Can auditors guarantee the integrity of credits from carbon trading schemes? New research published by the University of Pennsylvania in July says no. And the primary reason is conflict of interest. The norm in the carbon market industry—both in the voluntary market and the compliance market—is that auditors are hired and paid by carbon project developers, baking in an incentive for auditors to rubber stamp projects.

Article 6.4 of the Paris Agreement allows both countries and private companies to trade carbon credits as a way to meet their commitments to reduce emissions. The UN Supervisory Body on carbon markets is currently in the process of empanelling auditors to validate and verify those emission reductions. The first auditor to be empanelled is an Indian company called 'Carbon Check (India) Private Limited'.

A carbon offset market consists of project developers, registries, auditors and buyers. The developers advance and run the projects while the registries provide a digital database of carbon credits and design methodologies to estimate a project’s benefits. The developers hire auditors from a list approved by the registries and then sell the verified credits to buyers like a company that seeks to offset its emissions.

Proponents of the offset market often tout the integrity of carbon credits by claiming that third-party auditing means credibility. However,  the new research notes that auditing faces "structural limitations" given that auditors are selected and paid by the organizations they are auditing.

It states "An offset credit structure in which the key actors—carbon credit sellers, buyers, and registries—all gain when projects claim more credits only reinforces the economic incentives and cognitive biases that generally affect auditing reliability. ”

The magazine Science published an editorial based on the research titled 'Auditors can't save carbon offsets'.

“The claim that auditors provide independent assurance that credits are worth what they claim to be worth is not supported by science or by 20 years of experience with carbon offset projects,” said Cynthia Giles, one of the authors of the research. Giles previously worked as a senior adviser at the US Environmental Protection Agency.

Danny Cullenward, a climate economist and lawyer said the new study is “the first comprehensive one” that looks at the problems of auditing in carbon markets and its relationship to conflicts of interest in other auditing applications like in financial regulation more broadly.

Systemic conflict of interest

The researchers analysed 95 offset projects verified by Verra that were subsequently found to be over-credited. Verra is a private registry based in Washington DC. At present, Verra is the largest registry in the voluntary carbon market. It has issued more than 1.3 billion verified carbon credits across 125 countries.

The researchers found that 21 of 33 Verra-approved auditors were involved in one or more of 305 audits of the 95 projects. This shows that multiple audits signed off by multiple auditors and then reviewed by Verra staff was still not sufficient to fix over-crediting issues. Essentially, this means auditing cannot guarantee the integrity of carbon offset credits. The researchers say this is because of an inherent bias in the carbon market structure where auditors are selected and paid by carbon project developers.

Over-crediting is a serious issue that plagues carbon markets as a whole. Research published by the journal Nature Communications last year found that less than 16% of the carbon credits issued to the investigated projects constituted real emissions reductions.

Drilled sent queries to the UN Supervisory Body about systemic conflict of interest between auditors and project developers and how they aim to address this in the global carbon market governed by the UN. They said in a statement that “entities are accredited as Designated Operational Entities [DOEs] only after undergoing a rigorous assessment process. This process is conducted in strict accordance with the accreditation standards, which include thorough evaluations to identify and mitigate any potential conflicts of interest arising from their operations. Furthermore, accredited DOEs are subject to regular surveillance and performance assessments to ensure they continue to operate independently and impartially while fulfilling their designated functions.” They also referred to accreditation standards for the carbon market governed under Article 6.4. which is called the ‘Paris Agreement Crediting Mechanism’.

The standards under the Paris Agreement Crediting Mechanism require the auditor to analyze threats against impartiality and identify activities like development or financing of carbon projects, providing consultancy, training or advertising for projects etc as activities that threaten impartiality.

However, neither the response from the UN Supervisory Body nor the accreditation standards address the specific issue about systemic conflict of interest that arises from auditors being hired and paid by project developers. The standards also rely on individual auditors assessing their own impartiality.

“The elephant in the room is the reality that the developer selects and pays its own auditor. No amount of ‘analysis’ or ‘impartiality procedure’ will change the profound conflict this introduces in the system,” Giles explained. “An auditing firm cannot tell a developer that 80% of their project's claimed credits aren't deserved, because that auditing firm would not be hired by anyone again. There is no ‘analysis’ or ‘procedure’ that could protect from a conflict like that.”

“One would hope that the UN, which carries this heavy burden of trying to implement this programme that aims to address the threat of climate change, would respond to the relevant science and they would design a programme that acknowledges the truth of what science and many years of experience have proven, and not just ignore it,” Giles added.

