With the European Union reinstating carbon credits as a mechanism for industries and companies to offset their carbon dioxide emissions, carbon rating agencies stand ready to assess the system’s actual effectiveness.
As the European Union revives the application of carbon credits to assist industries and businesses in Europe in compensating for their greenhouse gas emissions, Euronews interviewed Sebastien Cross, co-founder and chief innovation officer of the London-based carbon rating agency BeZero Carbon.
Established in 2020, the agency primarily evaluates carbon credits and estimates the probability that they neutralize one tonne of carbon, following a process similar to how financial rating agencies estimate the default risk on bonds and other securities.
«What we do as a rating agency is to assess credits,» Cross explained. «We do not develop methodologies nor provide accreditation. Our role is to examine the credits and determine the likelihood that these credits genuinely represent one tonne of carbon mitigated, which is the claim attached to all of them.»
The EU27 carbon market, known as the Emissions Trading Scheme (ETS), enables companies in Europe to buy and sell emission permits. Until 2020, the bloc employed carbon credits, then identified as Clean Development Mechanism (CDM) credits, which allowed wealthier countries to earn credits by investing in sustainable initiatives in developing nations.
Use of CDMs was abandoned amid allegations of greenwashing, excessive credit allocation, and distraction from authentic domestic emission reduction efforts. Nevertheless, with the introduction of the EU’s 2040 climate target law, targeting a 90% reduction in greenhouse gases, the bloc is reconsidering the deployment of international carbon credits to offset 5% of its emissions.
Development of carbon markets
According to BeZero’s co-founder, governments utilizing ratings are seeking assistance to evaluate the reliability of credits they intend to acquire under Article 6 of the Paris Agreement.
«Governments have shown interest in leveraging ratings as a tool while designing their approach to incorporating carbon credits within compliance frameworks,» he stated. «The discussions currently taking place in the EU are especially notable from this standpoint.»
Cross pointed out substantial changes over the past five years, including shifts in risk perception and actual carbon credit performance.
«The rating agency offers buyers and investors a risk assessment measure to better understand the fundamental dynamics,» he noted, adding that carbon markets lacked any risk metrics five years ago.
He remarked that carbon markets are evolving, a positive trend given the increased political emphasis on carbon credits’ role in decarbonisation.
A global carbon markets pledge was recently endorsed by the EU, Brazil, China, France, Germany, and the UK, among others, during the COP30 climate summit. This commitment signals a broad consensus to establish mechanisms for carbon pricing and create a global carbon market.
Carbon credits are issued via two distinct channels: the compliance market and the voluntary market.
The compliance market is government-regulated, requiring certain companies to purchase official permits allowing them to emit a specified amount of CO2 under strict regulations.
Conversely, the voluntary market permits companies to purchase credits generated by environmental initiatives, such as forest conservation or renewable energy projects, aiming to reduce their carbon footprint.
However, Cross explained that with the EU open to including carbon credits as a tool for decarbonisation and integrating Article 6 of the Paris Agreement into their climate objectives, the EU or its member states will determine the credit pricing.
«Greater carbon prices are essential to preserve the incentive for decarbonisation,» Cross noted. «The worry is that if foreign credits flood the market, carbon prices may fall, diminishing motivation for companies to invest in domestic decarbonisation measures.»
He also voiced concerns about the potential effects of integrating carbon credits into the ETS, as the EU27 considers adding permanent carbon removals to the scheme’s scope.
«There is a perceived risk that introducing more affordable credits might suppress the ETS price,» Cross remarked.
The validation problem
Within a carbon credit system, countries or companies exceeding their greenhouse gas emission limits need to purchase additional allowances. Conversely, those emitting less can sell surplus credits, thus establishing a market for trading allowances.
«A carbon credit reflects an activity or intervention aimed at reducing or removing carbon, and attempts to assign credit for that mitigated carbon,» explained Cross.
Such interventions may be nature-based, like afforestation and protection of mangroves and peatlands, or involve non-nature-based approaches, such as employing carbon capture and storage technologies.
«Regarding non-nature-based methods, we have historically seen many renewable energy credits. When crediting the generation of energy from renewables instead of the grid, it reduces carbon intensity,» Cross added.
When carbon credits are issued, businesses using them must disclose a defined set of information publicly.
«When analysing issued projects, we begin with publicly accessible data. We then communicate with the developer or project owner if some details are unclear, missing, or require clarification,» Cross noted.
«The rating agency’s responsibility is to gather as much information and data as possible to critically examine the accuracy of those figures. This analysis is then reflected in our overall rating.»
Carbon credits’ performance
Cross told Euronews that the effectiveness of various carbon credits varies substantially—and that it is often difficult to precisely measure their real impact.
«Exact outcomes cannot be observed because estimations must rely on factors like counterfactual baselines, which are unobservable,» he explained. «There’s never perfect data underpinning the number of credits issued.»
For example, in direct air capture of carbon dioxide, extensive data is available since technological systems quantify how much carbon is separated from air components and transported. Still, determining a baseline figure remains necessary to evaluate the real effect of these efforts.
«This is the most debated aspect of a carbon credit project—figuring out what would have occurred had the project not been implemented—because that’s the range against which credits must be assigned,» Cross said.
This challenge partly explains the EU’s past difficulties with CDM integration, where some projects falsely claimed emissions reductions that were unlikely to occur.
«The key advancement now is the availability of tools like ours, which allow real understanding of what projects achieve, using satellite imagery and more sophisticated technologies than previously available,» he concluded.