NBS Knowledge Lab Webinar: Carbon Credits and the Race to Net Zero

In the race to achieve net zero emissions, carbon credits have become a vital tool in balancing environmental footprints. However, this approach is not without challenges. Beginning with the principles and science behind "net zero", businesses need to understand the different markets — both regulatory and voluntary — and the various project types that avoid, reduce, and remove greenhouse gases.

During the webinar, panellists Mr Daniel Lee, Associate Professor at NBS’s Division of Banking & Finance, and Mr Duncan van Bergen, Co-founder of Calyx Global, addressed significant challenges, including measurement and verification, permanence, and leakage. They also shared how businesses can actively contribute to a more sustainable future while overcoming these obstacles. 

Moderating the session was Associate Professor Matthew Dearth, NBS’s Assistant Dean (Executive Education) and Co-Director, Centre for Sustainable Finance and Innovation (CSFI).

The following is an edited transcript:

Matthew Dearth: Let's start by discussing the link between carbon markets and net zero. Daniel, could you give us an overview of net zero, its meaning, and importance?

Daniel Lee: I'll address this in two parts. First, the core concept of net zero is the balance where the total greenhouse gases entering the atmosphere equals the total removed. This balance is crucial as rising temperatures are caused by the total stock of greenhouse gases in the atmosphere, not just the flow. A common analogy is a bathtub: imagine water pouring in from a tap into the bathtub. Net zero is the point where the amount of water entering equals the amount being drained, preventing overflow. While we cannot completely stop the tap (as some emissions are inevitable), we can reduce and remove emissions to maintain this balance.

The second part concerns how net zero is typically used. It is linked to the Paris Agreement goals on how net zero should be achieved sooner rather than later. Achieving net zero in 100 years would be too late, as temperature rises are tied to the total stock of greenhouse gases. The aim is to align with the Paris goals of limiting temperature increase to well below 2 degrees Celsius, with efforts to limit the increase to 1.5 degrees Celsius.

You all may have seen some of these charts that show the emissions level rising, then there's this steep decline. That's typically the pathway by which emissions are supposed to come down. The Intergovernmental Panel on Climate Change (IPCC) has said that as a society, we should get to net zero on a fairly steep gradient to maintain or reach that 1.5-degree limit. If you reach net zero too late, the gradient is not steep enough, and it takes longer to get to net zero, you might reach a temperature increase well above the Paris goals.

So, how soon is soon enough? Very briefly, the IPCC says that using 2019 emissions levels as a baseline, we should have a reduction by 43 per cent in 2030 and by 84 per cent in 2050. That gives you a sense of the steepness of that decline.

The second typical context in which net zero is used is when an organisation or company, typically a non-state entity, is setting a net zero target. The debate is about which emissions to consider. Do you only consider emissions from your factories and facilities, or do you also consider emissions from the consumption of your products or your suppliers? Most people are familiar with the idea of Scope 1, Scope 2, and Scope 3 emissions. The established view is that for corporate contexts, you need to account for a portion of your Scope 3 emissions, acknowledging the difficulty due to lack of data or influence. There are finer details about how much of Scope 3 to account for. The gold standard is to account for everything, but organisations like the Science Based Targets initiative (SBTi) have some nuances around this.

Matthew Dearth: So, net zero is really important. We've got to get there quickly to limit temperature rise. I love that bathtub analogy as it resonates with everyone. I've got a bunch of follow-up questions. We have this idea of net zero, what's the role of carbon credits in getting companies to net zero?

Daniel Lee: It's a big question, Matt. There's a big debate on this topic. I'll answer it on several levels. In some circles, there's an existing philosophical, perhaps ideological, debate around the use of carbon credits. It boils down to whether using carbon credits means the organisation does not need to implement other actions to reduce or remove emissions from the atmosphere.

For those who oppose the use of carbon credits, they're worried about a scenario where a company simply buys carbon credits and continues to pollute. This concern is shared by everyone, not just those against carbon credits. Sometimes this argument layers in the concern that carbon credits are of low quality, but that's a separate point from the ideological debate. The main contention is that the use of credits distracts or excuses a company from making operational changes. The response is that it's not an exclusive solution but a complementary one.

If you step back from the ideological debate, the finer point is about how much to use carbon credits and under what circumstances, recognising that it's complementary. The debate is about the guardrails, how much is acceptable and many more.

