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Carbon offsets and credits

Wind turbines near Aalborg, Denmark. Renewable energy projects constitute one common type of carbon offset project.[1]

Carbon offsetting is a carbon trading mechanism that allows entities such as governments or businesses to compensate for (i.e. “offset”) their greenhouse gas emissions. It works by supporting projects that reduce, avoid, or remove emissions elsewhere.[2][3][4] In other words, carbon offsets work by offsetting emissions through investments in emission reduction projects. When an entity invests in a carbon offsetting program, it receives carbon credits. These "tokens" are then used to account for net climate benefits from one entity to another.[5] A carbon credit or offset credit can be bought or sold after certification by a government or independent certification body.[6][7][8] One carbon offset or credit represents a reduction, avoidance or removal of one tonne of carbon dioxide or its carbon dioxide-equivalent (CO2e).

Offset projects that take place in the future can be considered to be a type of promissory note. The purchaser of the offset credit pays carbon market rates for the credits. In turn they receive a promise that the purchaser's greenhouse emissions generated in the present (e.g. a ten-hour international flight) will be offset by elimination of an equal amount at some point in the future (e.g. 10 to 20 years for planting 55 seedlings). Offsets that were generated in the past are legitimate only if they were in addition to reductions that would have happened anyway.[9]

A variety of greenhouse gas reduction projects can create offsets and credits. These include forestry projects (avoidance of logging, sapling planting, etc.),[1][10] renewable energy projects (wind farms, biomass energy, biogas digesters, hydroelectric dams, etc.), as well as energy efficiency projects. Further projects include carbon dioxide removal projects, carbon capture and storage projects, and the elimination of methane emissions in various settings such as landfills.

Carbon offset and credit programs provide a mechanism for countries to meet their Nationally Determined Contributions (NDC) commitments to achieve the goals of the Paris Agreement.[11] Article 6 of the Paris Agreement includes three mechanisms for “voluntary cooperation” between countries towards climate goals, including carbon markets. Article 6.2 enabled countries to directly trade carbon credits and other units such as gigawatts (GW) of renewable power with each other. Article 6.4 established a new international carbon market allowing countries or companies to use carbon credits generated in other countries to help meet their climate targets.

Carbon offset and credit programs are coming under increased scrutiny because their claimed emissions reductions may be inflated compared to the actual reductions achieved.[12][13][14] To be credible, the reduction in emissions must meet three criteria. Firstly, the must last indefinitely (e.g. the newly planted forest must not be logged or susceptible to wildfires). Secondly, they must be additional to emission reductions that were going to happen anyway. And thirdly, they must be measured and monitored to assure the that the amount of reduction promised has in fact been attained.[9]

Definition

A carbon offset is a way of compensating for emissions of carbon dioxide or other greenhouse gases. It is a reduction, avoidance, or removal of emissions to compensate for emissions released elsewhere. It represents an emission reduction or removal of one metric tonne of carbon dioxide equivalent or CO2.e, i.e. it can also represent an equivalent amount of other greenhouse gases (GHGs).[15] Carbon offsets and credits are a form of carbon pricing, along with carbon taxes and subsidies. The concepts of offsets and credits are linked. Both offsets and credits can move among the various markets they are traded in.[16]

There are several labels for these one-tonne emission reductions. Examples are "Verified Emission Reduction" or "Certified Emission Reduction". The label depends on the particular program that certifies a reduction project.

At COP27, negotiators agreed to define offsets and credits issued under Article 6 of the Paris Agreement as "mitigation contributions" in order to discourage carbon neutrality claims by buyers.[17] Certification organizations such as the Gold Standard also have detailed guidance on what descriptive terms are appropriate for buyers of offsets and credits.[18]

Common features

Common features associated with carbon offset programs are listed below in alphabetical order.

  • Additionality: A term that refers to the complex issue of whether emissions reductions achieved by a project are “additional” to what would have happened without the project. If a wildlife preserve, for example, sells carbon credits for not logging its forests, the presumption of credits may come under scrutiny.[19]
  • Carbon markets: Carbon emission trading systems in which carbon credits can be bought and sold.
  • Carbon-neutral or net zero: Terms used to describe a state where an entity’s greenhouse gas emissions are entirely balanced by purchasing carbon credits from past or future offsetting projects.
  • Carbon retirement: Offset credit holders must "retire" carbon offset credits in order to claim their associated GHG reductions towards a specific GHG reduction goal. In the voluntary market, carbon offset registries define the manner in which retirement happens. Once an offset credit is retired, it cannot be transferred or used. This means it is effectively taken out of circulation.[20] Voluntary purchasers can also offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs. Such programs include the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme.[21]
  • Forward crediting: A practice that issues credits for projected emission reductions that the project developer anticipates. This provides financial support for the project, but risks issuing too many credits if it does not achieve its planned impact. The practice allows credit buyers to claim emission reductions in the present for activities that have not yet occurred.[22]
  • Offset certification registries: An offset registry program is a system for reporting and tracking offset project information including project status, project documents, credits generated, ownership, sale, and retirement. These vary in terms of governance and accounting practices.[23]
  • Verified emission reduction or certified emission reduction: Labels for the one-tonne emission reduction credits. The label is designated by the particular program that certifies the reduction project.[24]
  • Vintage: The vintage is the year in which the carbon emissions reduction project generated the carbon offset credit.[25] This is usually the year in which a third party verifies the project. Examples of such third parties are a validation-verification body, a designated operational entity,[26] or other accredited third party reviewers.[27] "Legacy credits", for projects such as wind farms that were built in the past, meanwhile can allow ongoing carbon pollution with no additional impact on climate change, because renewable energy may displace fossil fuels, but in many cases the renewables' reductions in emissions were projects that are going to happen anyway.[9]

Origins and general features

In 1977 major amendments to the US Clean Air Act created one of the first tradable emission offset mechanisms. This allowed a permitted facility to increase its emissions. In return it had to pay another company to reduce its emissions of the same pollutant by a greater amount at one or more of its facilities.[28] The 1990 amendments to that same law established the Acid Rain Trading Program. This introduced the concept of a cap and trade system, where limits on a pollutant would decrease over time. It allowed companies to buy and sell offsets created by other companies that invested in emission reduction projects.[29] Regulatory frameworks for the US Clean Water Act enabled wetlands offsetting and mitigation banking in the 1990s. Wetlands offsetting also set the procedural and conceptual precedent for carbon offsetting.[30] In 1997 the Clean Development Mechanism was created as part of the Kyoto Protocol. This program expanded the concept of carbon emissions trading to a global scale. It focused on the major greenhouse gases that cause climate change.[31] These include carbon dioxide (CO2), methane, nitrous oxide (N2O), perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride.[32]

Carbon credits are part of national and international efforts to mitigate growth in concentrations of greenhouse gases (GHGs). These programs cap greenhouse gas emissions. Markets then allocate the emissions among the group of regulated sources. The goal is to allow market mechanisms to drive these sources towards lower GHG emissions. Since GHG reduction projects generate offset credits, the approach can finance carbon reduction projects from trading partners around the world. Within the voluntary market, demand for carbon offsets arise from individuals, companies, organizations, and sub-national governments. They do this to meet carbon-neutral, net-zero, or other GHG reduction goals. Certification programs offer project developers guidelines and other requirements necessary to produce carbon offsets. In this way they support this industry.

Programs and markets

There is a diverse range of sources of supply, sources of demand, and trading frameworks that drive offset and credit markets.[33] As of 2022, 68 carbon pricing programs were in place or scheduled to be created globally.[34] Some of these involve carbon taxes, but many are carbon emission trading programs, or other types of market-oriented program involving carbon offsets and credits. International programs include the Clean Development Mechanism, Article 6 of the Paris Agreement, and CORSIA. National programs include ETS systems such as the European Union Emissions Trading System (EU-ETS) and the California Cap and Trade Program. Eligible credits in these programs may include credits that international or independent crediting systems have issued. There are also standards and crediting mechanisms that independent, nongovernmental entities such as Verra and Gold Standard manage.

Demand for offsets and credits derives from a range of compliance obligations. These have arisen from international agreements and national laws, as well as voluntary commitments that companies, governments, and other organizations have adopted.[33] Voluntary carbon markets (VCMs) usually consist of private entities purchasing carbon offset credits. They do this to meet voluntary greenhouse gas reduction commitments. In some cases non-covered participants in an ETS may purchase credits. Or organizations might buy them as an alternative to purchasing offsets in a voluntary market.[16]

Currently several exchanges trade in carbon credits and allowances covering both spot and futures markets. These include the Chicago Mercantile Exchange, CTX Global, the European Energy Exchange, Global Carbon Credit Exchange gCCEx, Intercontinental Exchange, MexiCO2, NASDAQ OMX Commodities Europe and Xpansiv.[35] Many companies now engage in emissions abatement, offsetting, and sequestration programs. These generate credits that can be sold on one of these exchanges.

Compliance market credits account for most of the offset and credit market today. Trading on the VCM was 300 MtCO2e in 2021. By comparison, the compliance carbon market trading volume was 12 GtCO2e,[36] and global greenhouse gas emissions in 2019 were 59 GtCO2e.[37]

Kyoto Protocol (1997) and Paris Agreement (2015) Article 6 mechanisms

The original international compliance carbon markets emerged from the Kyoto Protocol. That treaty establishes three mechanisms that enable countries or operators in developed countries to acquire offset credits.[38] The economics behind these programs was that the marginal cost of reducing emissions would differ among countries.[39][40] Studies suggested that the flexibility mechanisms could reduce the overall cost of meeting the targets.[41] The Kyoto Protocol was to expire in 2020, to be superseded by the Paris Agreement. Countries are still determining the role of carbon offsets in the Paris Agreement through international negotiations on the agreement's Article 6.[42]

Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country. The cost of greenhouse gas reduction activities is usually much lower in developing countries but the effect on the atmosphere is the same.[43] The developed country receives credits for meeting its emission reduction targets. The developing country receives the capital investment and clean technology or beneficial change in land use. Once approved, these units are termed Certified Emission Reductions, or CERs. Country-specific Designated National Authorities approve projects under this program.[44] Under Joint Implementation (JI) a developed country with relatively high domestic costs of emission reduction would set up a project in another developed country. Offset credits under this program are designated as Emission Reduction Units.[45] Nuclear energy projects are not eligible for credits under either of these programs.[46] The International Emissions Trading (IET) program enables countries to trade in the international carbon credit market to cover their shortfall in assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under Annex B of the Kyoto Protocol.[47] Current CDM projects will transfer to new arrangements under the Paris agreement.

Article 6 of the Paris Agreement continues to support offset and credit programs between countries. These now occur to help achieve emission reduction targets set out in each country's NDC. Under Article 6, countries can transfer carbon credits from reducing GHG emissions to help other countries meet their climate targets. Article 6.2 creates a program for trading GHG emission reductions via bilateral agreements between countries. Article 6.4 is expected to be similar to the Clean Development Mechanism of the Kyoto Protocol. It establishes a centralized program to trade GHG emission reductions between countries. The UNFCCC supervises this program.[48] Countries, companies, or even individuals can buy Emission Reduction (ER) credits purchased under this program.[49]

Under Article 6.2 the credits are called internationally transferred mitigation outcomes, or ITMOs. It is possible to transfer them from host countries, where the reduction in GHG is achieved. There are a number of ways to do this. Credits can go to credit-buying countries towards achieving their NDCs. They can also be transferred and used in market-based schemes such as CORSIA.[50] The system requires "corresponding adjustments" (CAs) to avoid double counting of emission reductions. Double-counting occurs if both the host country and purchasing country count the reduction towards their target. If the receiving country uses ITMOs towards its NDC, the host country must ‘un-count' those reductions from its emissions budget by adding and reporting that higher total in its biennial reporting.[50] Otherwise Article 6.2 gives countries a lot of flexibility in how they can create trading agreements.[51]

A Supervisory Board will oversee projects under Article 6.4. This is responsible for approving methodologies, setting guidance, and implementing procedures. The preparation work for this is expected to last until the end of 2023. Emission reduction (ER) credits issued under Article 6.4 will fall by 2% to ensure that the program as a whole results in an overall Mitigation of Global Emissions. An additional 5% reduction of Article 6.4 ERs will go to a fund to finance adaptation. Administrative fees for program management are still under discussion.[50] CDM projects may transition to the Article 6.4 program subject to approval by the country hosting the project, and if the project meets the new rules. There are exceptions for rules on methodologies. Projects can generally continue to use the same CDM methodologies through 2025. From 2026 on, they must meet all Article 6 requirements. Up to 2.8 billion credits could potentially become eligible for issuance under Article 6.4 if all CDM projects transition.[17]

Article 6 does not directly regulate the voluntary carbon markets. So in principle it is possible to issue and purchase carbon offsets without reference to Article 6. It is possible that a multi-tier system could emerge with different types of offsets and credits available for investors. Companies may be able to purchase ‘adjusted credits' that eliminate the risk of double counting. These may be seen as more valuable if they support science-based targets and net-zero emissions. Other ‘non-adjusted' offsets and credits could support claims for other environmental or social indicators. They could also support emission reductions that are seen as less valuable in terms of these goals. Uncertainty remains around Article 6's effects on future voluntary carbon markets. There is also uncertainty about what investors could claim by purchasing various types of carbon credits.[50]

Other international programs

The REDD+ program works to create financial value for carbon stored in forests by using market approaches to compensate landowners for not clearing or degrading their forests. REDD+ also promotes co-benefits from reducing deforestation. One example is biodiversity. REDD+ largely addresses tropical regions in developing countries. The concept of REDD+ was introduced in its basic form at COP11 in 2005. It has grown into a broad policy initiative to address deforestation and forest degradation. In 2015, REDD+ was incorporated into Article 5 of the Paris Agreement. REDD+ initiatives typically compensate developing countries or their regional administrations for reducing their emissions from deforestation and forest degradation. REDD+ consists of several stages. They include (1) achieving REDD+ readiness; (2) formalizing an agreement for financing; (3) monitoring, reporting, and verifying results; and (4) receiving results-based payments. Over 50 countries have national REDD+ initiatives. They are mostly developing countries in or adjacent to the tropics. REDD+ is also being taking place through provincial and district governments and at the local level through private landowners. As of 2020, there were over 400 ongoing REDD+ projects globally. Brazil and Colombia account for the largest amount of REDD+ project land area.[52]

The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is a global, market-based program to reduce emissions from international aviation. It aims to allow credits and offsets for emissions that cannot be reduced by technology and operational improvements, or sustainable aviation fuels.[53] To ensure the environmental integrity of these offsets, the program has developed a list of eligible offsets that can be used. Operating principles are similar to those under existing trading mechanisms and carbon offset certification standards. CORSIA has applied to international aviation since January 2019. At that point all airlines were required to report their CO2 emissions on an annual basis. International flights must undertake offsetting under CORSIA since January 2021.[54]

Emissions trading systems

Emissions trading are now an important element of regulatory programs to control pollution, including GHG emissions. GHG emission trading programs exist at the sub-national, national, and international level. Under these programs, there is a cap on emissions. Sources of emissions have the flexibility to find and apply the lowest-cost methods for reducing pollution. A central authority or government body usually allocates or sells a limited number (a "cap") of permits. These permit a discharge of a specific quantity of a specific pollutant over a set time period.[55] Polluters are required to hold permits in amounts equal to their emissions. Those that want to increase their emissions must buy permits from others willing to sell them.[56] These programs have been applied to greenhouse gases for several reasons. Their warming effects are the same regardless of where they are emitted. The costs of reducing emissions vary widely by source. The cap ensures that the environmental goal is attained.[57][58]

At the start of 2022 there were 25 operational emissions trading systems around the world. They are in jurisdictions representing 55% of global GDP. These systems cover 17% of global emissions.[59] The European Union Emissions Trading System (EU-ETS) is the second largest trading system in the world after the Chinese national carbon trading scheme. It covers over 40% of European GHG emissions.[60] California's cap-and-trade program covers about 85% of statewide GHG emissions.[58]

Voluntary carbon markets and certification programs

Voluntary carbon markets (VCM) are largely unregulated markets where carbon offsets are traded by corporations, individuals and organizations that are under no legal obligation to make emission cuts. In voluntary carbon markets, companies or individuals use carbon offsets to meet the goals they set themselves for reducing emissions. Credits are issued under independent crediting standards. Some entities also purchase them under international or domestic crediting mechanisms. National and subnational programs have been increasing in popularity.[61]

