Carbon offsets: A key tool for climate action, or a license to emit?
by Ian Morse on 4 November 2022
The carbon offset market has existed for 25 years, and experts say there are still fundamental problems in its structure. Some question the underlying concepts, and refuse to consider it a tool for climate action.
Part of the issue is that transparency is low. Buyers and sellers of carbon offsets often never meet and are separated by numerous intermediaries with their own profit incentives: registries, verifiers, and brokers. It’s not clear who buys offsets or which emissions are offset.
Most experts say the offset market is not meant to contribute meaningful change to emissions, but rather to be an extra tool to channel funds toward sustainable development when companies are failing to transition from fossil fuels.
Players in the carbon offset market say they offer a solution to the climate crisis. When an emitter releases carbon in one place, they can support a project elsewhere that removes carbon from the atmosphere or reduces carbon emissions. Thousands of projects around the world say they can offset a ton of carbon emissions for anywhere from cents to hundreds of dollars.
Recent years have seen resurgent interest in the offset market. Corporations have publicized net-zero commitments that rely on paying others to offset their own emissions. Startups say they can establish standards to govern the market, and intricate financial tools have begun to inflate sales. The voluntary carbon offset market, which includes purchasers not required to neutralize emissions, reached nearly 500 million transactions worth more than $2 billion in 2021, according to Ecosystem Marketplace , an environmental finance information service.
However, the carbon offset market has existed for 25 years, and experts say there are still fundamental problems in its structure. Some question the underlying concepts, and refuse to consider it a tool for climate action. The market is working “dismally,” but it’s at a crossroads, says Barbara Haya, who directs the Berkeley Carbon Trading Project, an initiative of the Goldman School of Public Policy at the University of California, Berkeley.
“What we do now matters. If offsets are allowing us to claim that we’re doing something when we aren’t, that’s very dangerous in this decade when we need real action,” Haya said.
Part of the issue is that transparency is low. Buyers and sellers of carbon offsets often never meet, and are separated by numerous intermediaries with profit incentives: registries, verifiers, and brokers. It’s not clear who buys offsets or which emissions are offset. It’s not clear how some funds contribute to emissions mitigation, or how much goes to which projects.
In 2021, U.S-based tech giant Amazon in partnership with nonprofit The Nature Conservancy (TNC) set up a carbon-offset project in Pará state. Image by Flavio Forner/ASL Brazil via Flickr ( CC BY-NC 2.0 ).
Carbon dioxide removal (CDR) projects, which have perhaps the largest potential to contribute to real carbon reductions in the atmosphere, have contributed to the market’s image, but they comprise a tiny fraction of the total trade volume. According to models by the Intergovernmental Panel on Climate Change for capping the global temperature rise at 1.5° Celsius (2.7° Fahrenheit) above pre-industrial levels, these technologies that suck carbon dioxide out of the atmosphere will need to be rapidly scaled up this decade.
Researchers and market players disagree over definitions and even basic questions about the role of the market. Does the carbon market take up resources that would be better spent elsewhere, or is it a central climate tool? What kinds of companies can play a role in the market? Will it reward companies who increase emissions? What exactly are you buying when you buy an offset?
“The whole question is ‘Do people trust that a ton of carbon is actually a ton of carbon?’” Anton Root, head of research at Allied Offsets, an offset data consultancy firm, told Mongabay. Gilles Dufrasne, policy officer at Carbon Market Watch, would add two more questions: Is the money actually reaching those who are implementing climate mitigation activities? And is the buyer using the credits to make misleading claims that could be detrimental to climate action?
The Integrity Council for the Voluntary Carbon Market (ICVCM), a philanthropically funded NGO, is currently designing a standard of integrity that purchasers could use to evaluate the likelihood that offsets benefit climate action. Under the Core Carbon Principles (CCP) label, the group says it hopes to separate the good offsets from the bad.
“For the sake of integrity of the climate regime and climate architecture toward achieving the 1.5 degree of the Paris alignment, we need to make sure that every single credit in the market reflects a real reduction or removal by the enhancement of the carbon sink,” says Daniel Ortega-Pacheco, co-chair of the ICVCM expert panel.
