Auditors fail in role of safeguarding carbon offsets

Auditors are failing in their role as third-party guarantors of the quality of carbon offsets, according to new academic research.

In a paper published Thursday in Science, an international peer-reviewed journal, Cary Coglianese, a law and political science professor at University of Pennsylvania, and Cynthia Giles, a former senior advisor at the U.S. Environmental Protection Agency, conclude that auditors selected and paid by the companies they inspect can’t affirm the credibility of the projects they assess.

This is largely due to “economic incentives and an unconscious bias to make findings that work to their client’s advantage,” the authors wrote. “It is hard to see how auditors could maintain their livelihoods if they were to disapprove” the amount of junk credits that have been identified in the market, they wrote.

Companies buy carbon credits produced by projects elsewhere in the world to offset their own emissions. The market peaked at roughly $2 billion in 2022. It has since slumped after a string of greenwashing allegations. Numerous industry-led efforts are now underway to improve credit quality and bolster demand. Many of these emphasize the role of third-party auditors in helping clean up the market.

The problem with auditors, however, is widespread and not limited to individual so-called bad apple firms, the authors found. They studied 95 projects that had been initially certified by a leading registry and then later rejected or suspended by the same registry, or were found in peer-reviewed research to have significantly exaggerated credits. Just over 30 auditors have been accredited to assess projects, and 21 of them were involved in evaluating at least one of the 95 projects in question.

The snapshot illustrates that “auditors’ failure to stop projects with integrity issues is a systemic issue, not just an isolated concern with a few auditing firms,” the authors wrote.

Auditors have long been criticized for failing to prevent or flag what turned into financial scandals. The carbon market is particularly exposed due to the core claims made by project developers that auditors are asked to assess, the authors wrote.

“No quantitative measurement can demonstrate that a project is additional or permanent,” they wrote. “Instead, auditors must assess the credibility of judgments, assumptions and claims.”

Some question the conclusions of the academic report. The authors have overlooked the fact that much of the market no longer relies on binary judgment from auditors because there are now carbon-credit ratings that make assessments based on a sliding scale of risk, said Tommy Ricketts, chief executive of BeZero Carbon, which rates carbon credit projects.

“Risk sits at a project level and ratings mean carbon markets can now take account of this,” he said.

Still, the concerns about auditors are emerging at the same time that there are signs of a revival in the carbon-credit market. The United Nations agreed last year to a set of rules that’s paving the way for a new market for carbon credits. And, there’s mounting pressure on industry standards bodies to allow the use of carbon credits to offset a company’s supply-chain emissions, often its largest source of pollution.

Bill Winters, chief executive of Standard Chartered PLC, recently touted an “enormous, untapped opportunity” in potential corporate need for the credits.

For Coglianese and Giles, little can be done to address the problems surrounding audit firms and carbon credits. An increase in demand will only make the problem worse, they wrote.

White writes for Bloomberg.