Many different groups exist within the voluntary carbon market.[62] Participants include developers, brokers, auditors, and buyers.[63] Certification programs are a key component of this community. These groups establish accounting standards, project eligibility requirements, and Monitoring, Reporting and Verification (MRV) procedures for credit and offset projects. They include the Verified Carbon Standard issued by Verra, the Gold Standard, the Climate Action Reserve, the American Carbon Registry, and Plan Vivo.[64] Puro Standard, the first standard for engineered carbon removal, is verified by DNV GL.[65] There are also some additional standards for validating co-benefits. They include the Climate, Community and Biodiversity Standard (CCB Standard), also issued by Verra and the Social Carbon Standard,[66] issued by the Ecologica Institute.

The voluntary carbon markets (VCM) currently represents less than 1% of the reductions pledged in country NDCs by 2030. It represents an even smaller portion of the reductions needed to achieve the 1.5°C Paris temperature goal pathway in 2030.[67] However the VCM is growing significantly. Between 2017 and 2021 both the issuance and retirement of VCM carbon offsets more than tripled.[68] Some predictions call for global VCM demand to increase15-fold between 2021 and 2030, and 100 times by 2050.[69] Carbon removal projects such as forestry and carbon capture and storage are expected to have a larger share of this market in the future, compared to renewable energy projects.[70] However, there is evidence that large companies are becoming more reluctant to use VCM offsets and credits because of a complex web of standards, despite an increased focus on net zero emissions goals.[71]

Verified Carbon Standard by Verra

Verra was developed in 2005. It is a widely used voluntary carbon standard. As of 2020 there had been over 1,500 certified VCS projects covering energy, transport, waste, forestry, and other sectors.[72] In 2021 Verra issued 300 MtCO2e worth of offset credits for 110 projects.[73]: 37  There are also specific methodologies for REDD+ projects.[72] Verra is the program of choice for most of the forest credits in the voluntary market, and almost all REDD+ projects.[74] There have been criticisms of this program. As a result, Verra will replace its current rules for forestry projects with new rules from 2025 onwards.[75] General Verra A standards cover the types of projects allowed. They also cover allowable project start dates and project boundaries. They provide for a 10-year crediting period and require the project boundaries to cover all primary effects and significant secondary effects. Verra has additional criteria to avoid double counting. It also has requirements for additionality. It prohibits negative impacts on sustainable development in the local community.[76] Its accounting principles include relevance, completeness, consistency, accuracy, transparency, and conservativeness.[77]

Gold Standard

The Gold Standard was developed in 2003 by the World Wide Fund for Nature (WWF) in consultation with an independent Standards Advisory Board. Projects are open to any non-government, community-based organization. Allowable categories include renewable energy supply, energy efficiency, afforestation/reforestation, and agriculture. The program also promotes the Sustainable Developments Goals. Projects must meet at least three of those goals besides reducing GHG emissions. Projects must make a net-positive contribution to the economic, environmental and social welfare of the local population. Program monitoring requirements help determine this.[78][79]

Types of offset projects

A variety of projects can be used to reduce GHG emissions and thus to generate carbon offsets and credits. These can include land use improvement, methane capture, biomass sequestration, renewable energy, or industrial energy efficiency. They also include reducing methane, reforestation and switching fuel, for example to carbon-neutral and carbon-negative fuels.[80][81] The CDM identifies over 200 types of projects suitable for generating carbon offsets and credits.[82] An example of land use improvement is better forest management.[80][83]

Offset certification and carbon trading programs vary by how much they consider specific projects eligible for offsets or credits.[84] The European Union Emission Trading System considers nuclear energy projects, afforestation or reforestation activities, and projects involving destruction of industrial gases ineligible.[85] Industrial gases include HFC-23 and N2O.