Firstly, most people agree that carbon credits can be used for emissions that cannot be eliminated, provided that all necessary efforts to reduce emissions have been made. This consensus is often far out in 2050. You can use carbon credits after doing everything you can.

Secondly if a company has set a net-zero target with a science-aligned pathway, it can use carbon credits to abate emissions that don't yet need to be reduced in the current year. For example, if a company emitted 100 tons in 2019 and needs to reduce to 57 tons by 2030, and it has successfully reduced to 75 tons by 2025, it can buy carbon credits for the remaining 75 tons. Organisations like the Voluntary Carbon Markets Integrity (VCMI) recognise contributions in this space for high ambition. The real debate is about the 25 tons reduction from 100 to 75. For most industries, a large portion of this will be Scope 3 emissions. There's consensus that for Scope 1 and Scope 2, companies will say not to use carbon credits. For Scope 3, there's debate because it's difficult to influence suppliers or consumers. The SBTi is working on this, and many are waiting for their guidance.

Matthew Dearth: When you're talking about Scope 1, 2, and 3, is that related to offsetting versus insetting?

Daniel Lee: Not completely. Offsetting involves buying a carbon credit from a project that has reduced or removed emissions outside your value chain. Insetting involves implementing initiatives within your value chain to reduce Scope 1, 2 or 3 emissions. For example, an agricultural company improving practices within its value chain.

Matthew Dearth: To clarify, Scope 1 involves direct emissions from fossil fuels burned by your organisation. Scope 2 involves emissions from electricity purchased from another emitter on organisation’s behalf. Scope 3 involves emissions within your value chain, either upstream or downstream. One more question: where do carbon taxes fit into this? What is the relationship between credits and taxes?

Daniel Lee: Carbon taxes are another policy tool. Economic theory says we are emitting too much greenhouse gas because the price for pollution is too low. A carbon tax imposes a cost on this externality as a regulatory policy tool. Regulatory regimes can be different from voluntary regimes where carbon credits are used, though there can be overlap, such as in Singapore.

Matthew Dearth: Duncan, could you give us an overview of what a carbon credit is and are there different types? Maybe you could share some examples.

Duncan van Bergen: A carbon credit is an instrument certifying that one metric ton of CO₂ or its equivalent has been reduced or removed from the atmosphere in a way that is additional and permanent in meeting certain criteria. Think of it as a certificate or a receipt for proof of work done, not a promise. It's stored electronically, indicating a ton has been reduced or removed. Carbon credits can represent CO₂ or other greenhouse gases like methane or nitrous oxide.

Credits can represent either the reduction of a ton versus the status quo or the removal of a ton from the atmosphere. The concept of additional and permanent criteria is very crucial when it comes to the debate around quality of carbon credits. Additionality means the reduction or removal wouldn't have happened without carbon financing. For example, we move around Singapore using the MRT, but we don't need the additional incentive of carbon finance, so we won't be able to create carbon credits because we were already using the MRT. It's not incremental or additional. Permanence means the reduction shouldn't be reversible. For example, if we plant trees for 10 years and they absorb a lot of CO₂, but then we cut them all down and burn them, the CO₂ goes back into the atmosphere, making it impermanent.

Carbon credits often claim other positive impacts on sustainability alongside CO₂ reduction. Often, these are pegged to the United Nations Sustainable Development Goals. Some people talk about co-benefits. The core benefit is CO₂ reduction, and the co-benefits include all the other positive impacts. Interestingly, the question arises: what do you do with the instrument? This relates to what Daniel was discussing. Now you have an instrument that can be traded between those who develop these kinds of carbon projects and the companies Daniel mentioned that want to use carbon credits. This is the essence of the carbon credit trade. Companies want to buy, and project developers are willing to sell. That’s the basics.

Matthew Dearth: You're getting to the markets part. These credits can be traded. Daniel, you mentioned regulatory and voluntary markets. What's the difference between those?

Daniel Lee: Relating back to the question on tax, the idea continues to be that because governments may see that the cost of polluting is too low. In the economy, there’s a need to impose a cost on pollution such as carbon tax. In some jurisdictions instead of imposing a carbon tax, an emissions trading scheme is used to create a carbon price. Instead of the government determining the level of cost per tonne, it is for the market to determine. So, in brief, what happens is the government sets the rules on which entities are liable. Typically, these would be large installations and facilities that emit a significant amount of greenhouse gases into the atmosphere. Power generation is usually straightforward to impose this on. For every tonne of greenhouse gases or CO₂ equivalent that you emit, you need to buy and surrender a permit or allowance imposed across the board in this sector. Companies may then determine their emissions, for example emitting 100 tonnes, and thus need to acquire 100 allowances and surrender them to the government, otherwise facing a substantial fine.

