In 1986, the CEO of an energy company felt guilty about his firm’s coal-fired power plant project in Connecticut after learning about climate change. Ultimately, his company invested in tree planting initiatives in Guatemala, aimed at incentivizing farmers to preserve intact forests while offsetting carbon emissions from coal plants.

This initiative holds the potential to create a marketplace for “voluntary” carbon credits, enabling companies to offset their emissions via investments that combat deforestation. Proponents argue land users should be financially rewarded for preserving forests, while critics claim land users often never intended to clear the forest.

But who is right? A growing body of research reveals that both sides have merit. According to a recent study, many early projects successfully reduced deforestation, yet they sold an average of nearly 11 times more carbon credits than the actual forest saved.

Historically, forests have acted as significant carbon sinks, particularly tropical forests, which absorb approximately half of humanity’s fossil fuel emissions. However, rapid deforestation continues due to agricultural expansion, especially for cattle ranching and palm oil in low-income regions.

“Forests are under severe threat, and we need financial mechanisms that can compensate for their protection,” says Dr. Tom Swinfield, leading research at the University of Cambridge. “Carbon financing is among the most viable options for forest conservation.”

In response, Swinfield and his team evaluated 44 projects compliant with UN guidelines under the Reducing Emissions from Deforestation and Forest Degradation (REDD+) framework. They found that 36 projects achieved at least a slight improvement in deforestation metrics compared to what would have occurred without intervention, while only one project saw a significant rise in deforestation.

However, only about 1/11 of all credits issued were genuinely justified. This average was skewed by eight projects that did not effectively reduce deforestation but issued numerous credits. Excluding these top nine credit sellers, approximately 25% of the credits were legitimate.

Swinfield attributes the over-issuance of credits to two main factors stemming from unintended errors. Credit developers relied on “reference areas” that had experienced greater deforestation to estimate potential future clearing rates. This approach often led to selecting reference areas closer to roads or those with rolling terrain, producing inflated future deforestation predictions.

The study highlights a project in the Peruvian Amazon that sought to provide alternative livelihood options for 18 local communities. The French firm responsible for the project utilized the nearby rainforest as a reference area, which was more vulnerable to deforestation, thus exaggerating the benefits of their project area.

“While many of these projects may have sound intentions, the methodologies used to calculate credit issuance were often flawed,” remarks Swinfield.

If project developers and credit agencies adopt the more precise methodologies highlighted in this research, excess credit issuance could be mitigated. Nonetheless, reduced credit supply leads to increased costs, requiring companies to pay more for carbon credits to maintain net-zero emissions claims, according to Dr. Julia Jones from Bangor University.

“The era where companies can offset carbon emissions cheaply is over. Achieving equitable and effective forest conservation cannot come at a low cost,” she asserts.

Currently, deforestation avoidance credits correspond to one ton of CO2 emissions prevented and are available for just a few dollars, while high-quality credits can range into the tens of dollars. In contrast, credits for technologies actively removing carbon, such as tree planting and direct air capture, start at several hundred dollars.

“We need a marketplace for high-quality carbon credits that genuinely contribute to preventing deforestation,” Jones emphasizes.

Research indicates that while deforestation avoidance credits can mitigate some emissions, they conflict with the Paris Agreement’s net-zero emissions target. As per Danny Cullenward from the University of Pennsylvania, “these credits are often acquired to offset emissions instead of actual reductions.”

For effective forest and climate preservation, companies should prioritize high-quality credits or simply contribute to forest protection, instead of merely “retiring” credits in their emissions budgets. Accurate assessment of deforestation risks is crucial for informed interventions.

“We must safeguard tropical forests and, through improved measurement strategies, pay for and quantify the benefits without relying solely on carbon credits,” he concludes. “This can be accomplished both with and without credit systems.”