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Commentary: Are carbon credits a growing ‘lemon’ problem?

LaksaNews

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SINGAPORE: Over the past year, there has been a stream of negative news related to carbon credits. Heralded as one solution to the growing climate crisis, the practice allows companies to offset their emissions by buying carbon credits in supporting projects such as tree planting or renewable energy.

Carbon credits hold undeniable appeal as they appear to offer a convenient fix for a complex problem. Corporations can tout carbon-neutral products, and consumers can purchase flights guilt-free with carbon-compensated tickets. This means businesses can avoid costly emission reductions, consumers can make guilt-free purchases, and the environment supposedly benefits. All this sounds perfect, in theory. But there are potential pitfalls that could enable greenwashing.

In August last year, a study published in the journal Science concluded that the majority of carbon offset schemes significantly overestimate their impact on deforestation. Notably, of a potential 89 million credits - only 5.4 million (6 per cent) were linked to additional cuts in carbon emissions created by preserved trees - the entire basis on which credits are sold.

This means that many of the carbon credits bought by companies to balance out emissions are not tied to real-world forest preservation as claimed, said the team of researchers behind the study led by the University of Cambridge and Vrije Universiteit Amsterdam.

Earlier in January 2023, The Guardian reported that more than 90 per cent of the rainforest credits issued by Verra, a prominent global certification organisation, were likely to be “phantom credits” and could potentially worsen global warming. Verra has disputed these claims.

Climate litigation against companies claiming carbon neutrality is also on the rise. In May last year, a class action lawsuit was filed in the United States against Delta Air Lines for promoting itself as “the world’s first carbon neutral airline” while relying on questionable carbon offsets. Delta has said the lawsuit is “without legal merit”.

A COMPLICATED PROMISE​


Singapore in December last year published its list of approved international carbon credits, which companies may use to offset up to 5 per cent of their carbon tax liability.

Singapore’s carbon tax rate was initially S$5 per tonne but is now at S$25 per tonne. It will rise to S$45 per tonne in 2026, before reaching a target of S$50 to S$80 per tonne by 2030. This signifies that Singapore is serious about climate action.

To date, Singapore has concluded negotiations on carbon credits cooperation with Ghana, Vietnam, Paraguay and Bhutan, although Papua New Guinea is currently the only country on the eligibility list. The National Environment Agency (NEA), as the administrator of Singapore’s carbon tax regime, has said it will review and update the list from time to time.

When it comes to carbon credits, one major concern is the challenge of verifying “additionality”: Ensuring that supported projects would not have happened otherwise. It is difficult to determine whether a wind farm was built because of purchased carbon credits or if it was already in the works. Without robust verification systems in place, it is easy to greenwash as companies can simply buy credits from dubious projects and claim environmental responsibility.

Moreover, “permanence” poses another significant risk factor as trees planted today to offset carbon generated by a flight a few months later might be chopped down in 2030 to become firewood. Poorly managed forests have the potential to eliminate those diligently acquired carbon offsets, resulting in an originally neutral footprint becoming worse than before. Without proper long-term monitoring and enforcement measures in place, these solutions today could fuel greenwashing narratives in the future.

“Double counting” also contributes significantly to undermining the integrity of the system. This occurs when a country claims emission reductions from forests protected by carbon credits, while companies that buy those credits also count them as their own. This practice inflates perceived progress within the carbon market but fails to bring down actual emissions. Inflated claims confuse the true impact, and this inherently leads to greenwashing.

Related:​


WHAT CAN BE DONE?​


The carbon market does not solely consist of negative aspects. When utilised effectively, carbon credits have the potential to be an asset. There are indeed verified high quality projects that demonstrate clear additionality and deliver permanent impact. Companies that incorporate these alongside their internal emission reduction efforts can significantly contribute to tangible change.

To prevent greenwashing, transparency is essential. Organisations should reveal the nature, authentication, and influence of their credits. Investors and consumers should insist on this data and fact-check company claims independently. Regulatory agencies must enhance standards and eliminate questionable methods. Only then can carbon credits become a positive force rather than a means for environmental deceit.

For example, the European Union’s Unfair Commercial Practices Directive empowers consumers and competitors to sue companies for misleading environmental claims. Such legal tools equip consumers and regulators with the ability to challenge inflated claims and hold companies accountable, potentially through compensation, fines, injunctions, or even corrective advertising. Similar legislations exist in Australia and the UK and other developed countries.

Related:​


WHAT ARE THE LIMITATIONS?​


However, legal complexities arise when considering cross-border transactions and carbon credit projects based in developing countries. Proving misrepresentation or harm can be challenging, especially when dealing with projects with unclear additionality, permanence, and double-counting risks. Additionally, different verification standards and regulatory environments create further hurdles in enforcing uniform legal consequences.

The International Carbon Credit (ICC) Framework in Singapore permitting companies to offset some of their taxable emissions with carbon credits is a step in the right direction, but analysing its effectiveness would require some more time as high-quality projects that can benefit the climate are not yet available.

International cooperation is needed to establish clear legal frameworks and enforce consistent standards across borders, ensuring everyone plays by the same rules.

Unfortunately, countries at the United Nations’ COP28 climate summit in Dubai in December failed to seal a deal on carbon trading rules. Until there is consensus, the voluntary carbon market continues to be the main channel for private capital investment in initiatives focused on reducing or eliminating greenhouse gas emissions.

Another pitfall is that carbon credits allow companies to offset their emissions by investing in projects that reduce greenhouse gases elsewhere, rather than directly tackling their own emissions. This can create a moral hazard, where companies prioritise offsets over actually reducing their own emissions, leading to an overall increase in emissions.

Addressing climate change requires systemic changes to our energy systems, transportation infrastructure and industrial processes. Carbon credits can be a helpful tool in the transition, but they cannot replace the need for fundamental changes in the way we live and produce.

While they provide hope, they also carry potential pitfalls. By advocating openness, holding businesses responsible and emphasising real emission reductions, there is potential to transform this market into an authentic force for addressing climate change rather than a deceptive tactic for appearing environmentally conscious.

Ben Chester Cheong is a doctoral researcher in sustainability law at Cambridge University, a corporate regulatory compliance lawyer at RHTLaw Asia and a law lecturer at Singapore University of Social Sciences.

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