Carbon market’s wild west: Cowboys and Intermediaries thrive

This is the third article in our five-part series on forest carbon credits and the voluntary market. Read Part One and Part Two. Part Four and Part Five will be published later this month.

When Andrea Babon learned about what a company called Kanaka Management Services (KMS) had been up to in Papua New Guinea, she was aghast at the apparent incoherence of its plans. The India-based carbon credit consultancy had scoped out a forest conservation project in Oro province that would, KMS claimed, reduce millions of metric tons of annual carbon emissions that could then be sold as credits through the voluntary carbon market.

“I find it hard to believe they are legitimate carbon project developers based on the poor quality of their project design documents,” Babon told Mongabay in an email. In 2022, the Australian researcher and expert on the forest conservation scheme known as REDD+ worked with colleagues in PNG and beyond to bring KMS’s plans to the attention of the PNG government and Verra, the world’s largest carbon credit certifier. Verra had listed the project on its website as “Registration and verification approval requested,” a distinction that means the project was — and still is, as of late 2023 — under review.

REDD+, short for reducing emissions from deforestation and forest degradation, is a forest conservation strategy that, in one iteration, seeks to monetize the emissions of carbon “reduced” as a result of a project. Part of that money is then supposed to support the economic development of communities often responsible for the sustainable or improved forest management leading to those carbon savings.

Babon and her colleagues’ criticisms of the Oro province project included technical issues — for example, that the project documents didn’t identify how KMS would address forest loss and degradation in the proposed 418,000-hectare (1.03-million-acre) area. Those missing details called into question whether the project would really save the 800 million metric tons of carbon dioxide over the 100-year life span of the project as KMS claimed. Demonstrating this “additionality” in the reduction of emissions through forest conservation is an integral part of how carbon credits are valued in the voluntary carbon market.

The project may also cause problems for communities in the vicinity, commenters noted, because it wasn’t clear how or whether KMS had informed local communities about its intentions. And Babon had noticed that parts of KMS’s written submission referred to roads that aren’t present in the project area, and railways, which don’t exist outside of mining sites in PNG, as potential drivers of deforestation. She said she suspected KMS probably copied this section from a proposal for a project in a different geographic location altogether.

“The project document is poorly written, largely incomprehensible and lacks the details that would enable an adequate technical assessment of the project,” Babon and a colleague wrote in a March 2022 analysis of the project.

KMS hasn’t limited its work to Oro province. Babon also found it had a second, even larger project in another part of PNG. In that case, it covered parts of four different provinces but was still riddled with similar issues. Nor is PNG the limit of the company’s ambitions. It’s been working in the Democratic Republic of Congo (DRC) on a project that was rejected by Verra, and in Zambia. Both projects in Africa had also raised eyebrows about the firm’s expertise and concern for community rights.

KMS hasn’t made representatives available to speak with Mongabay, despite repeated requests since May 2022, and the company hasn’t answered specific questions about the project.

The company is what’s known as a project proponent or developer. Some leaders in PNG call KMS and others like it “carbon cowboys,” and their work led the country to institute a moratorium on all REDD+ projects on March 2, 2022.

A diverse set of actors connect these carbon projects on the ground with buyers of credits, with each credit representing a metric ton of carbon dioxide. The voluntary carbon market is a way to funnel private funds into forest conservation, supporters say. They also say it’s urgently needed to address climate change, given the glacial pace of government-led actions and a separate U.N.-backed process for trading carbon emissions that also employs REDD+ principles.

The value of the unregulated voluntary market grew to a peak of around $2 billion in 2021, according to Ecosystem Marketplace, which was a fourfold increase compared to 2020. That surge has led some observers to voice concerns that the prospect of making money, rather than an abiding concern for climate change mitigation or forest protection, has enticed some of these actors into the fray.

Other groups and individuals known as intermediaries seek to provide services such as forest monitoring via satellites, or marketing services that, in theory, allow project teams on the ground to focus the bulk of their time on the work of forest conservation.

The influx of these players has made it difficult to deduce, for example, how much of the value of a credit’s price goes into restoring forests, avoiding deforestation and other activities meant to tackle worrying rates of both emissions and forest loss. The trend has also exposed the dangers of a largely unregulated market, particularly to people with the least power in the system who nevertheless play a vital role in any nature-based solution aimed at climate change mitigation.

At the same time, a chorus of criticism has arisen around whether even the most highly touted REDD+ credits on the voluntary market truly reduce carbon emissions as claimed.

