Carbon offsetting – as a financial product – has quickly grown into a $1 billion market that is being embraced by many companies. At the same time, banks and regulators are raising concerns about the integrity of offsets as a commodity.

As corporate boards raced to announce their net-zero carbon emissions targets, carbon offsets, or “credits,” went from relative obscurity to a widely used and cheap tool to claim achievements.

Typically, CO2 offsets – in the form of projects that reduce emissions, such as B. newly planted trees – are bought and then ‘scrapped’ in an independent register so that no one else can claim the CO2 reduction from them.

They come in two flavors: regulated and unregulated. The EU Emissions Trading Scheme is the largest, bringing in $34 billion in 2021. This so-called cap-and-trade program measures greenhouse gas emissions and requires companies to buy additional allowances if they pollute excessively, or to sell carbon credits to others.

However, as prices for regulated EU offsets reach record highs, companies are turning to the voluntary, unregulated offsetting market to meet their carbon targets.

According to a report by investment management and financial services firm Morgan Stanley, this voluntary carbon offset market reached $1 billion in 2021, up from $306 million in 2020. That figure compares to about $115 billion the primary market of the EU emissions trading system. However, the unregulated market could grow to about $35 billion by 2030, adds Morgan Stanley.

Former Bank of England Governor Mark Carney estimates the potential for the carbon offset market to grow to $50 billion by 2030, despite scrutiny of his balance sheet.

But even as market participants work to establish best practices for the carbon offset market, he faces increasing criticism.

“[The] The voluntary carbon market is the ‘wild west’ of carbon markets,” said investment bank Credit Suisse in a May report. It is a self-regulated market “with little transparency”.

Credit Suisse found that purchases of carbon credits by Delta, the airline and vehicle manufacturer Volkswagen in 2021 were about double and five times, respectively, their purchases in 2020. However, the bank cautioned that, based on disclosures to the Sustainability watchdog CDP, “we can see that most companies buy carbon offsets with potentially questionable environmental integrity. In particular, we have found that most renewable energy projects are not located in the least developed countries.”

Credit Suisse added that while hundreds of companies make carbon credit statements, they use terms like “net zero” differently — which has caused confusion. As a result, “investors, regulators and even consumers will be increasingly vigilant that claims are reasonable and not greenwashing.”

Media attention at last year’s COP26 climate conference prompted companies to set net-zero targets, even if they didn’t present plans to achieve them.

So if you have a choice to renovate, for example, by reducing natural gas use, or “this cheap, easy-to-buy option [carbon] credit from the market. . . of course it is imperative to do so,” explains Barbara Haya, director of the Berkeley Carbon Trading Project at the University of California.

The US Securities and Exchange Commission proposed greater transparency on its use of carbon offsetting in a key climate change announcement in March. If carbon offsets are used to meet emissions targets, information about the carbon emissions reduced by offsets must be disclosed, the SEC said.

SEC Commissioner Caroline Crenshaw said the US regulator had been warned by industry experts about “issues with offset verification, accuracy and quality.” “If companies claim that they are reducing overall carbon emissions in other ways, they need to tell investors how they are doing it,” she said.

To help companies comply with new regulations, Annette Nazareth, a former SEC commissioner, has joined the Integrity Council for the Voluntary Carbon Market, a global governance body formed in September to set standards. Nazareth says the council’s first task is to set a benchmark for high-quality carbon credits and it aims to publish those standards in the third quarter of 2022.

However, skepticism about the market remains. Haya has been involved in carbon offsetting for two decades and says: “It didn’t work 20 years ago; it still does not work. Why is the quality still so bad after 20 years of ‘learning by doing’?”

Current climate initiatives are plagued by double counting and vague standards, Haya argues. Companies could supplement carbon offsets, she suggests, by investing in actual carbon clean-up projects, such as environmental protection or new technologies that eliminate carbon emissions.

“We must try to tighten the current market,” adds Haya. “He has to shrink a lot first. And then there are many other ways companies can offset their emissions.”