Companies can then trade allowances among themselves depending on each company's individual circumstances. For example, Factory A may be much more energy-efficient than Factory B and therefore their natural emission level is considerably lower so they don't need to buy as many allowances and may have some extra ones they wish to sell. In many of these emissions trading schemes, the government may initially give a free allocation to subsidise the scheme, which may be reduced over time. It's just another modality by which we achieve carbon pricing. The critical point is that regulatory emissions trading schemes and carbon taxes can exist alongside voluntary markets because emissions trading schemes can be limited in scope. For example, they may only cover power generation, not retail or FMCG or only cover Scope 1 emissions and not Scope 3. Voluntary carbon markets and net zero goals are complementary to that.

Matthew Dearth: In a voluntary market, a firm is under no regulatory obligation to participate in the creation, buying, selling, or any activities related to carbon credits. They simply decide to do it. Is that correct?

Daniel Lee: In general, yes. In some jurisdictions particularly Singapore, they may say "You have a tax, but to meet your tax obligation there is some flexibility. You may, for example choose to acquire some carbon credits to offset that liability up to certain caps and in this case 5% in the Singapore context, but subject to certain conditions like the types of credits you can use. So, there's a slight overlap.

Matthew Dearth: These credits, Duncan, you said before they represent the reduction or removal of one metric tonne of CO₂ or its equivalent right? It sounds like there are many ways that could happen as the starting point with the project. Can you walk us through the process from the project to entering one of these markets and then to the end of life of that credit?

Duncan van Bergen: There are many ways to create carbon credits — it's not an exaggeration to say that there are hundreds of ways. People often think about planting trees, and for many that's where it stops. Planting trees is indeed a way to create carbon credits, provided it's done well, but there are literally if I'm not mistaken around 180 different methods range from planting trees to capturing methane from landfills, to destroying gases known as ozone-depleting substances, which are highly potent greenhouse gases. Other methods include capturing methane from wastewater and so on.

To answer your question on how a carbon credit is created: it starts somewhat poetically in the imagination of a carbon project developer. They see an opportunity to reduce emissions such as planting a forest solely dedicated to absorbing CO₂ from the atmosphere. Sometimes, the creation of carbon credits can be a byproduct of another process. The developer must be able to demonstrate how the activity would only occur due to the financial incentive provided by selling carbon credits. This is crucial otherwise the credits are not considered additional.

To turn the effects of the project into credits, the project developer must choose a standard and a methodology. This is akin to a recipe that allows them to convert the activity such as planting trees or capturing methane into individual carbon credits. For example, a landfill gas project developer might see the opportunity to install additional equipment to capture methane from a landfill and flare it, thus converting methane into CO₂, which has a lower greenhouse gas effect. The project developer might use the Climate Action Reserve, one of the leading standards for creating carbon credits. The Climate Action Reserve has a protocol or methodology for landfill gas projects, detailing all the measurements, reporting, checks, and verifications needed to create the credits. This concept is documented in a project development document submitted to the standard for validation. An independent auditor, known as a validation and verification body, checks whether the methodology's rules were followed. If validated, the project is not yet complete. To issue the carbon credits, the project must make a claim such as stating that it prevented the emission of 50,000 tonnes of CO₂ equivalent over the past 12 months. This claim, along with a report, must be audited by the validation and verification body. If everything checks out, the credits can be recorded in a registry and can be sold.

For example, initially, these credits are registered in the name of the project. When a professor travels, NTU might decide to buy credits from landfill gas project so the ownership of the credit’s transfers from the developer to NTU. When NTU use it, they have to retire the credits to offset emissions. This ends the life of the credit as it can only be used once.

Matthew Dearth: Let's talk about that because there's an idea out there that an unscrupulous project developer could sell a credit multiple time. What prevents that from happening?

Duncan van Bergen: The system of registries works well to prevent issues like double selling of credits. Each credit is uniquely identified in an electronic registry and can only be sold once. The buyer should verify the credit in their own registry account. So, it’s no longer in the hands of the developer as he can’t sell it another time, and neither should a buyer just buy blindly as they should be able to see it in their own registry account.

