Luke Oliver: The Perplexity Problem of Voluntary Carbon Markets

Voluntary carbon offset markets, not to be confused with cap-and-trade carbon allowances markets, continue to be a topic of contention, with the validity of offsets frequently called into question. Luke Oliver, managing director, head of climate investments, and head of strategy at KraneShares responded to recent claims regarding the validity of current offset credits in a post on the Climate Market Now blog.

An article run by the Guardian made assertions that 90% of offsets approved by Verra, the world’s largest carbon offset certifier, were “phantom credits” and would not create carbon reductions.

The voluntary carbon offset market is still nascent and not without the types of problems that many nascent industries face, namely a lack of uniform regulation. Given this lack of standardization, it makes ensuring that offset projects are actually delivering on their commitments a crucial step in carbon offset investing while the market works to create standards and regulations, something it’s actively working towards right now.

“Carbon offsetting is one of the key mechanisms to achieving the ambitious climate targets under the Paris Agreement,” Oliver explained. “Carbon offsets are intended as supplements, rather than substitutes, to direct climate action. More critically, offsetting helps fund environmental projects that are unable to secure funds on their own.”

The Nuance to Carbon Offsets Should Not be Understated

Oliver went on to deconstruct the claims that the Guardian made over Verra’s carbon offset validity based on a singular non-peer-reviewed study, and it underscores one of the primary challenges within the voluntary market.

Voluntary carbon offsets are created utilizing a baseline estimate of what emissions would have been had the offset project not existed and then what emissions were conserved after the project was put into place. Take deforestation as an example: a baseline scenario would be what emissions would have been created had deforestation occurred over a set acreage, and the offset would be based on the estimates of emissions captured by the forest being protected.

The article published by the Guardian claimed that Verra had conflated the deforestation rate in their baseline estimates, and then uses the separate study’s findings, based on a synthetic approach using a control area far from the project area.

“Additionally, they assumed a generic set of physical variables that they deemed applicable to all projects, without regard for local deforestation factors characteristic of specific projects,” Oliver explained.

It highlights the levels of complexity in creating offset estimates and why there is much more nuance to carbon offset credits than carbon allowances in cap-and-trade programs that are strictly regulated and standardized.

Oliver welcomes the attention that the Guardian article is bringing to the voluntary carbon market once more, and the heated debate that has followed in the wake of the article being published. Greater attention to quality within the offset market will benefit all players and is vital, particularly given the offset market’s current net worth of $2 billion and its estimated growth to between $10-40 billion by 2030.

“It is important to ensure that investment is being channeled into projects that have the highest impact,” Oliver said. Despite the progress towards quality that is still underway in projects like forest carbon ones, the table stakes are simply too high to not support these efforts.

“For in the fight against one of humanity’s biggest threats, it is better to be vaguely right than precisely wrong.”

KSET Invests in Voluntary Carbon Markets

Further regulation and transparency will bring increased stability and likely drive even greater investment in the coming months and years. The KraneShares Global Carbon Offset Strategy ETF (KSET) is the first U.S.-listed ETF that offers investors carbon offset investing opportunities and exposure to the voluntary carbon markets. It tracks the S&P GSCI Voluntary Carbon Liquidity Weighted Index, which also offers a first-of-its-kind benchmark for the global voluntary carbon futures market performance that trades through the CME group.

The fund is structured to offer global coverage of voluntary carbon markets by tracking carbon offset futures contracts comprised of nature-based global emissions offsets (N-GEOs) as well as global emissions offsets (GEOs) that trade via the CME group.

As the voluntary carbon markets are a dynamic space, the index is structured in a way that will allow flexibility in re-weighting the securities it tracks. It will also move securities in and out of the index regularly, and it only tracks carbon offset credit futures that have a maturity within the next two years. The index weights the offset futures it tracks by the total value of their traded volume over the last six months.

KSET carries an expense ratio of 0.79%.

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