Players in the carbon market
Globally, Indigenous- and community-managed tropical forest land hold more than one-fifth of the world’s forest carbon. A 2020 study in the journal Proceedings of the National Academy of Sciences found that Indigenous territories and protected areas in the Amazon hold nearly 60% of carbon in the region, but account for only about 10% of emissions.

Levi Sucre Romero, an Indigenous Bribri leader from Costa Rica and the coordinator of the Mesoamerican Alliance of Peoples and Forests (AMPB), said in an unpublished essay shared with Mongabay that Indigenous peoples and local communities (IPLCs) should benefit from carbon-related projects on their lands. But he said he’s concerned about the actors connecting these communities to the market and the ways in which they may operate.

“In theory, the carbon market could help keep carbon in our forests and out of the atmosphere, and its profits could help us advance forest guardianship,” Sucre wrote. “Instead, we are seeing strange intermediaries show up in our territories, speak with people who do not have leadership roles, offer false promises, and tell us to ‘sign here.’”

KMS’s approach to community engagement around planned REDD+ in the DRC appeared to have mirrored Sucre’s descriptions, according to Mongabay’s reporting in 2022. Communities claimed they received scant details from KMS’s representatives, who spent 15-45 minutes explaining the project in each community. The forms they asked people to sign were in English and French, in an area where literacy rates are low and most residents speak little French and no English.

Elsewhere, in the Malaysian state of Sabah, a group led by an Australian consultancy and a Singaporean company signed an agreement with state leaders to secure rights to sell credits for carbon and other “natural capital” from 2 million hectares (4.9 million acres) of forests. Undeterred by widespread condemnation from Indigenous rights groups in Sabah and abroad for not including communities in the decision-making process, the project is moving forward, according to Jeffrey Kitingan, Sabah’s deputy chief minister and the project’s most vocal backer. Kitingan and his associates have declined to speak with Mongabay and answer key questions about the agreement despite repeated invitations.

The opacity with which intermediaries can operate in the voluntary carbon trade has drawn a lot of criticism, largely because the hidden fees and shares of project revenues these operators siphon away obscure the true value of the money that’s going to climate action. Determining the proportion that actually reaches the work that’s supposed to fund climate action, like addressing deforestation, is challenging, if not impossible, for many players, said Gilles Dufrasne, policy lead for global carbon markets at the nonprofit Carbon Market Watch, who authored a February 2023 report on intermediaries.

“It’s a bit crazy that nobody is measuring this,” Dufrasne told Mongabay. “There is no number, no data at all on how much finance is really flowing to climate action.”

Around 90% of intermediaries don’t share what they charge or how much they make from credit trades. Average rates for the intermediaries who did report their takes were about 15.5% per transaction, Dufrasne found. He suggested that requiring more openness could improve fairness in the market — and the efficacy of the funds that are meant for climate action.

“Without more transparency, there’s the risk of placing a bet on the wrong horse,” he said. That may mean the voluntary market “might not be delivering as much finance [to climate change mitigation] as we think it is.”

A push for innovation — but at what cost?
For all the blemished reputations of carbon market intermediaries, there are operators who are willing to share what they see as valuable additions to the marketplace.

California-based Pachama, backed by billionaire investors like Marc Benioff and Bill Gates, helps large companies purchase credits, sometimes as a way of offsetting their own emissions. Pachama has also promoted dynamic baselines as an alternative to current methods relying on predicted deforestation rates in the absence of a project.

The methods for calculating the impact of projects vary widely and are a key issue for which the voluntary market and REDD+ has recently come under fire. A major criticism has been that developers of REDD+ projects have had leeway in choosing the methodology used to calculate the impacts of their project on reducing emissions from deforestation. The greater the deforestation they predict would have happened in the absence of their project, the more effective their project will appear, and thus the more credits they can sell. (On Nov. 27, carbon credit certifier Verra updated its REDD methodology for projects aiming to avoid “unplanned” deforestation — the creeping forest loss that occurs on a smaller scale. The Washington, D.C.-based group says these changes now put Verra itself in charge of the baseline-setting process.)

Pachama’s dynamic baselines are reassessed throughout the life of a project. In contrast to the counterfactual scenarios currently in use, the technique involves matching each pixel in a satellite image of a project to a pixel in a control area outside the boundaries of the project.

“It’s similar to a medical trial in that way, in that we’re trying to isolate the effect of the project relative to the changes in the landscape overall,” Dick Cameron, Pachama’s vice president of science, told Mongabay. “It could change the way in which crediting is done.”

The approach would allow the determination of how many credits a project should be generating without the counterfactual-based predictions that detractors of carbon markets have criticized.