Verra responded to the research in much the same way that the UN Supervisory Body did. It sent Drilled the same response, as was uploaded on its website, to our questions about systemic conflict of interest and the responsibilities of registries.

It claimed that its system “reflects global best practices for oversight and independence” and that “every audit submitted undergoes an internal review by Verra staff before any projects are certified or carbon credits are issued.” This is regardless of the fact that the new research showed that 305 audits by 21 auditors which were then reviewed by Verra staff still failed to catch over-crediting issues.

Verra also dismissed issues of systemic conflict of interest stating “Whether it’s financial audits, food safety inspections, or environmental certifications, the party seeking certification typically pays for the audit. Who else would?”

‘Just box-ticking exercises’

Globally, Verra is just one among the many major carbon market registries. There are others like Gold Standard, American Carbon Registry, and Climate Action Reserve. And, in addition to auditors, they also have responsibilities to ensure integrity of the credits they certify. But there are serious questions here too.

Trishant Dev, Deputy Programme Manager, Climate Change, Centre for Science and Environment (CSE) in New Delhi said “the way auditors certify these projects is also quite laughable. If you look at the reports, the question isn’t how the auditor can write such a report, but rather how the registries are willing to accept it as verification or validation, because so many of these reports are essentially just box-ticking exercises.”

Dev is the lead author of an investigation titled ‘Discredited: The Voluntary Carbon Market in India’ published by CSE in 2023 that showed how the voluntary carbon market in India has failed on two counts of claims: emission reductions and benefits to local communities. India is the world’s second largest source of carbon offsets in the voluntary carbon market, the United States being the first.

This reporter has seen projects in India verified by major registries like Verra and Gold Standard where multiple claims are not backed by data. For instance, an LED bulb distribution project claimed to have distributed 700,000-800,000 LED bulbs but only lists about 20 interviews with end-users whose locations are also vaguely categorised as the state they belong to like “Uttar Pradesh” and “Rajasthan”.  And the location file shows the map of India.

In another cookstove project in India, no end-user agreements were available to verify since the cookstoves were yet to be distributed but user agreements from a similar previous project from the same developer was used as proxy. And in multiple projects, the location of the end-users was limited to the state where they reside.

“It seems like they don’t want these people to be reachable independent of the project developer,” Dev said.

Danny Cullenward, the climate economist, pointed to how auditors play a very limited role. Essentially, an auditor is only required to check if the project has conformed to the requirements of the registry that issued the credits. The auditor is not asked to express an independent view about whether or not a project developer's claims make sense. This means that in the carbon offset projects in India, the methodologies perhaps did not require the specification of the places where the LEDs and cookstoves were distributed.

“Whether or not the auditor does a good job, weak methodologies allow project developers to make completely irresponsible claims. In those cases, third-party verification is effectively window dressing,” Cullenward said.

‘Plethora of unmeasurable assumptions and judgments’

Another private registry called Isometric does things a little differently. They select and pay the auditor directly. And Isometric is, in turn, paid by carbon credit buyers; not project developers.

Lukas May, Chief Commercial Officer at Isometric, said the new research is interesting. “The findings are similar to what we have observed in carbon markets, and why we've decided to take a different approach.”

The fact that Isometric is contracted and paid by carbon credit buyers, May said, aligns their incentives with buyers seeking credits for high-quality carbon removal.

“Buyers want to ensure the money they are spending is truly resulting in climate impact. Aligning our incentives with buyers, rather than project developers, helps avoid a major conflict of interest that exists in today's market.”

However, even if conflict of interest is mitigated to some extent, the buyer is still part of the ecosystem that benefits from the credits. And a  ‘buyer pays’ system has its own conflicts.

Giles, one of the authors of the new research said “Isometric's approach is less important as a ‘solution’ than it is as an acknowledgement from people deep on the inside that the conflict we write about - auditors selected and paid by the developers do not provide an unbiased assessment - is a real issue.”

And unlike in the regular market or even environmental markets, the quality of the commodity is more difficult to ascertain in the carbon market.

The authors of the new research wrote “Environmental markets that work well require reliable measurement, such as in pollution allowance trading markets that rely on real-time monitoring of emissions. Offset markets are at the opposite end of the measurement credibility spectrum due to the plethora of unmeasurable assumptions and judgments that underlie offset credit claims.”

Dev pointed to the same issue as well, noting how a fundamental problem with carbon markets is that everyone benefits from an invisible commodity. “A shopkeeper selling 2 kgs of potatoes as 5 kgs would definitely be called out by the buyer. But with carbon, everyone benefits from an inflated claim because it can’t be ‘seen’, it holds no material value for any stakeholder except the environment itself,” he observed.