The problem is that research shows a very small number of existing projects fulfill some of the requirements for offsets. In 2016, German environmental consultancy Öko-Institut found that 85% of projects under the U.N.’s Clean Development Mechanism (CDM) likely did not have any real impact on atmospheric greenhouse gases. Just 2% were found to have environmental integrity, meaning they reduced emissions or removed carbon at least equal to the credits issued. Since then, Haya says, there has been little change.
“If we’re going to use the offsets as equivalent to mitigation, then we need much higher standards for quality,” says Zeke Hausfather, climate lead at Stripe, a financial services firm, and a research scientist at Berkeley Earth, a climate data collection organization.
How registries build a market
Carbon offset projects often start with a project developer. A company or community finds a partner to develop a project that fulfills a climate goal.
Projects can take a wide range of forms, and they can be broadly divided into two categories: reductions and removals. When a project replaces a practice that would have otherwise emitted more carbon, they use credits they sell on the market to provide incentives to avoid emitting. Removal projects take carbon out of the air and store it permanently so that it cannot be emitted again. Credits from reductions vastly outnumber credits for removals, but there are often serious doubts about whether they contribute to emissions reductions, because they are largely theoretical.
“They are trading, on the one side, actual GHG emissions in the atmosphere with projected possible future emissions that are now avoided. But what did the atmosphere see? It saw an increase in emissions,” says Peter Riggs, who leads U.S.-based nonprofit Pivot Point. (Riggs is on Mongabay’s board but has no editorial control.)
Renewable energy projects account for more than half of the projects that have received credits from a registry. Most of these are old projects listed on the CDM registry, while newer initiatives have gravitated toward industrial, waste management, forestry, and household or community projects. One of the most popular household and community projects is replacing gas-burning cookstoves with more energy-efficient ones, typically in low-emitting countries.
Jo Anderson, director of Carbon Tanzania, has set up three offset projects that pay farmers to maintain forests so they can continue to grow and store carbon. His goal was to finance conservation, and the offset market offered a “parsimonious way” to do that. Through his connections in local NGOs, he approached a community of farmers with the idea.
“It was about making it clear that this was an equitable offering — a business offering, a transaction at a basic level — around saying you own your resource, you have managerial and tenure rights over that resource, and we would like to offer you the opportunity to earn compensation for the efforts you make to do that,” Anderson says.
Projects elsewhere have been criticized for failing to include local communities in the process. In Malaysia, foreign companies planned to develop 2 million hectares (5 million acres) of forest into an offset project without the involvement of Indigenous communities in and around the area.
In Tanzania, Anderson and his team shopped around for a registry that offered a method of calculating carbon that worked with their project. They selected Plan Vivo, a small registry based in Scotland, whose methodology was “sympathetic to the community dimension.”
Registries, which Haya describes as “the rule makers,” are defined by their methodologies for calculating carbon credits. Registries receive a cut of each credit issuance, as well as fees at various steps in the process of registering a project. The five largest registries are the CDM, American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard (GS), and Verra (VCS).
For most projects in the voluntary market, a registry issues credits after the carbon reductions have already occurred. If a reforestation project sells credits, for example, each one represents a ton of carbon that will be sequestered by trees already planted.
Governments can also create a compliance market, in which they make companies keep their emissions below a certain level. If firms don’t adjust their own practices to reduce emissions, they can buy offsets to bring their net emissions in line with regulations. In a voluntary market, companies or other purchasers aren’t required to buy offsets. Instead, they may do so to bolster their environmental image or smooth the transition to cleaner alternatives.
The carbon market is filled with low-quality projects, Haya says. “You’re buying a permit to emit. You’re buying your way out of reducing your own emissions. You’re buying something that looks really good on paper.”
Prices are usually determined in the market, which typically means negotiations with buyers who can browse for cheaper credits from other projects. Sometimes, that means a project may only be able to sell credits at a price that just barely covers costs. Forestry projects across the top five registries fetched the highest average prices this year, although they also had the widest range of prices. To offset a ton of carbon, some projects receive $32, while others receive less than $2. A single ton of carbon from the atmosphere is roughly equivalent to the amount a few dozen trees remove in a year.
“The average price for an offset today is between $3 and $7 a ton, which probably tells you something about the quality of those, because when it comes to carbon, you get what you paid for,” Hausfather says.
The voluntary carbon market is small, but industries and net-zero commitments plan on it growing. When it grows, companies have more opportunities to purchase credits meant to offset their own emissions.
In theory, each of these credits translates to a ton of carbon that was not emitted, and as a result, it works to close the gap between a healthy emissions budget and current emissions.
The IPCC said in its most recent report that emissions would have to shrink by almost half by 2030 if temperatures are to have the best chance of staying at or below 1.5ºC warming from pre-industrial levels. That means annual emissions must drop by roughly 24 billion tons by 2030. The carbon offset market, if it works as planned, comprises a small sliver of that gap.
What makes a good carbon project?
Every offset project has the potential to avoid emissions or remove carbon from the atmosphere. The question that registries have to answer is how much carbon is actually offset. If registries overestimate the credits, the climate will still warm, even if purchasers think they are helping it. The key, Haya says, is an abundance of caution, because projects can’t be perfect across the board. Overcrediting can be avoided by ensuring three qualities: that projects use scientifically backed accounting methods; that projects would not have occurred without the offsets market, called additionality; and that the carbon dioxide emissions don’t shift elsewhere, called leakage.
To achieve additionality, the project needs financing from the offset market and couldn’t survive without it. For example, would users adopt cleaner cookstoves even without the offset program? If so, then the purchase of an offset, and its claim to reduce emissions, is no different than other funds typically given to other projects and does not aid climate action.
“Understanding whether a project is additional or not is a judgment,” Haya says. It’s difficult to understand whether each project is additional, so a high-integrity method builds cautious crediting into the registry’s methodology to counterbalance non-additional credits. Registries can ensure additionality by issuing a conservatively low number of credits to its 100 hundred cookstove projects, for example. That way, even if some projects are non-additional, the total credits issued will more likely be additional, and therefore of higher quality.
The claim that a project is additional relies on establishing a baseline. What is the normal adoption rate of cookstoves? What is the typical rate of deforestation for a protected forest? Will developers build a solar installation even without credits?
When Anderson of Carbon Tanzania set up his projects, he worked with a company to identify threats to the forest, which were mainly farmers practicing shifting agriculture that would clear the forest. With the credits, he said, the farmers are paid to protect the land they already protect. The firm asserted that the forest was in a steady state, and any additional carbon above or below ground could be counted as avoided emissions.
Forest-based projects, as well as others, often confront the problem of leakage. If one area is protected, do people simply go elsewhere to cut down trees? Even though one area is protected, the climate still sees rising emissions. Haya found that California’s Air Resources Board used a carbon accounting methodology that did not adequately restrict leakage. The U.S. Forest Protocol, as it is called, estimated leakage at 20% when she found it to be 80%, meaning four in five credits never should have been generated.
Then there is the question about how much carbon is really saved. Each project is unique, but methodologies rely on broad assumptions across areas and types. Often, forest-based methodologies use similar carbon accounting across large regions. Recently, new evidence that some soil carbon projects may actually be increasing emissions has ignited lively debate among researchers and offset companies.
“One of the challenges in the market today is that we don’t value permanence,” Hausfather says. Ensuring permanence would mean preventing the destruction of offset-funded trees, guaranteeing renewable energies last, or trapping carbon and keeping it from being released again. If an offset project eventually sees its carbon reductions disappear, there is no benefit to the climate.
Renewable energy and nature-based projects like forest and ocean management often falter on these principles, according to Carbon Direct, a research firm. Using Haya’s and her team’s data, the firm found that almost 80% of credits were “very risky” because they came from these kinds of projects. Considering renewable energy sources have become much cheaper in the past few years, it’s unclear whether the projects are actually dependent on financing from offsets.
Nature-based projects, the firm says, often rely on counterfactual scenarios to show that they need offset credits, and those scenarios can rarely be proven. For instance, in Massachusetts, the Audubon Society told purchasers it would cut down trees in forests it had managed for decades unless they bought its credits. Climate catastrophes may jeopardize the permanence of nature-based projects. In California, wildfires over the past decade have burned through almost all forests set aside to buffer against disasters for the next 100 years.
According to Ecosystem Marketplace, the greatest growth in carbon credits was in these two sectors. The number of transactions — each meant to signify a ton of carbon removed or avoided from emissions — has increased to almost four times the 2021 rate this year.
Hausfather promotes CDR technologies that trap carbon and store it underground as a good alternative. But currently these types of projects, which include direct air capture, enhanced rock weathering, and biomass removal and storage, are a negligible portion of the offset market. Hausfather says he hopes this decade can be spent on understanding how to scale them up. This year, he championed a private sector campaign to commit to spending $1 billion on carbon removal over the next nine years.
