A carbon removal expert on how to fix carbon markets: ‘Buyers were misled’

Major problems with the voluntary carbon markets — ranging from allegations of worthless credits to outright fraud — are fixable with the right changes to market incentives, said Lowercarbon Capital’s Ryan Orbuch.

• The current take: “The problems with...the traditional system have been made so evident and so loud that buyers can't look the other way anymore,” said Orbuch, speaking to Shayle Kann on a recent episode of Catalyst. Orbuch is an investor who leads Lowercarbon’s carbon removal work.‍
• The market grounding: After spikes in purchases on the carbon offset market, trading was down in 2023 for the first time in many years. “The market for high quality, much more expensive tons, has gone up dramatically this year. So I think it's more of a reshuffling than a total contraction,” explained Orbuch.‍
• The outlook: A “reshuffling” in carbon markets is bringing new questions from investors who are concerned that credits are not having an impact. Orbuch explained on Catalyst that major changes are needed in how registries evaluate impact, and when credits are delivered.

“At the end of the day, the buyer should send money to the supplier after they have done the thing, not preemptively based on a guess in the methodology about how much of the thing they might do, which then undermines any feedback loop or incentive,” said Orbuch.

Registries like Verra, ACR, and Gold Standard make money by verifying projects, and sometimes even by transacting credits. So the more projects verified and more credits issued, the more the registries earn.

However, with bad incentives, the registries could never deliver on their initial premise: be the arbiters of quality in the voluntary markets, argued Orbuch.

“Buyers were misled that [registries] could effectively play that role in this old system,” Orbuch said, “because their incentives were optimized for the suppliers’ financial interests and the suppliers’ ability to produce predictable volume, not to actually understand the actual carbon cycle.”

That focus on volume led buyers to believe that they could purchase as many credits as they needed to totally offset their emissions. And that system “gave people the impression that you could have real avoidance or carbon removal benefit outside of your supply chain, some random other place on earth, for like $10 a ton.”

In turn, the buyers, like airlines, oil companies and big tech, were incentivized to avoid the appearance of buying low-quality credits.

“The buyers don't want to go back and say, ‘Wow. All this money we've been spending over the last 10 years was a waste.’ So the registries want to save face and be like, no, no, no. We're, we're improving our methodologies. We're updating it. Like that thing is still real.’ And it just becomes this like house of cards where like every actor benefits from the thing looking fine.”

The idea of ex-post payments, also known as forward offtakes, is catching on. The market for carbon removal, a category that includes technologies like direct-air capture and bio-oil storage, is growing, largely in the form of forward purchases, also known as forward offtakes.

“It's not like projected tons. It's not conceptual,” he added. “It's tons that have actually delivered like a log of things that have happened to the carbon cycle.”

Meanwhile, staples of the legacy market, like renewable energy credits and avoided deforestation projects, are losing market share, according to a report from research firm Carbon Direct. Buyers often paid for these credits prior to delivery.

Designing a better market

Orbuch explained how he would design the carbon market from scratch, firmly placing registries as the first arbiters of quality. 

One registry that argues for the kind of approaches Orbuch described is Isometric, which recently released a protocol for bio-oil storage, a technology being tested by startup Charm Industrial. 

Beyond his first two recommendations — having buyers pay registries and using forward purchases — Orbuch emphasized the need for feedback loops with suppliers.

“The suppliers don't always know how much or what to measure. And that's not their fault. Reasonable people can disagree about this, right?” he added.

“Like, how much more should you spend taking deeper soil samples, or more soil samples, or what shape should you put your control plot in the field, or like, these are not like, One, one answer is obviously doing fraud and the other answer is obviously correct.”

The idea is that as the science improves, registries can update their protocols, pushing the suppliers to improve their methods, too. “The question the registry has to answer is, the supplier thinks these tons were delivered. Were they actually?”

Listen to the full episode of Catalyst: