can now be compensated with credits from the insurance pool. Therefore the credits keep their value.

A standing tree finally got a price tag. It was turned into a tradeable commodity, built on complex statistics. What is actually traded is a piece of paper – or entry in a database – that confirms that a hypothetical scenario did not occur.

Forest protection projects were set up in developing countries, from Peru to the Democratic Republic of the Congo to Indonesia. There are now around 90 worldwide. Some projects are run by environmental organizations and agencies, some even by private companies. Protecting forests has turned into a commercial enterprise, or so it seems. 

However, in the beginning, carbon credits – intended to cool the climate – were just warming shelves. Market demand was low. Companies would buy carbon credits to compensate for their emissions voluntarily, but political and public pressure to do so was low.

With the climate strike led by Swedish activist Greta Thunberg in 2018, the climate movement gained momentum. Voluntary carbon offsets soon became a booming commodity. Companies from all sectors wanted to become climate neutral, or at least demonstrate that they were making an effort. A large part opted for avoided deforestation credits. In 2021 the avoided deforestation credits accounted for almost a third of the voluntary carbon market, now a billion dollar industry.

But did the projects really reduce deforestation? Thales West, environmental scientist and assistant professor at the Free University in Amsterdam, compared a sample of protected forests to forest areas with similar characteristics, but without protection from carbon credits. I was part of a team of journalists from The Guardian, Die Zeit, and SourceMaterial who analyzed West’s results further. We found that 94 per cent of the carbon credits from projects we examined were worthless for the climate. It became apparent that projects often exaggerated their what-if-scenarios about what would have happened to these forests.

I think what went wrong is simple: when the climate value of “standing forests” is calculated, nobody at the table has a natural interest to keep numbers low. Those who protect the forests want to generate as many credits as possible. Those who buy the credits want to get as many credits as possible. Those who seal the deal earn a fee from every credit. The nature of this virtual product leads to the bizarre situation that all parties involved – seller, re-seller, standard bodies, buyers – want big numbers. So they got big numbers. 

A solution for this conflict of interest could be a new political framework which is about to be established. After the Paris Climate Agreement in 2015, every country in the world will define climate goals. This means creating forest inventories and quantifying deforestation. If forest protection projects want to generate credible carbon credits, they will have to go to a national environmental agency and ask for these credits to be subtracted from the national carbon accounting. This may be crucial in the future, because it finally brings to the table a party that has a natural interest in keeping the number of credits for standing forests low: us, society, represented by the state.

On the market side there are now countless startups and initiatives to establish more robust calculations for forest projects. The availability of easy-to-use digital technology could also make it easier for owners of smaller forests to convert them into carbon credit projects.

But why stop with carbon? In his dystopian satire Venomous Lumpsucker British novelist Ned Beauman imagines a world where companies buy “extinction credits” which give them “bulldozing rights to any species on earth”. Every wrong that’s done to nature can be compensated in a zero-sum game. It is a novel, but not entirely fictitious. "Biodiversity credits”, which quantify improvements to natural habitats, are an emerging concept. Bird nests in trees? They could finally become a commodity too.