Why markets?
Proponents of the voluntary carbon market often cite the ability to direct money from the private sector into forest conservation as one of its key benefits, especially given the slow pace of the U.N. REDD+ system and mandatory government “compliance” markets aimed at capping emissions. In the wake of the voluntary carbon trade’s growth, a bevy of intermediate companies have sprung up around the idea of acting immediately to address the severity of the climate crisis.

London-based Respira International aims to bring together financial and forest conservation expertise. Respira was co-founded by finance professional Ana Haurie in 2019. One of the company’s key goals is to help projects get upfront funding for their work. Respira helps facilitate long-term “off-take” agreements for these projects, essentially commitments to purchase the credits the project ultimately generates.

Haurie, also Respira’s CEO, said the work to address deforestation and the associated reductions in emissions is critical and urgent.

“If we don’t do anything to stop the rates of deforestation,” Haurie said, “[we’re] going to have a bigger challenge to deal with.

“These reductions are taking place right now,” she added, “And without demand for those reductions, then what’s the incentive? There isn’t one.”

On another part of the spectrum sit companies like U.S.-based Everland, which takes on the marketing and communication tasks for REDD+ projects around the world. In theory, shouldering this load allows project operators to focus their efforts on the conservation and community work that will generate carbon credits.

Josh Tosteson, Everland’s CEO, said that getting money to the ground is paramount.

“The substantial majority of the money has to flow to the stakeholders who have a say in what happens in the forest,” Tosteson said in an interview. “That’s the bottom line.”

Still, he said intermediaries can play an important role, especially at a time when heightened criticisms of the voluntary market are leading to more volatility.

“Financial intermediaries often get a bad name,” he said. But, he added, “One of their principal functions — and this is true in all markets — is to absorb market risk.”

How much are services worth?
Most intermediaries claim to demand a “fair” price for their services. Just how much they consider fair is often more difficult to track down and something intermediaries seem reluctant to share, as Gilles Dufrasne found in his February report for Carbon Market Watch.

The terms of the natural capital agreement in Sabah stipulated that Singaporean company Hoch Standard would get 30% of the gross revenue from the project, despite the fact that the agreement requires the state of Sabah to shoulder most of the management costs, according to an analysis by civil society and research groups. In the case of Hoch Standard and its Australian partner, Terra Australia, it’s unclear what risk these companies are taking on. Critics of the agreement say the state of Sabah and its people stand to lose the most if the deal goes sideways.

The details about revenue sharing came to light only after a copy of the document was leaked in late 2021. It didn’t include crucial details, such as where the forests were located when it was signed in October 2021, and to this day the authors have yet to share that information.

How revenues from carbon credit sales should be divided has become another salient question for the organizations that work with communities’ REDD+ forest conservation projects. In Papua New Guinea, Jim Thomas, CEO of the NGO Tenkile Conservation Alliance (TCA), has received numerous entreaties from carbon project developers promising big financial returns for communities in the Torricelli Mountains, where the TCA has worked for the past two decades.

Many people in these communities have heard about the prospects of carbon deals, and they say they’re intrigued by a framework that could help stymie the constant pressure to log their lands. Pressure to log the region’s valuable hardwood trees and clear the land for crops like oil palm has closed in around the TCA’s project area.

“Carbon stops all this,” Lawrence Yanamba, the head primary school teacher in the community of Muku, said in an interview. He added that carbon financing could be a “safer, healthier and richer” way forward to provide for his community’s development.

In the villages where the TCA works, the forests remain remarkably lush and home to a growing number of tree kangaroos, including critically endangered species. Parts of these forests also remain the sites for the gardens, building materials and medicines that support the people who have lived there for generations.

Thomas has remained skeptical of the so-called “cowboy” developers. But like Yanamba, he’s been interested in finding a way to help the communities in the region benefit financially since the advent of REDD+ in the mid-2000s.

One set of potential investors proposed taking 30-50% of the carbon credit sales over the 30-year life span of a project in the Torricellis. But Thomas said his own back-of-the-envelope calculations suggested that TCA, a nonprofit organization, could handle the administrative tasks of marketing the carbon credits and channeling the funds back to the communities for a fraction of that amount.

CIFOR-ICRAF, a global research and development organization, has been approached by developers with similar terms in the tropical forests where the organization operates, said chief operating officer Robert Nasi. But it’s been reluctant to work with companies that would charge high rates when their only added value would be to find someone to purchase the credits that the communities and the organization generate.

In such cases, “We will find the buyers ourselves,” he told Mongabay in an interview.