A global carbon credit program risks rewarding the wrong behavior

A framework supported by the United Nations for the protection of tropical forests may permit governments to generate revenue through carbon credits while failing to promote effective forest conservation. The fundamental issue lies in the method of calculating baselines, which represent the anticipated deforestation rate without intervention. Although there has been no observable action taken by enrolled jurisdictions, including countries, states, and provinces, the incentivization structure benefits those who have the potential to game the system, as highlighted in a study conducted by researchers at Yale published in the Proceedings of the National Academy of Sciences. Furthermore, jurisdictions that could benefit most from intervention are, paradoxically, penalized under the current framework.

According to the Global Carbon Budget, emissions derived from changes in land use, predominantly due to deforestation, constitute approximately 10-12% of total anthropogenic carbon dioxide emissions. The focus of the study is on jurisdictional REDD (JREDD+), an adaptation of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) program, which has faced significant criticism for issuing credits that do not effectively correspond to genuine emissions reductions.

REDD+ operates on a project-based model, whereby landowners receive payments for reducing deforestation on their properties. This framework was developed under the United Nations Framework Convention on Climate Change and incorporated into the 2015 Paris Agreement. However, REDD+ projects can include forests that were never genuinely at risk for deforestation. Additionally, project-based REDD+ raises concerns regarding leakage: as enrolled landowners decrease their deforestation rates, others may increase theirs to satisfy market demands.

In response to the shortcomings of the REDD+ program, JREDD+ was gradually established, compensating state, provincial, and national governments for reducing deforestation within their jurisdictions. Brazil pioneered this program in 2008. The voluntary carbon market has increasingly viewed JREDD as a more credible alternative to project-based carbon credits; however, the recent study revealed that this version of the program also suffers from design flaws. Key issues identified include:

• Jurisdictions already making strides toward reducing deforestation are eligible to generate credits without any additional action.
• Areas experiencing increases in deforestation—and in need of the most funding—may be dissuaded from participating in the program due to stringent conditions that require significant reductions in forest loss before credits can be earned.
• A temporary surge in deforestation occurred in half of the jurisdictions participating in JREDD just prior to the commencement of the crediting period.

"While the advantages of obtaining carbon credits from jurisdictional REDD have been widely discussed, this study clearly highlights concerns that warrant attention, even if actors have yet to exploit these vulnerabilities," stated Luke Sanford, assistant professor of environmental policy and governance at the Yale School of the Environment and co-author of the study.

Currently, there are more than $3 billion in committed credit purchases under ART TREES, one of the two principal registries for JREDD. Some of the largest purchasers of credits from JREDD+ include U.S. companies like Amazon, Walmart, and Salesforce, who participate through the LEAF Coalition, a public-private initiative focused on eliminating tropical deforestation by 2030.

"Significant commitments amounting to billions of dollars are in place, yet there has been relatively little evaluation concerning the anticipated characteristics and effectiveness of these credits, as well as the program's strengths and weaknesses," Sanford remarked.

The study's most troubling discovery, as noted by the authors, is the potential for adverse selection—the risk that jurisdictions may enroll in JREDD+ because they can anticipate being credited for reductions they were already planning to enact. This element is inherent in the program's design: the JREDD protocols establish baselines through a simple average of past deforestation rates. Thus, jurisdictions with a downward trend in deforestation can enroll and receive credits without the introduction of new conservation initiatives.

Conversely, the research indicated a detrimental effect on jurisdictions with increasing deforestation rates—those that would benefit most from intervention. Such jurisdictions would need to achieve significant reductions in deforestation to qualify for credits, a requirement that may be economically unfeasible.

Despite the evident structural risks for manipulation, the study found no indications that enrolled jurisdictions have taken advantage of these flaws. Unlike private entities, governments cannot easily time their enrollment to optimize profits and face political hurdles—such as election cycles and legislative processes—that complicate strategic behavior, according to Sanford.

Nonetheless, the authors highlighted another significant concern: deforestation exhibited notable increases in the years leading up to the JREDD+ crediting period, followed by reductions post-enrollment. These pre-enrollment spikes can distort the baselines, making the reductions during the crediting period appear more substantial than they truly are. Sanford and co-author Alberto Garcia, a former postdoctoral researcher at YSE and currently an assistant professor at the University of Utah, referred to this phenomenon as an "anticipatory moral hazard."

They proposed an alternative methodology utilizing dynamic baselines, where the baseline would be established after the conclusion of the crediting period based on deforestation data from comparable jurisdictions rather than being predetermined. This adjustment would prevent jurisdictions from knowing their baselines in advance, thereby minimizing opportunities for manipulation, although it could also pose challenges for governments in foreseeing the benefits of the program.

"We conducted a thorough evaluation of how the different incentives impacting both jurisdictional governments and landowners can influence the integrity of forest carbon credits in jurisdictional programs," Garcia explained. "I remain hopeful that enhanced design can lead to improvements in these initiatives."