The Pivot from ‘Offsetting’ to ‘Investing’

Key Takeaways

• Carbon markets are entering a transition as tighter rules under CORSIA force a rethink of the avoided-deforestation credits that underpinned years of cheap compliance.
• Legacy supply is being tested, with satellite analysis of Project 985 pointing to internal deforestation and patterns consistent with leakage.
• Credits are no longer interchangeable, as low-integrity avoidance supply falls out of favour and the gap with high-quality removals widens.
• Carbon is shifting from a procurement exercise to an investment problem, where credibility, measurement, and duration determine value.

Introduction

• Over the past decade, airlines relied on low-cost avoided-deforestation (REDD+) credits to support carbon-neutral and net-zero claims with limited scrutiny of real outcomes.
• Much of this supply came from legacy credits generated under early methodologies and issued prior to 2016, when oversight was less stringent.
• From January 2024, these credits are largely excluded under CORSIA, forcing airlines to reassess the value and integrity of existing inventories.
• This note presents an independent satellite-based plausibility analysis of Project 985 to test whether deforestation avoidance claims align with observed land-use outcomes.

The “Junk” Addiction

• Airlines prioritised volume over value, purchasing millions of tonnes of avoided-deforestation credits at deep discounts to support net-zero marketing claims.
• The carbon market became flooded with cheap vintage credits from 2012–2018, treating the real cost of carbon as a marginal expense.
• These credits sat on airline balance sheets as de facto compliance instruments despite growing integrity concerns.
• Investigations in 2023 suggest a large share of these REDD+ credits are now effectively stranded for future regulatory use.

The Regulatory Catalyst: CORSIA Phase 1

• CORSIA eligibility rules largely exclude credits generated under early avoided-deforestation methodologies, particularly those originating pre-2016.
• This creates a vintage trap for airlines holding non-compliant legacy inventories.
• Replacement credits that meet eligibility criteria can cost multiples more, creating an unpriced operating cost shock.
• What was once a low-cost compliance tool has become a material financial and strategic issue.

The Analysis: Verification of the IAG Portfolio

• An independent geospatial analysis was conducted on Project 985 (Cordillera Azul), a key source of historical airline offsets.
• Google Earth Pro time-series imagery from 2008 to 2025 was used to test the plausibility of deforestation avoidance claims.
• The analysis focuses on internal deforestation and leakage risks rather than replicating registry MRV methodologies.
• Findings should be interpreted as a plausibility assessment, not a formal verification of project performance.

The Findings: Internal Deforestation & Leakage

• Satellite imagery shows evidence of internal degradation within the project boundary during the crediting period.
• Observed clearing and infrastructure development represent a direct loss of carbon stock paid for preservation.
• Adjacent areas show rapid urbanisation consistent with displacement risk.
• While not definitive proof of leakage, these patterns raise questions about whether deforestation pressures were mitigated or relocated.

Investment implications

• CORSIA’s rules force the market to confront the quality of supply that supported years of cheap carbon compliance.
• As demand moves away from legacy avoidance credits, price dispersion is increasing and substitution is breaking down.
• Greater emphasis is shifting toward project-level scrutiny, long-dated offtake agreements, and capital-intensive supply.
• Carbon is becoming an investment problem, where some supply remains cheap because it is no longer useful, while credible supply becomes scarce and expensive.

We would like to thank our Visiting Research Analyst, Kavika Hewamana, for researching this topic and writing the note.