Matthew Dearth: So, there are multiple registries and not just a single global list. Are there major differences between the registries?

Duncan van Bergen: Yes, there are differences between them but not so much how the mechanisms work. It’s more or less similar in terms of electronic setup. Over time, it's likely that distributed ledgers will be increasingly used for this purpose, though we aren't there yet. The differences among registries lie in their standards; each standard has its own registry. Some specialise in specific types of projects, while others focus on different ones. For example, a newer standard called Puro.Earth primarily deals with removals rather than reduction credits and they vary in terms of oversight and governance. These differences impact quality.

In our process of rating, we first assess the registry before rating individual projects. We evaluate aspects such as governance, scientific review, appeal processes, and transparency in decision-making. To reassure, the four major voluntary market registries — Vera, the Gold Standard, the Climate Action Reserve, and the American Carbon Registry — have all passed our scrutiny, along with Puro.Earth and several other smaller or newer standards.

Matthew Dearth: Regarding the trading of carbon credits, once credits are issued, they can be traded on exchanges, not just purchased within a registry. This is like trading stocks or bonds in a secondary market. Is that right?

Duncan van Bergen: As the market has grown, more players have emerged to facilitate transactions. The primary issuance from developers often goes to brokers or traders who act as intermediaries between projects and the market. These credits may be traded several times before reaching an end buyer. This is typical of a mature financial or commodity market. The market includes various players such as traders, funds investing in carbon credits, and independent rating agencies like ours, which help buyers make informed decisions.

Matthew Dearth: I find this interesting. If there are funds investing in these, it implies a range of valuations, right? What is the range of prices, and how does that relate to the underlying variables of the type of project or other credit attributes? What drives price?

Duncan van Bergen: Prices range from as low as $0.50 per tonne to over $1,000 per tonne. Each credit represents one tonne of reduced or removed emissions. The price is determined by what buyers are willing to pay. Historically, marketing value has had the most significant impact on price, such as projects that conserve forests or support communities, though this hasn't always been a reliable indicator of credit quality. At the lower end, credits from large-scale hydro projects are often criticised for additionality, as many would have happened without carbon finance.

In some cases, we see projects that only considered carbon credits three years after project was started being built, indicating they were not a key element initially. This reflects low quality and low market appetite. At the other end, people are willing to pay high prices $800 and above for direct air capture projects, which are mostly pilot scale and involve installations that literally suck CO₂ out of the atmosphere. Whether these will scale to have a significant impact or if prices will decrease remains to be seen. In between these extremes, many credits trade in the $10 to $50 range including projects like landfill gas methane capture, tree planting, and biochar. As better information becomes available on the inherent quality and efficacy of the credits — how well they represent one tonne of reduced or removed emissions—we see a stronger correlation between quality and price.

Matthew Dearth: I’m wondering what do we know about the effectiveness of the carbon markets ecosystem is leading to greenhouse gas emissions reductions? Are there any studies into this?

Duncan van Bergen: We’re now in the range of a few billion tonnes that have cumulatively been reduced or removed from the atmosphere as a result of these voluntary carbon markets. This is starting to be meaningful. People often say that for something to be impactful, it needs to represent a billion tonnes (a gigatonne). This solution has reached closer to two billion tonnes. So yes, it’s having an impact. The current question is how to scale it and ensure that every credit created truly represents one tonne. Daniel, what’s your perspective on this?

Daniel Lee: From a research angle, the answer varies depending on the schemes. This includes both voluntary and regulatory markets. For example, there’s extensive research on the effectiveness of compliance or regulatory markets such as the European Union Emission Trading Scheme (EU ETS) and China’s Emission Trading Scheme. Conclusions range from conclusive support for the EU ETS to more cautious assessments of China’s scheme due to its early stage.

There’s also research showing that companies buying carbon credits tend to lead in climate action, setting better targets and taking more initiatives to reduce their emissions compared to those not participating in the market. This challenges the notion that companies use carbon credits as an excuse to avoid other actions. Further research addresses the potential of Paris Agreement Article 6 markets to reduce emissions and promote greater ambition among countries. Additionally, there’s a efficacy between carbon taxes and emissions trading schemes from practical perspective. The common theme is that details matter, as each jurisdiction applies these schemes differently. If we take a step back to look at voluntary carbon markets, which have been the focus of today’s discussion, a lot of work has been done and it’s important to remember that these markets are not a standalone solution. They are a complementary strategy to other measures deployed to achieve net-zero emissions.

