The U.S. has struggled for years to scrape together enough money to meet its promises to provide billions of dollars in international climate aid. Now, the Biden administration is encouraging the use of shadowy carbon markets to buttress its efforts.
The move by the United States to increase the delivery of climate aid comes as Republican lawmakers thwart efforts to send taxpayer money overseas amid soaring damage from disasters and global calls to expand clean energy. It’s also an attempt to future-proof climate aid in the event that former President Donald Trump wins the election in November.
That has led American officials to look for new sources of cash that could be used to partially fulfill ballooning funding needs for projects such as planting mangroves on low-lying Pacific islands, building solar farms to replace coal-fired power in Asia and protecting storm-battered countries globally.
Voluntary carbon markets can help companies meet their climate targets through the purchase of credits from projects that reduce emissions.
“Voluntary carbon markets that adhere to principles of high integrity can play a critical role in getting private capital off the sidelines,” John Podesta, the White House senior adviser for international climate policy, said in May.
But voluntary carbon markets have been beset with high-profile failures that have vastly overestimated the amount of climate pollution being stored in tropical forests or assumed a renewable energy project wouldn’t have been built without the sale of carbon credits.
The plan also raises concerns that the U.S. would rely less on public money to fund projects in developing countries — something many climate officials say is part of its responsibility as the world’s largest polluter in the industrial era.
The idea comes amid skyrocketing funding requests for helping poorer nations grapple with rising temperatures. Developing countries are calling for upwards of $1 trillion a year, far above an earlier goal of $100 billion that rich countries struggled to meet.
Supplementing U.S. aid through carbon markets could complicate negotiations around increasing international funding for climate efforts as talks come to a head in November at the global conference called COP29.
Biden officials acknowledge that limiting global temperature rise requires huge amounts of money. They called for a “multi-layered approach” in a recent submission to the United Nations that outlined “complementary efforts” for achieving a new funding target at COP29 in Azerbaijan.
“Voluntary carbon markets will certainly be part of that,” a senior State Department official who was granted anonymity to discuss internal deliberations told POLITICO.
President Joe Biden pledged to provide $11 billion in climate aid over his first term. So far, the administration has delivered more than $9 billion to developing countries, according to another senior official with the State Department who was granted anonymity to discuss internal deliberations. Administration officials say revenue from voluntary carbon markets will supplement public climate aid, not replace it.
The carbon credits purchased by corporations can be generated by renewable energy projects or forest conservation programs that avoid putting new emissions in the atmosphere. One credit represents one ton of carbon dioxide and can be used to help counteract the climate pollution released by businesses. Buying credits also generates cash that could be used to support climate efforts.
U.S. officials have emphasized the need for “high integrity” credits, issuing a set of principles in May aimed at ensuring that voluntary markets achieve their stated emissions reductions. But they’re not binding and don’t include enforcement mechanisms.
“All of the talk of fixing integrity issues is doing nothing about the fundamental drivers of what creates fraud and bad credits in the market,” said Danny Cullenward, a senior fellow at the Kleinman Center for Energy Policy, a research group affiliated with the University of Pennsylvania.
“As a baby step you can take in the absence of public funding, I get why some people believe it if they think these market issues can be solved,” he added. “I am very skeptical that anyone is doing anything to solve them, and therefore I’m very skeptical that this approach can realize its potential.”
Proponents of voluntary markets say they have the potential to deliver billions of dollars toward fighting climate change, while helping companies meet their pledges to zero out emissions.
Critics say the voluntary markets are riddled with problems that overestimate the amount of carbon dioxide that’s being prevented from entering the atmosphere. And the markets might not deliver the cash windfall that American officials expect.
“Carbon offsets as a financing mechanism have not performed well and show no signs of performing well,” noted Cullenward, who sits on an expert panel that’s advising the U.N. on a separate carbon trading mechanism outlined in the Paris Agreement.
He pointed to a lack of enforcement over false or shoddy credits and argued that it’s hard to track how much money generated through the markets goes into projects or adaptation efforts rather than to project developers and companies that verify those credits.
“I think it’s just smoke and mirrors,” said Kevin Conrad, executive director of the Coalition for Rainforest Nations, who has consulted on forest-based carbon crediting projects.
Too little, too late?
A February report by BloombergNEF projected that voluntary markets could grow to between $34 billion and $1.1 trillion by 2050, if stronger measures are adopted to ensure credits reduce emissions.
There’s reason for doubt: The nonprofit Carbon Market Watch said it’s too difficult to track whether communities in need of climate finance actually receive the money generated by corporate purchases of credits. The money can be used to build projects such as renewable energy facilities.
The voluntary market plummeted 61 percent in 2023 — after reaching its peak two years earlier — amid growing concerns around greenwashing. The market was valued at $723 million after the one-year plunge, according to Ecosystem Marketplace.
It comes as standards organizations have increasingly warned of risks.
The Science-Based Targets initiative, a leading verifier of corporate climate targets, reported in July that using carbon credits to offset business emissions could hinder climate finance objectives if the offsets overstate environmental benefits.
That move came months after SBTi sparked controversy by proposing to loosen its rules to allow corporations to use carbon credits for neutralizing emissions in their supply chains — a move that could benefit some of the most polluting sectors.
That hasn’t stopped U.S. officials from touting the potential advantages of using the voluntary markets — particularly when it comes to generating much-needed cash. Some welcomed SBTi’s move.
The first senior State Department official said the Biden administration has “general confidence that the voluntary carbon markets work and they can overcome some of the trust and measurement issues of the past.”
The official argued that money generated through carbon markets would provide another layer of financial support for nations grappling with climate disasters — rather than replace public aid from the U.S. and other wealthy countries. The official acknowledged that more public funding is needed.
“There are those who have a very, very narrow perspective about what climate finance should be,” the official said. “We need to recognize that climate finance has evolved significantly since Paris, and that this global effort is now underway to finance climate at many different levels with many different actors.”
That view foreshadows U.S. positioning ahead of COP29, when negotiators are expected to decide on a new global goal for climate finance. The U.S. sees that agreement as having two parts — one that covers money generated through country contributions and another, bigger pot that encompasses all sources of finance, including private dollars.
In written comments to the U.N., U.S. officials said last month that the new financial goal should also include several “qualitative elements” that reflect “the breadth of complementary efforts.” So-called high-integrity carbon markets are among the “innovative sources” the U.S. proposal encourages.
How that all fits into a final commitment at COP29 — and whether developing countries will agree with the U.S. — remains to be seen.
Unlike country pledges, contributions from the private sector are harder to determine or rely on. Boston Consulting Group estimated in a 2023 reportproduced with Shell that the value of the voluntary market could reach between $10 billion and $40 billion by 2030. McKinsey estimated in a 2021 report that the market could be worth more than $50 billion by the end of this decade. But that depends on credit prices and demand, which has fallen since those projections were issued.
“We’re just too late for this voluntary approach. Companies have to be regulated,” said Conrad from the Coalition for Rainforest Nations.
A ‘crisis of trust’
There could be another reason U.S. officials are pushing to include carbon markets in the finance goal: Trump.
The credits could help U.S. companies hit their climate targets and fund international projects if Trump wins the election and withdraws the U.S. from the Paris Agreement, as expected.
Treasury Secretary Janet Yellen said during a visit to Brazil in July that investments in high-integrity carbon credits “can both support nature and make economic sense.” She has promoted them to prevent corporate climate commitments from losing ground.
U.S. officials pushed carbon markets as far back as COP27 in Egypt, where then-climate envoy John Kerry unveiled a plan that incorporated revenue raised from offsets to help countries expand clean energy. The initiative has been slow to take off. Critics say it lacks details on how to verify credits and where demand for them would come from.
But the Biden administration has backed Kerry’s so-called Energy Transition Accelerator, or ETA. At a State Department event in April, U.S. and international officials, along with business executives, touted his plan and the LEAF Coalition, another U.S.-backed carbon market initiative, for their ability to pool climate cash. They also highlighted various efforts to restore trust in carbon credits.
“It’s important that ETA credits be used as part of a corporate climate strategy alongside emissions reductions in companies’ own operations and value chains,” said Nathaniel Keohane, president of the Center for Climate and Energy Solutions, an environmental think tank that advises the ETA.
He said the ETA has an aim to supplement, not replace, funding from governments.
“As long as we’re getting the integrity right and the quality right, I don’t think there’s any risk,” he added.
At a Chamber of Commerce event in June to preview COP29, deputy climate envoy Sue Biniaz told business executives the U.S. was trying to “unlock” as many sources of money as possible, including through carbon markets.
“We’ve been encouraging companies to join high-integrity buyers’ coalitions,” she said, pointing to the ETA and LEAF.
The U.S. approach has irked countries that want more robust standards and transparency for international carbon markets.
Spain, which held the rotating presidency of the European Council year, stated in a background paper ahead of COP28 last December that by promoting its own initiatives the U.S. is “allowing the use of credits for offsetting emissions without clarifying the levels of ambition and the accounting rules that should ensure integrity and transparency.”
Agus Sari, a former Indonesian official who participated in U.N. negotiations on rainforest carbon credits, said mistrust of the voluntary markets has dropped credit prices too low to be worth the risk.
“It’s too much ado,” he said.
Turbulence within the markets has created a “crisis of trust,” said Tom Crowther, an ecologist whose research inspired the global campaign to restore and plant 1 trillion trees. People in lower income countries, especially those that rely on agriculture and the forest economy, see carbon markets as offering a valuable revenue stream, he noted.
But that depends on companies being willing to pay a high price for the credits — and then steering it to local communities rather than into the hands of project developers.
“All of our market forces, whether it’s a credit for bananas or a credit for carbon or a credit for biodiversity, every market we’ve ever built tends to aggregate wealth in the hands of few at the expense of the many,” Crowther said. “If that happens, then it’ll only drive further degradation.”
Correction: An earlier version of this story mischaracterized the status of SBTi’s proposal to revise its corporate net-zero standard. The update is expected at the end of 2025.
