Do Carbon Credits Help Combat Climate Change?

While many individuals and organizations work to reduce their carbon footprints, some emissions remain unavoidable. For example, a company could rely on air travel to visit customers or suppliers and may need to use fossil fuel-based electricity at their facilities. These companies can offset their remaining emissions through a market-based system known as a cap and trade program. Under this system, each company receives a number of allowances (or credits) that decline over time; if they produce more than their allotment of allowances in one year, they must purchase additional carbon credits to offset the excess.

However, the voluntary carbon.credit market is plagued by challenges that impede its growth and the impact of the work it supports. These issues include the difficulty in identifying and assessing quality, the lack of financial incentives for carbon credit producers, and the insufficient transparency of pricing. These barriers limit the market’s ability to support a just and accelerated energy transition.

A large, effective voluntary carbon market is essential for enabling corporations to achieve their emissions reduction goals and help the world meet its ambitious goal of limiting global warming to 1.5 degrees Celsius or less by 2050. In a new report, the McKinsey Global Institute and other members of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) discuss how to address key market issues that could increase the flow of capital to projects that deliver measurable, verifiable emission reductions.

To address these barriers, we propose a set of criteria that can be used to identify high-quality carbon credits and a roadmap for how to build an effective, sustainable carbon market. These criteria are based on work from several leading experts in the field, and are intended to provide a starting point for market participants—including standard-setting organizations, investors, financial institutions, market-infrastructure providers, and other constituencies—to develop a blueprint for building a large, effective carbon credit market that is transparent, robust, and credible.

This new approach to carbon credit certification focuses on the project’s ability to generate second-order benefits, including biodiversity protection, community economic development, and water quality, in addition to reducing greenhouse gas emissions. We believe that such an approach would improve the credibility of carbon-offset claims and reduce transaction costs.

We call on all market participants to move quickly to adopt this framework and make it available to all interested stakeholders. Together, we can ensure that a vibrant carbon market continues to drive the investment needed to reduce greenhouse-gas emissions while supporting a just and accelerated energy transition. This is the most important step we can take to accelerate the climate crisis solution.