Third-party auditors are meant to safeguard and underwrite the quality of carbon markets, yet the intrinsic conflict of interest with which they grapple undermines their role as independent verifiers. This was the conclusion of a new study.

The market for carbon credits is facing a credibility crisis, with mounting evidence of projects failing to deliver their claimed carbon benefits. Current marginal reform efforts are unlikely to solve this.

One such example is the reliance on external auditors to bolster confidence in the market. A recent research paper and an accompanying editorial published in Science dive into one of the foundational concepts of carbon credit markets: that project developers hire and pay auditors from an approved list to verify claimed emission reductions or removals. 

Unconscious bias

As the paper outlines, this arrangement creates a direct conflict of interest. Auditors’ income depends on the developers whose work they evaluate, leading to both economic incentives and an unconscious bias to arrive at findings that favour their clients. 

While the paper notes that this arrangement is not unique to carbon credit markets, as auditing processes are common across different sectors, the self-serving bias is particularly pronounced in carbon credit markets due to the inherent ambiguity and numerous judgement calls required in carbon credit validation and verification. Auditors are asked to assess the credibility of developers’ subjective assumptions about “additionality” (whether the project would have happened anyway), “leakage” (emissions shifting elsewhere), and “permanence” (whether the project has a lasting climate impact). These criteria are typically not directly measurable, and many assessments are qualitative, which creates opportunity for biased interpretation.

Despite many carbon market stakeholders promoting third-party auditing as “essential to the environmental integrity” and “critical to ensuring the integrity and quality” of the voluntary carbon market, history shows auditors have not prevented widespread overcrediting, such as has occurred with cookstove projects and REDD+ forestry projects.  

A few bad apples?

The paper explores whether the issue of auditors failing to correct for overcrediting is limited to ‘a few bad apples’ or structural. Taking the largest certifier of carbon credits Verra as a case study, the analysis finds that 64% of Verra’s certified auditors have been involved in problematic projects where overcrediting was either explicitly acknowledged by Verra or found by peer-reviewed science.

While steps have been taken to restore the credibility of the market, including the suspension of some auditors that were involved in projects where overcrediting was brought to light, these steps have so far been marginal and do not tackle the problem at its core. 

As the paper states, “training, better oversight, or sanctions for a few auditors, do not address the inherent pressures to support what developers want that are built into the structure of an auditing system in which audited entities select and pay their auditors”. 

Some stakeholders have suggested a restructuring of the auditing process, drawing auditors from a global pool instead of a direct selection by the project developer. This has thus far not been taken up, despite evidence from a pilot on pollution audits showing that such a system could significantly improve the accuracy of auditors.

As the authors of the research paper also stress, demand for carbon credits is likely to increase due to the rollout of Article 6 carbon markets, with many countries indicating their intentions to use Article 6 carbon credits to meet their nationally determined contributions (NDCs), and the requirement for airlines under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to increasingly offset their emissions with carbon credits. According to the paper, such “dramatic increases in demand can only make the problem worse”.

Relying on flawed credits to justify real emissions not only fails to tackle climate change, but can even exacerbate it when used to justify increased emissions. Without robust auditing, these flaws proliferate. For the integrity of climate action, a fundamental rethinking of carbon credit validation and verification is urgently needed.