As we urgently address the climate crisis, it is right and proper for the media to scrutinise whether efforts are delivering their intended impact. In this case, however, we believe that much of the information in the Dutch platform's article published on January 27 has been presented out of context, without important background details, in a manner designed to sensationalise the story and give a negative impression of the actions of so many working hard to implement the Kariba project .
Trust and integrity are fundamental to our business, and to the effective operation of carbon markets, so we want to be fully transparent and share the real story of South Pole and Kariba REDD+.
Below we explain our position in response to the criticism that too many credits were issued to the Kariba project, and that the financial benefits were not properly distributed.
Kariba REDD+ is one of the world's first large-scale REDD+ forest protection projects, designed to conserve a
vast area of threatened forest close to the size of Puerto Rico, over a 30-year period in a rural part of Zimbabwe. And because the project has already been running for over a decade, it is a useful example to look at if you want to ask the question of whether carbon markets are working as intended, and delivering the intended impact.
In summary, the answer is Yes.
Firstly, as you will see in our statements below, we followed the Verra methodology to the letter for this project, and tried to the best of our ability, with the information we had at hand when this project started over a decade ago, to predict and model the deforestation rate for the next 10 years. We are now starting a first re-validation of the 30 year project, which will ensure that the rate of carbon credit generation will be adjusted as the predicted deforestation rate is compared to the observed rate, as the methodology requires.
Secondly, the accusation that we are making undue profits from this project is unfair and a misrepresentation of the truth. We have entered into two different contracts with the project entity: one as a consultant, where we were paid 25% of the revenue of the Kariba credits sales for our work. This work included finding buyers of the credits (marketing and sales) as well as other overhead, and various external fees, including for monitoring, verification/validation and reporting), leaving a very small profit margin. The other type of contract was one where we purchased high-risk assets which had no buyers at the time (early in the project) simply to ensure that the project didn't go bankrupt. These credits had no value at the time. We kept them on our books and benefited when the VER prices went up, sometimes as long as six years later.
For more context and detail, here is our story.
Set up in 2011, Kariba REDD+ used one of the only proven methodologies available at the time, known as the Verra VM9 methodology, which uses a Cumulative Deforestation Model. The model follows observed (past) deforestation patterns to predict the future.
It is important to keep in mind that there may always be a level of uncertainty in these methodologies, as they are trying to do something that we all recognize to be inherently uncertain: predicting the trajectory of human behaviour into the future.
This is also why the VM9 methodology has a self-correcting mechanism built into it, which means that if there is an early issuance of verified carbon credits in one phase of the 30-year project, this is taken into account and adjusted for in the next stage, following something called “baseline revalidation". We call this a 'true up' mechanism.
Revalidating a project's baseline currently happens at the end of a REDD+ project's first 10-years of issuing carbon credits (crediting period). It compares the initially predicted deforestation rates, in line with the model, with the actual observed deforestation rates in a so-called 'reference area' close to the project. This revalidation of the project baseline happens
in addition to the periodic monitoring, reporting, and verification of the project performance, and its frequency will be increased by Verra to every 6 years going forward. The same applies to Kariba.
We have transparently explained South Pole's approach used to estimate the Kariba project's deforestation dynamics and baseline, in line with Verra's VM9 methodology. Already back in 2022, the technical work to establish preliminary findings for the 2023 baseline revalidation was already started, since this takes a long time and involves extensive 'ground-truthing' (i.e checking satellite images against actual data seen on the ground). Finalising this work also entails contracting an auditor for the formal baseline revalidation and having this audit reviewed and approved by Verra.
We are confident that all credits from Kariba REDD+ were legitimately issued under Verra's VM9 methodology. In light of the ongoing baseline revalidation work, however, South Pole has decided not to immediately sell the credits from the 2019-2021 verification period . This is in order to have a better understanding of the discrepancy between the modelled deforestation rate and the deforestation rate observed in the reference area. We suspect that the deforestation rate in the reference area will turn out to be lower than the deforestation rate predicted by the model. This is in fact good news for Zimbabwe. But it does not mean that deforestation is not happening in the country. It just means that the rate in Kariba and areas close by (including the reference area) were not as high as predicted by the model.
While the VERs from later years (2019-2021) have been verified by a 3rd party auditor, and the project has the right to sell them, our advice is that they are sold in smaller batches until the real deforestation rate catches up with the modelled deforestation rate. At the same time, by selling a little at a time, it ensures that the project will not face a sudden cut off of revenues, as their fixed costs continue.
South Pole has played two roles in Kariba.
We were initially, as with many other projects,
a consultant to the project developer. In this role we were entitled to a 25% commission on any sales that were made. In return for this, we are in charge of all the measurement, reporting and verification work for the project, and we also do all the marketing and sales for the credits.
However, between 2015 and 2019, when the carbon market went through a rough period following the end of the first phase of the Kyoto Protocol, we also became
a direct buyer of last resort for credits from Kariba. This was at a time when the project faced financial failure and this was necessary to sustain the viability of the project.
We made these first distributions in 2015 at a time when we were a much smaller business - just 150 people, compared to over 1,200 today. We spent a large proportion of our profits on a high risk asset, knowing there was a good likelihood we would never see any positive return. We did this because this was a flagship project for South Pole that we had been involved in since 2010. We were genuinely proud of the impact that it was delivering, and did not want to see it fail.
After the market started picking up more recently, we found ourselves in the fortunate position that prices went up and we could sell credits that we bought to keep the project afloat.
Actions taken up to six years ago in good faith, to keep the Kariba project alive, resulted in us getting an additional EUR 18 million in revenue above and beyond what we would have made in the usual course of business as a consultant.
Across the lifetime of the Kariba project, there has been a little over EUR 100m in revenue generated from the sale of carbon credits. Much of this has come from sales in the past two years (for credits dated between 2012 and 2018). Through the profits made from these sales, CGI and the communities in Zimbabwe have earned more than EUR 57m, which shall be distributed according to their mutual agreement. These communities and stakeholders include Carbon Green Africa - the team that delivered the deforestation avoidance and social development project activities on the ground - the four Rural District Councils (RDCs), community projects, a community 'rainy day' fund, and two concession leaseholders.