Matthew Dearth: At the end, we should address what might be one of the elephants in the room, which is the notion of integrity or quality in reduced deforestation projects has been questioned. Several studies have shown that these projects are achieving only about 6% of the promised emissions reductions. One such paper, which I believe was published in Nature last year, highlighted these concerns. What measures are being taken in the market to ensure quality? For instance, when an airline offers to offset emissions by purchasing carbon credits, how do we reach a consensus that an activity is truly of high integrity and quality?

Duncan van Bergen: Essentially, quality means having confidence that the claim made by the credit is accurate. If a credit claims to offset one tonne of CO₂, how confidence can we be that this claim is true? High confidence indicates a high-quality credit, while low confidence suggests a poor-quality credit. Now, what is the industry doing? It is true empirically that there is a wide variability in quality. When we examine the 550 projects we've rated to date, we find that fewer than 10% fall into our highest rating categories — A+, A, and B+. This means that over 90% of projects fall into the B category or lower, with a significant portion in the C or below categories. This is something to be aware of, but high-quality projects do exist. What are the problems? Often, it's that the project isn’t additional. For example, the large-scale projects I mentioned earlier may face problems with impermanence. These projects might not provide much information about what will happen beyond their 20-year life cycle, making it difficult to have confidence that there won’t be a reversal after that period.

Matthew Dearth: How can projects that follow standards still encounter issues, even if they have been approved?

Duncan van Bergen: This happens because standards allow for some degree of interpretation. What is being done to address this? For the market to scale, people need to have confidence in its credibility. There are three main areas of action. Firstly, standards are tightening and improving. Recent years have been a wake-up call highlighting the need for better standards. For instance, forest conservation projects came under heavy scrutiny in 2022 and 2023. Vera, one of the largest standards for forest conservation has developed a new methodology called the Consolidated REDD methodology, which is a significant improvement on the previous version. Similarly, standards and methodologies across the board are being tightened.

Secondly, the industry has taken several initiatives. A body called the Integrity Council for the Voluntary Carbon Market has recently started issuing labels called Core Carbon Principles given to certain project types indicating a lower risk associated with them. Thirdly, the ecosystem is maturing. Companies like ours, which didn’t exist four or five years ago, are now providing valuable information for making informed decisions about high-quality carbon credits. While it's still early days, our recent report, "The State of Quality in the Voluntary Carbon Market," shows that the issuance of the lowest quality carbon credits has decreased over the last 18 to 24 months. It’s too early to make definitive conclusions, but there are signs of improvement.

Matthew Dearth: As we wrap up, I’d like to invite each of you to share your final thoughts on the key takeaway for our viewers today and the direction in which the market is heading?

Daniel Lee: I'd like to leave the audience with this thought: beyond the quality of the credit itself, as Duncan has explained, the way you use it within your overall net zero strategy is important. If you only buy credits without taking further action, even the best-quality credits won’t protect you from criticism. The key is to combine high-quality credits with a strong, honest claim. Remember, carbon credits are a complementary tool, not an exclusive tool.

Duncan van Bergen: I’ve been at the three-foot level in this discussion for a long time. I’m going to go up to the 30,000-foot level here, and I’ll share something that one of my earliest friends in the carbon markets told me "If you can, you must." I leave that thought with the audience. There’s much debate but ultimately, there is a need more and faster action. I’ll be the last one to be cheerleader for carbon markets or say that it’s a silver bullet — most definitely it’s not. Companies would be deluding themselves if they thought carbon credits alone constitute a climate action plan. They can be a part of a climate action plan, but no action is the worse. To use a bathtub analogy, it's more valuable for the planet to reduce the flow of the tap a little today rather than waiting until 2030 that makes a material difference as the time value of carbon savings. And so, if you can, you must.

Matthew Dearth: I’ll leave you with one final thought: this is a dynamic, interesting, and important market. It takes a little bit of work to stay on top of everything that’s going on because it’s pretty new and evolving in front of us. It’s kind of like, I’m going 60 miles an hour down the highway while I’m building the car around me. Sometimes, it feels that way. At the same time, if you do have an interest in this, it’s worth spending some time to get yourself up the curve.

Watch the webinar here: