What is a carbon credit rating and how does it mitigate risk?

Wednesday, 15 Nov 2023

A landfill gas project participates in methane flaring, by which greenhouse gas chemicals are burned before infiltrating the atmosphere. These projects are often funded by carbon credits.

Carbon credits offer companies an opportunity to make an impact for the climate. Credits can be used to offset emissions after a company has done the hard work to decarbonize its operations and supply chains or even to make a positive climate contribution outside of offsetting. Regardless of the claim behind a carbon credit, carbon credit ratings make purchasing carbon credits less risky and easier for companies using them.

What are carbon credit ratings

Carbon credit ratings are an evaluation of a particular claim. Carbon credit ratings can be produced for different aspects of carbon credits. Carbon credit ratings are most commonly given for the risk that a carbon credit isn’t delivering the greenhouse gas (GHG) mitigation it claims. That said, a credit can have multiple claims, and as such it can be evaluated on multiple bases. At Calyx Global, for example, we evaluate both the greenhouse gas claims and the Sustainable Development Goal (SDG) contributions of carbon credits independently and provide unique ratings for both. 

A carbon credit rating can be applied to any carbon project type, from technological to nature-based, and can even be applied at the vintage level, which is the year that the emission reduction/removal occurred. Scales of ratings differ depending on the agency supplying the rating. Calyx Global GHG ratings are on a 10-step scale from A+ to E and our SDG ratings range from 1 to 10 for each unique contribution claim. 

What goes into a carbon credit rating

Different ratings agencies or platforms may evaluate aspects of a credit’s integrity differently. It is important to dive into what exactly any given rating is investigating to ensure you can compare ratings appropriately. While evaluating GHG integrity, every platform considers additionality, permanence and whether the emissions reductions (or removals) are well quantified as components of their ratings’ approach. However, some raters give more weight to additionality than others, or some may require a reversal-prone credit to have longer durability than others to receive a good rating. For example, at Calyx Global, our ratings approach is aligned with the Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles (CCPs). Our ratings for GHG integrity include assessments of additionality, over-crediting (baseline, project emissions, leakage), permanence and overlapping claims for each credit. Each of these factors are not treated equally at Calyx Global, with some characteristics having a stronger influence on the overall GHG integrity of projects’ claims of emission reductions or removals. You can learn more about our approach in our Calyx Global ratings explainer here.

Why lowering risk when using carbon credits is critical 

Assessing the quality of carbon credits is not easy or straightforward. Companies have been in the headlines of Bloomberg, the Guardian and other media for making poor carbon credit purchase decisions – in particular, ones that failed to deliver on their greenhouse gas claims. While often well-intentioned, the reputation of the carbon buyer has suffered from being labeled as a “greenwasher,” not to mention the planet suffers as well. 

How carbon credit ratings support decision-making

Carbon credit ratings provide carbon buyers the information they need to make good purchase decisions and credible claims. Companies often lack internal staff and expertise to evaluate project documentation and data at a scalable level – even those with large sustainability teams in place. Carbon credit ratings agencies such as Calyx Global can be a company’s expert partner and provide the level of scrutiny and rigor in analysis necessary to augment resource-constrained teams. 

A carbon credit ratings agency should represent deep expertise across various project types and geographies. It should understand the unique pain points associated with any carbon project. Details of assessed risks need to be highlighted so a carbon buyer can decide which credit best suits their risk tolerance while meeting their goals. When risks are disclosed it allows the company using those carbon credits to be confident in their impact and to make accurate claims that avoid greenwashing.

Carbon credit ratings for greenhouse gas claims

A carbon credit rating of greenhouse gas integrity represents the risk that a credit has not removed or avoided the release of greenhouse gas into the atmosphere as it claims. When evaluating the integrity of a carbon credit, Calyx Global takes into account six risk factors including additionality, overcrediting (baselines, project emissions, leakage), permanence and overlapping claims. At Calyx Global, an evaluation of the carbon crediting program (standard certifying the credits, e.g. VCS), the methodology used to calculate the emission reductions (or removals) and the project’s application of the methodology and its specific claims are all factored into the rating using a consistent and rigorous framework. Ratings can also be specific to credit vintages, meaning the year in which the emission reduction (or removal) took place. Because conditions can change from year to year, the risk associated with a project’s claims can also fluctuate. A ratings by vintage approach recognizes this variability. Again, not all carbon credit rating agencies take the same approach so it is important to ask any agency about their evaluation criteria. For more on the Calyx Global GHG ratings framework, see our GHG Ratings Explainer.

Carbon credit ratings for Sustainable Development Goals

In 2015, world leaders committed to 17 Sustainable Development Goals (SDGs) to help society end extreme poverty, fight inequality and injustice and tackle climate change. Carbon projects have a great potential to contribute to these SDGs and project developers can officially claim benefits generated by a project through a certification process. SDG benefits are highly project-specific, making the certification process important to ensure their real impact, that is why SDG benefits should be duly measured, reported and audited, not just self reported.  A carbon credit rating of SDGs evaluates the level of impact associated with the claims a carbon credit makes. So if a carbon credit says it is making progress on SDG 2 - No Hunger, a rating evaluates the evidence that the carbon project decreased hunger as a result of the project’s activities. For more information on Calyx Global’s approach to SDG ratings, see our Carbon Credit Ratings Explainer.

Environmental and Social Safeguards

In addition to SDG impact, carbon credit buyers should consider the environmental and social risks of a project. Safeguards ensure mechanisms are in place to prevent negative outcomes, such as abuse of local people or that biodiverse, natural lands are not converted to monoculture tree plantations that are intended to store more carbon but that ultimately harm the local ecosystem. To date, this has been an underrepresented area of focus within the carbon market. Although, environmental and social safeguards are becoming increasingly important as stories are being brought to light about how carbon projects have caused harm to people or the environment. A high-quality carbon credit will deliver high integrity GHG impact, high SDG impact and do no harm – carbon credit ratings should help you understand all of these aspects of a carbon credit.

How to access carbon credit ratings

Carbon credit ratings are available via subscription platforms such as Calyx Global’s. When a carbon credit buyer has access to such a platform, they can search for and find the credits that meet their unique needs while understanding the level of risk associated with the various claims any credit may make. Ratings are often accompanied by carbon market insights, project updates and deeper reports, enabling carbon credit buyers to navigate and better understand carbon markets. For a demo of the Calyx Global ratings platform, reach out.

The carbon market is still young and, as with any industry, is still finding its footing. As such, it means there is a level of risk to participating. Yet, the carbon market is born out of an essential need to tackle climate change. For many companies, participation in carbon markets is viewed as one way to make progress on their climate goals. Since many companies are unable to reduce their fossil fuel consumption to zero, carbon credits can provide an opportunity to achieve carbon neutrality, or a larger reduction in emissions, in the near term. When high-quality credits are implemented, the planet wins. 

In the last couple of years, new solutions have introduced ways to mitigate risk, including carbon credit ratings. As more and more buyers take advantage of carbon credit ratings we expect to see the negative headlines decrease. Some level of risk will always be present, even in the most mature markets – no stock purchase is a sure thing. But, there is also a risk to inaction. Tackling climate change is essential for the well-being of future generations. We have a collective responsibility to do as much as possible to protect and secure a healthy planet for all. 

Calyx Global was created to help companies navigate the carbon market with more certainty. If you would like a demo of our carbon ratings and insights platform, contact us.

About the author

Calyx Global

This article includes insights and input from multiple experts in Calyx Global.