“If you’re turning CO2 into rock, in a way that will be around for millions of years, it has a lot more value to the world than a tree that might be around for 30 years,” Hausfather says.
What’s the goal?
Most experts say the offset market is not meant to contribute meaningful change to emissions reduction, but rather to be an extra tool to channel funds toward sustainable development when companies are failing to transition from fossil fuels.
“A high-integrity voluntary carbon market is an important complementary tool — and to be clear — it is not a replacement for robust policy action, nor for rigorous and rapid internal decarbonisation of a company’s value chain,” the ICVCM said in a statement.
With its Core Carbon Principles (CCP), the council says it hopes to establish and regulate a threshold for high-quality credits. Independent experts would review the methodologies of registries to determine whether projects under those methodologies would likely contribute to real carbon reductions. Then, buyers could understand whether their funds are more or less likely to make a climate impact.
“The philosophy being that if you establish integrity, that will actually help the market to be able to develop and channel more finance to high-quality climate action,” says William McDonnell, chief operating officer of the ICVCM. In addition, Ortega-Pacheco of the expert panel says the aim is to have a marriage of climate action and sustainable development in the Global South, where most of the world’s tropical forests are.
There is not much evidence that offset credits have benefited the climate. They are often far cheaper than the costs of a company reducing its emissions, and companies often choose the cheaper option. For small firms with a carbon footprint of just a few thousand tons, it can be a cheap way to claim a “carbon neutral” label. For larger companies, it may delay needed changes.
Anderson of Carbon Tanzania says he wants to be able to review the businesses that purchase his offsets. He chose to register in the offset market because it helps fund conservation, with 60% of gross revenues going to the forest resource owners. If a company fails to follow its net-zero plan or uses the purchase to greenwash its activities, he would consider restricting sales to it.
Anderson says he also wants to make sure that the purchasers immediately “retire” his credits. This prevents the buyer from selling the credit again, to another buyer. Investors and financial markets may choose not to retire a credit, because they can sell the credit later at a higher price and pocket the difference. Often these purchasers target low-quality credits at low prices, and businesses like cryptocurrencies have attached their products to the carbon credits they’ve bought to sell them on to environmentally minded customers.
“I can’t possibly hold the entire financial system to account, but what I can say is if it’s not retired and if you deviate from the net-zero policy, we won’t deal with you,” Anderson says. In 2021, registries in the voluntary carbon market traded almost 500 million carbon credits, according to Ecosystem Marketplace. However, many of these credits have been bought and sold more than once.
Deforestation for oil palm plantations by palm oil industries in Malaysian Borneo. For small firms with a carbon footprint of just a few thousand tons of emissions, carbon offsetting can be a cheap way to claim a “carbon neutral” label. For larger companies, it may delay needed changes. Image by Rhett A. Butler/Mongabay.
Allowing the financial sector to invest in carbon credits, the ICVCM says, can incentivize more projects to enter the market. Dufrasne, of Carbon Market Watch, says this speculative buying may have both benefits and drawbacks for the climate, but mostly likely it has no impact on climate action, “which goes against what many of these financial actors would say, given the amount of ‘green finance’ talk there is out there.” Riggs says that speculative buying prevents the credits from contributing to real carbon reductions.
“We see no evidence other than they kick-start the creation of carbon markets, and thus allow companies to claim emissions reductions that they themselves did not accomplish but only achieved through the purchase of offsets,” he says. Similar to the market mechanisms used to reduce ozone levels from coal plants, Riggs says keeping carbon credits within a single region and industry would more likely push companies to reduce their emissions.
Just over half of credits issued across the ACR, CAR, GS and VCS registries have been retired, and the rest are likely on somebody’s balance sheet, waiting to be sold again.
The market is in a poor-quality loop, Haya says. Project developers want to earn credits, and registries want to issue them, while they also control methodologies. There’s little incentive for a project to sign up to a strict methodology when they won’t receive as many credits.
“The problem is the rules, the problem is the protocols. It’s the registries that need to change what they’re doing,” Haya adds. “We’re at a critical point in the offset market, and we need to launch ourselves into a quality system, otherwise it’s just going to collapse.”
Banner image: It’s not clear who buys offsets or which emissions are offset. Image by JuergenPM via Pixabay (Public domain).
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