Renewable energy

Renewable energy projects can include hydroelectric, wind, photovoltaic solar, solar hot water, biomass power, and heat production. These types of projects help societies move from electricity and heating based on fossil fuels towards forms of energy that are less carbon-intensive. However, they may not qualify as offset projects. This is because it is difficult or impossible to determine their additionality. They usually generate revenue. And they usually involve subsidies or other complex financial arrangements. This can make them ineligible under many offset and credit programs.[86]

Methane collection and combustion

Methane is a potent greenhouse gas. It is most often emitted from landfills, livestock, and from coal mining.[81] Methane projects can produce carbon offsets through the capture of methane for energy production. Examples include the combustion or containment of methane generated by farm animals by use of an anaerobic digester,[87] in landfills,[88] or from other industrial waste.

Energy efficiency

Chicago Climate Justice activists protesting cap and trade legislation in front of Chicago Climate Exchange building in Chicago Loop

Carbon offsets that fund renewable energy projects help lower the carbon intensity of energy supply. Energy conservation projects seek to reduce the overall demand for energy. Carbon offsets in this category fund projects of three main types.

Cogeneration plants generate both electricity and heat from the same power source. This improves upon the energy efficiency of most power plants. That is because these plants waste the energy generated as heat.[89] Fuel efficiency projects replace a combustion device with one using less fuel per unit of energy provided. They can do this by optimizing industrial processes,[90] reducing energy costs per unit. They can also optimize individual action, for example making it easier to cycle to work instead of driving.[91]

Destruction of industrial pollutants

Industrial pollutants such as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a much greater potential for global warming than carbon dioxide by volume.[92] It is easy to capture and destroy these pollutants at their source. So they present a large low-cost source of carbon offsets. As a category, HFCs, PFCs, and N2O reductions represent 71 percent of offsets issued under the CDM.[82] Since many of these are now banned by an amendment to the Montreal Protocol, they are often no longer eligible for offsets or credits.[93][85]

Land use, land-use change and forestry

Land use, land-use change and forestry have the collective label LULUCF. LULUCF projects focus on natural carbon sinks such as forests and soil. There are a number of different types of LULUCF projects. Forestry-related projects focus on avoiding deforestation. They do this by protecting existing forests, restoring forests on land that was once forested, and creating forests[94] on land that previously had no forests, typically for more than a generation. Soil management projects attempt to preserve or increase the amount of carbon sequestered in soil.

Deforestation is particularly significant in Brazil, Indonesia, and parts of Africa. It accounts for about 20 percent of greenhouse gas emissions.[95] It is possible to avoid deforestation by paying directly for forest preservation. Another way is to use offset funds to provide substitutes for forest-based products. REDD is a framework to encourage developing countries to reduce emissions and enhance removals of greenhouse gases through a variety of forest management options, and to provide technical and financial support for these efforts. REDD credits provide carbon offsets for the protection of forests. They also provide a mechanism to allow funding from developed nations to help developing nations with the protection of native forests. Offset schemes using reforestation are available in developing countries. They are increasingly available in developed countries including the US and the UK.[96][97]

This photo is showing branches overlapping each other with moss on top. These trees that are shown are a part of the carbon offset.

Soil is one of the important aspects of agriculture and can affect the amount of yield in the crops. Modern agriculture has caused a decrease in the amount of carbon that the soil is able to hold.[98] Farmers can promote sequestration of carbon in soils through various practices. These include the use of winter cover crops, reducing the intensity and frequency of tillage, and using compost and manure as soil amendments.[99]

Assuring quality and determining value

Many types of offset are difficult to verify because they are indirect. Many reports by NGO or in the media have questioned the credibility of the various certification providers.[100] Prices for offsets and credits vary widely.[101] This may be a reflection of the uncertainty associated with these programs and practices.[102] These issues have recently caused many companies to become more skeptical about buying offsets or credits.[103]

Creating offsets and credits

To assess the quality of carbon offsets and credits it is helpful to understand how they are created. It is necessary to show that a reduction in greenhouse gas emissions meets carbon offset quality criteria before certifying it for use. This requires a methodology or protocol that is specific to the type of offset project involved. Most carbon offset programs have a library of approved methodologies. These cover a range of project types. The next steps involve project development, validation, and registration. An offset project is designed by project developers, financed by investors, validated by an independent verifier, and registered with a carbon offset program. Official "registration" indicates that the program has approved the project and that the project is eligible to start generating carbon offset credits once it starts.[104]

