Via Bloomberg, a look at how a range of actors from global leaders to Wall Street are betting the struggle toward net-zero targets will reignite the troubled trade in carbon offsets:

It’s a vantage point that’s crucial to survey a development roughly the size of Las Vegas, stretched across 36,000 hectares (139 square miles) of Borneo’s central Kalimantan region, where mangrove swamps to woodlands and meandering rivers abound with exotic and endangered species.

Patrols monitor for signs of fire that threatens the area’s other prized resource — layers of peat up to a dozen meters thick that build up as leaves and branches accumulate in the waterlogged ground. Millions of tons of carbon dioxide are trapped in the muddy debris, a vital natural defense against the release of the planet-warming gas into the atmosphere.

The value of protecting that peat — in an area where vast tracts have been cleared for palm oil plantations — has been harnessed by the world’s turbulent market for carbon credits. The Rimba Raya site in Borneo alone has generated offsets that companies, including Volkswagen AG, Gucci and McKinsey & Co., have used to claim they’ve canceled out a total of 26 million tons of emissions since 2013 — roughly equivalent to London’s annual footprint.

When flames spread, staff at the vast site have dashed out in fire-proof shirts, masks and helmets, dousing blazes that can otherwise strip through forests and burn underground for weeks, releasing stores of carbon built up over centuries and imperiling habitats. During the worst of the dry season, the site can resemble a conflict zone — blanketed with thick gray and white smoke.

“The threat of fire is extremely high,” Anthon Kesaulya, then the project’s general manager, said peering down from the lookout last September. “We must extinguish it — so there is no bargaining, it is something that we must face.” Past drainage for logging has left the ground tinder dry and susceptible to quickly spreading blazes used by farmers and others to clear land.

Fires aren’t the only challenge for Indonesia’s Rimba Raya, or for the wider carbon credits industry. Years of tumult and integrity scandals have sapped demand and seen the value of the market fall by more than half from a peak of about $2 billion in 2021. Some projects have been criticized for wildly inflating their ability to mitigate emissions, and whole categories of the sector have found their purported climate benefits questioned — like the generation of offsets by renewable energy projects, which have long since passed a point of requiring additional revenue to make the economics viable.

Accusations of greenwashing leveled at some purchasers — and broader criticism that using offsets can deter companies from taking more expensive action to actually lower their emissions — has seen a series of previously enthusiastic consumers retreat. Past Rimba Raya customers like Delta Air Lines Inc. and Nestlé SA have set out new climate strategies that don’t rely on the credits, the companies said.

Yet advocates see a looming revival and point to 2025 as a crucial moment in the market’s development, as stricter standards bolster confidence in the value of the credits and as polluters continue to struggle to reduce emissions. Everyone from global leaders to project developers, traders and local communities are positioning for a share of the new spoils.

Carbon Credits Market

The value of carbon credit sales in the voluntary market fell 61% in 2023 on lower prices and weaker demand

“We are considered the lungs of the Earth,” Indonesia President Prabowo Subianto told the G-20 summit in Brazil in November, spelling out the nation’s plans to prosper from future sales of at least half a billion carbon credits. “We need continued commitment to compensate the role of our forests in maintaining the global temperature.”

Policymakers increasingly accept that large polluters are way off track in curbing their climate footprint, making it impossible to meet net-zero targets without access to reliable and effective credits. In recent months, industry-led standards bodies have issued a blizzard of new guidelines aimed at weeding out the most dubious types of projects, and compelled some developers to revise down the value of their credit portfolios.

In a major signal of confidence, negotiators at November’s COP29 climate conference in Azerbaijan reached agreement after almost a decade of wrangling on rules to guide a United Nations-supervised market under Article 6 of the Paris Agreement that’ll allow countries — and not just companies — to trade credits and use them to compensate for national emissions. Pacts worth more than $1 billion were announced during the Baku summit, according to BloombergNEF calculations. Singapore, Switzerland and Japan are among nations enthusiastically striking deals.

Future Value of Carbon Offsets

Starkly different scenarios could see market’s annual value rise to more than $1 trillion by 2050 or peak at $34 billion, according to BloombergNEF

There’s plenty of skepticism still over recent positive steps and the future value of the carbon credits market is highly uncertain. It remains dependent on the degree to which governments and companies stand by existing climate targets, according to data provider MSCI Inc., which forecasts the sector will grow to between $45 billion and $250 billion in 2050. Current indicators on improving quality and demand are positive, and suggest 2025 could be the year the sector “reestablishes its positive momentum,” MSCI said in a December report.

Under a scenario where the market resolves credibility issues – including through the introduction of more projects that remove rather than just avoid emissions, demand accelerates and greenwashing claims subside — the sector could be worth more than $1 trillion a year by mid-century, according to Kyle Harrison, BNEF’s global head of environmental markets. In a less-likely future where little improves, the outlook is vastly different — a market with a value that peaks at about $34 billion.

“Carbon credits are an essential tool in country and company toolkits for achieving net-zero emissions,” Harrison says. “Whether those credits are traded purely in a voluntary market driven by corporations, or a country-driven, regulated market under Article 6, we see a realistic pathway to over $1 trillion in annual value in 2050.”

Even with uncertainty over the potential future size of the sector, Wall Street has been eager to prepare. Bank of America Corp. to JPMorgan Chase & Co., and Barclays Plc have built out carbon trading and finance desks, though HSBC Holdings Plc recently abandoned its plans and reassigned staff.

Commodities trading giant Trafigura Group sees new developments as enabling credits to be treated like other “investment-grade assets and operations,” the group’s head of carbon trading Hannah Hauman said in a November interview. Additional projects are needed to meet rising demand, she says, and Trafigura is partnering with 11 nations to restore the Miombo woodlands spanning southern and central Africa.

Countries including Kenya, Zambia and Malawi have implemented or are preparing legislation aimed at ensuring governments and local communities win a greater share of project earnings. Zimbabwe, a major supplier, roiled the industry in 2023 with plans to take half of all revenues from offsets developed on its territory, though officials have since relaxed those rules to ensure developers can retain more of the profits.

“The concept of taxing carbon credit revenues is not surprising to anyone and is the trend that we’re on in the market,” says Sebastien Cross, co-founder and chief innovation officer at BeZero, a carbon ratings agency. “That monetization can have a meaningful impact on their economies, on their tax income, and the livelihoods of their populations.”

Indonesia has been similarly active. As the voluntary credit market surged in 2021, officials became alarmed that the state was receiving only about 10% of revenue from local offset projects. Officials were also concerned about losing access to tools that could be applied against the country’s own rising climate burden. Total greenhouse gas emissions in the nation of about 280 million people have more than doubled since 2000 and accounted for a larger share of the global total than Japan in 2023.

A moratorium imposed in 2021 blocked sales of new carbon credits. “Indonesia slammed on the brakes,” says Todd Lemons, the Mexico-based executive who co-founded InfiniteEARTH, the developer of the Rimba Raya project. “I think they’re leery of foreigners dictating to them what they do with their natural capital assets.”

Indonesia’s Prabowo, who took office in October, views the market as a so far under-exploited source of revenue and aims to raise billions through sales from existing and new projects, extending predecessor Joko Widodo’s efforts to win more value from the sector.

Prabowo’s office and Indonesia’s Ministry of Environment and Forestry didn’t respond to requests for comment on the nation’s plans, or on Rimba Raya specifically.

At Rimba Raya in September 2023, Kesaulya and his colleagues returned exhausted from tackling an outbreak of fires. As they did, staff were told Indonesia’s environment ministry had revoked the project’s license – a move seen as part of efforts to revise the distribution of revenue. “When we were trying to protect it, at the same time we received the decision,” Kesaulya says. “I was sad that the area was destroyed by fire, but this is even sadder.”

The Indonesian government’s move reinforced concerns among some foreign investors about the perils of delivering carbon projects in the developing world. Overall, there’s a need for “certainty and continuity,” says John Connor, chief executive officer of the Melbourne-based Carbon Market Institute, an industry advocacy group. “Investors want to know what the rules of the game are.”

For Lemons, it jeopardized his quest to prove the monetization of carbon assets could generate profits alongside positive climate action and community benefits. The goal has been to demonstrate “the potential to funnel institutional funding into conservation,” he says. “Bring Wall Street, Singapore, Hong Kong, and London markets to the table.”

In 2007, Lemons was based in Hong Kong and manufacturing sustainable building products while also scouting for sites to host a carbon offsets development. With frequent clearance fires for agriculture razing forests and peatland, it “became obvious that Indonesia was the place, and that orangutans were probably victim Number 1,” he says.

The most compelling opportunity was in a region of Borneo bordering the Tanjung Puting National Park, where scientist Biruté Galdikas — one of the so-called Trimates of primatology with Jane Goodall and Dian Fossey — was preserving habitat and campaigning against the expansion of the palm oil sector.

After months of unreturned calls, Lemons intercepted Galdikas as she disembarked a flight in central Kalimantan. Her initial response was blunt. “I heard all about you carbon cowboys, I’m not interested,” Lemons recalls her as saying.

Undeterred, Lemons accompanied Galdikas to a research camp deep in the swampy jungle. “We trudged through the flooded forest and she could tell I wasn’t a prissy city boy,” he says. “I was in my element, I was beaming from ear to ear.” Galdikas and her conservation program worked closely with InfiniteEARTH, and ultimately the Rimba Raya project won rights to a swath of forest and peatlands that had previously been approved for conversion to palm oil plantations.

In many respects, Rimba Raya’s fortunes have tracked the trajectory of the broader voluntary carbon market. The project issued its first credits in 2013 to Allianz SE and Gazprom PJSC, but for years struggled to eke out profits with only sporadic sales.

Demand then erupted around the start of the decade as polluters began to set net-zero targets — and quickly realized how hard it would be to meet them. “It was crazy,” says Jim Procanik, an entrepreneur who joined with Lemons in 2008 as InfiniteEARTH’s other co-founder. “We were lucky to sell a million tons in a year, and we sold 15 million tons in three months of 2021. We were frantically trying to fill all those orders.”

An upswing brought fresh attention from financial institutions, and a deal worth more than $20 million with Canada-based Carbon Streaming Corp. for the delivery of about 70 million credits over the following 20 years — an agreement impacted by Indonesia’s moratorium, and the subject of a legal dispute. InfiniteEARTH is also in arbitration with partner PT Rimba Raya Conservation, which employs local staff and is led by Rusmin Widjaja, an Indonesian businessman who helped secure the original project area license.

The future value of Rimba Raya’s credits has been questioned amid an increased industry focus on the quality of offsets. The project is based on protecting specific areas of land that had been gazetted to become palm oil plantations — an activity that would have destroyed carbon-trapping peatlands.

In other parts of the industry, those calculations have controversially often been based on hypothetical accounting for potential emissions avoided through the prevention of deforestation. There’s also the issue of displacement: Avoiding an activity in one location doesn’t always halt the negative impact — it can simply force polluters to shift elsewhere.

Rimba Raya has issued no new credits since Indonesia’s moratorium. Current activities are preparing for a potential future resumption, and the prospect that the sector’s demand — and prices — will begin to rise. Most of the project’s staff have been retrenched, and Kesaulya lost his position in December.

The job losses have meant difficult choices for former workers like Muti Jumidha, a 27-year-old agricultural studies graduate. She’s sold rice and cakes outside her home in Baung village since losing a role in the project’s biodiversity team, managing a database tracking flora and fauna. One option for a stable monthly income would be to take up opportunities in the palm oil sector, a path she’s ruled out in the past in favor of the carbon industry. “If I go to palm oil again, it’s the same as before, there will be no change,” she says.

Under the project’s original license, it would have about 50 more years of operations and could generate at least 1 million credits annually. Last July, PT Rimba Raya Conservation won backing from the Jakarta State Administrative Court to overturn the decision to revoke that authorization, though Indonesia’s government has several more months to lodge an appeal.

At a small plant nursery about the size of a basketball court, off the banks of a murky canal, Ruslan — who goes by a single name like many Indonesians — tended to more than 15,000 saplings last September, some already thigh-high. The native trees are eventually intended to help restore areas of forest decimated by the 2023 fires, in turn helping to protect the valuable peatlands.

Once employed as part of a band of loggers, Ruslan worked for Rimba Raya for about a decade until December. In the past, his biggest concern was how to most efficiently strip the forest of its best specimens. “What was important was that a tree was big enough, sufficient enough, then cut it down,” he says.

The arrival of the carbon credits operation offered him, and the wider community, a new understanding on how to benefit from the region’s natural riches, according to Ruslan. Residents are hopeful that the activities will eventually resume in full.