No one was surprised when a lightning bolt ignited a fire in the Fremont-Winema National Forest in early July 2021. All of southern Oregon, where the forest covers some 9,000 km², had experienced a major drought followed by heatwave in the preceding months. What ultimately blindsided residents and state officials was just how aggressively the fire consumed everything in its path. Over 1,500 km² of federally-protected wilderness was scorched in the blaze, known as the Bootleg Fire, which was finally contained in mid-August.

The forest itself was more than just a vital ecosystem – it also contained carbon offset projects designed to help companies and individuals compensate for their CO₂ emissions. Some of the land impacted by the Bootleg Fire is privately owned and managed by a group known as the Green Diamond Resource Company, which styles itself as a forest stewardship organisation. The firm says it has 280,000 hectares of active ‘carbon banks’ spread across several US states, including Oregon.

Once certified by an independent body, groups like Green Diamond can sell a ‘credit’ for every tonne of CO₂ absorbed by their forests. Less than six months prior to the fire, technology giant Microsoft purchased a quarter of a million tonnes of carbon removal credits from the company. By the time the Bootleg Fire was contained, an estimated 20% of Green Diamond’s land in southern Oregon had burned – and trees that were meant to sequester CO₂ indefinitely released it back into the atmosphere.

The incident is not an isolated one: BP purchased more than $100mn in forestry-based carbon credits in neighbouring Washington state in 2016 – and swathes of this land also burned in the 2021 wildfire season. Many high-emitting companies have come to rely on such credits to help them meet their sustainability and carbon neutrality targets. But whether they truly compensate for polluting activities is a matter of fierce debate.

Tensions around the topic ultimately boiled over at last year’s COP28 climate summit, where negotiators failed to agree on the rules for an international, UN-moderated carbon trading scheme. The idea was first put forward in Article 6 of the Paris Agreement, which gave countries permission to transfer carbon credits between themselves in order to hit their climate targets. While some viewed the deadlock as a major obstacle to progress, others took the view that no deal was preferable to a defective one.

‘The minimalist and no-frills framework that was on the table would have allowed countries to largely define their own reporting rules, to trade carbon credits flagged as having flaws, and to revoke authorisation for previously approved carbon credits without any limits, which could have led to double-counting,’ according to Jonathan Crook, a policy expert with the NGO Carbon Market Watch.

It appears that getting carbon credit markets up and running must be a top policy priority – until formal rules are agreed and enforced, the world of carbon credits will continue to be something of a ‘Wild West’.

Article 6  
As is so often the case in multilateral climate agreements, Article 6 is made up of a number of separate (but related) parts. Article 6.2 allows countries to exchange carbon credits directly with each other through bilateral agreements. If, for instance, an African country invested heavily in solar energy and exceeded its own emissions reduction targets, a South American country struggling to restrain its CO₂ output could buy some of the surplus.

At the centre of the UN’s efforts to develop a global carbon market is Article 6.4 – which is meant to set out a system for the validation, verification and issuance of credits. The market would ultimately be overseen by a supervisory body that would have to approve projects before they can issue UN-backed carbon credits.

The key difference here is that countries are responsible for trading between themselves under 6.2 – whereas the credits created under 6.4 can be purchased by countries, companies or individuals in an open forum. However, neither element is currently operational, given the failure of talks in Dubai in December. The protracted disagreement means the market that would theoretically be enabled through Article 6.4 won’t get off the ground for another year or more. Negotiations will resume at the COP29 meeting this year, in Kazakhstan.

Bilateral trades  
Meanwhile, some countries are ploughing ahead with bilateral trades despite a lack of formal guidance or oversight. Switzerland, a vocal proponent of carbon trading, announced it had purchased a batch of credits generated by a Thai electric mobility company last year. The group, called Energy Absolute, converted diesel-fuelled buses in Bangkok to battery power and a Swiss fossil fuel importer funded the enterprise via its credit purchases. The certificates were eventually handed over to Switzerland’s federal government to count towards its CO₂ reduction target.

The roll out of the electric buses is expected to prevent half a million tonnes of CO₂ being emitted between 2022, when they first hit the roads, and 2030. However, subsequent analysis by Alliance Sud, a Swiss development policy organisation, uncovered ‘shortcomings in the additionality aspect’ of the project. Put simply, the owner and operator of Bangkok’s electric buses must be able to prove that it would never have been rolled out without the funding from credits. But there’s no way to prove that capital wouldn’t have flowed in from elsewhere.

‘It is plausible that a major investment in e-buses would have taken place in the next few years anyway,’ wrote the investigators from Alliance Sud, citing the fact that the vehicles had begun appearing in the Thai capital prior to 2022. Ultimately, the researchers concluded that ‘there must have been funding pathways [...] prior to the Bangkok E-Bus Programme’. Can Switzerland therefore claim it had a part in decarbonising public transport in Thailand – and count this towards its own climate goals?

Air-tight certification  
Critics have argued that offset schemes like this allow wealthy countries to meet their targets on paper, while failing to meaningfully reduce their domestic emissions. If anything, this incident illustrates the need for an air-tight certification process, which only grants credits where they are due. Groups like Carbon Market Watch say it’s important that countries focus the bulk of their attention on decarbonisation at home ‘while providing separate climate finance to developing countries’.

But as of the end of last year, some four-fifths of countries have said they will be relying on Article 6 to meet their Nationally Determined Contributions (NDCs) – or commitments to CO₂ reductions. As such, it appears that getting carbon credit markets up and running must be a top policy priority. Until formal rules are agreed and enforced, the world of carbon credits will continue to be something of a ‘Wild West’.

For now, the scandals are stacking up. Most recently, oil giant Shell has been accused of using discredited offsets to count towards its carbon-reduction targets. The credits in question, certified by standards group Verra, came from rice projects in China that utilised improved irrigation methods to reduce methane emissions. An investigation by the website Climate Home News found that the actual environmental benefits of the schemes had been greatly exaggerated.

Verra has since suspended the projects and its internal review is ongoing. Voluntary carbon credit markets require all actors to proceed in good faith to be effective. But pressure to go green is mounting while formal standards have failed to launch. This combination risks undermining the certificates in the long term.