One common purchasing option is to contract directly with a project developer. This involves an agreement to deliver carbon offset credits as they are issued. These contracts provide project developers with a level of certainty about the volume of offset credits they can sell. Buyers are able to lock in a price for offset credits that is typically lower than market prices. However, this may involve some risk for them in terms of the project actually producing offsets.[104]

It is necessary to monitor a project and verify it periodically once it has started. This is to determine the quantity of emission reductions it has generated. The length of time between verifications can vary, but is typically one year. A carbon offset program approves verification reports. Then it issues the appropriate number of carbon offset credits. The credits are then deposited in the project developer's account in a registry system administered by the offset program.[104]

Criteria for assessing quality

Criteria for assessing the quality of offsets and credits usually cover the following areas:

  • Baseline and Measurement—What emissions would occur in the absence of a proposed project? And how are the emissions that occur after the project is performed going to be measured?
  • Additionality—Would the project occur anyway without the investment raised by selling carbon offset credits? There are two common reasons why a project may lack additionality. One is if it is financially worthwhile anyway due to energy cost savings. The second is if environmental laws and regulations require it to be done anyway.
  • Leakage—Does implementing the project cause higher emissions outside the project boundary?
  • Permanence—Are some benefits of the reductions reversible? Trees may be harvested to burn wood. Does growing trees for wood to burn decrease the need for fossil fuel? If woodlands are increasing in area or density, then carbon is being sequestered. After roughly 50 years, forests begin to reach maturity, and remove carbon dioxide more quickly than a recently re-planted forest area.
  • Double counting—Is the project claimed as carbon offsetting by more than one organization?
  • Co-benefits—Are there other benefits in addition to the carbon emissions reduction, and to what degree?[105]

Approaches for increasing integrity

Besides the certification programs mentioned above, industry groups have been working since the 2000s to promote the quality of these projects. The International Carbon Reduction and Offset Alliance (ICROA) was founded in 2008. It promotes best practice across the voluntary carbon market.[106] ICROA's membership consists of carbon offset providers based in the United States, European and Asia-Pacific markets who commit to the ICROA Code of Best Practice.[106]

Other groups are now advocating for new approaches to ensure that offsets and credits have integrity. The Oxford Offsetting Principles state that traditional carbon offsetting schemes are "unlikely to deliver the types of offsetting needed to ultimately reach net zero emissions."[107] These principles focus instead on cutting emissions as a first priority. In terms of offsets, they advocate for shifting to carbon removal offset projects that involve long-term storage. The principles also support the development of offsetting aligned with net zero.[107] The Science Based Targets initiative's net-zero criteria argue that it is important to move beyond offsets based on reduced or avoided emissions. Instead projects should base offsets on carbon that has been sequestered from the atmosphere, such as CO2 Removal Certificates.[108]

Some initiatives focus on improving the quality of current carbon offset and credit projects. The Integrity Council for the Voluntary Carbon Market (ICVCM) has published a draft set of principles for determining a high integrity carbon credit. These are known as the Core Carbon Principles. Final guidelines for this program are expected in late 2023.[109][110] The Voluntary Carbon Markets Integrity Initiative has developed a code of practice that was published in 2022.[111][112] The UK government partly funds this initiative.

Determining value

In 2022 voluntary carbon market (VCM) prices ranged from $8 to $30 per tonne of CO2e for the most common types of offset projects. Several factors can affect these prices. The costs of developing a project are a significant factor. Those tied to projects that can sequester carbon have recently been selling at a premium compared to other projects such as renewable energy or energy efficiency. Projects that sequester carbon are also called Nature-Based Solutions. Projects with additional social and environmental benefits can command a higher price. This reflects the value of the co-benefits and the perceived value of association with these projects. Credits from a reputable organization may command a higher price. Some credits located in developed countries may be priced higher. One reason could be that companies prefer to back projects closer to their business sites. Conversely, carbon credits with older vintages tend to be valued lower on the market.[113]

Prices on the compliance market are generally higher. They vary based on geography, with EU and UK ETS credits trading at higher prices than those in the US in 2022.[114][115] Lower prices on the VCM are in part due to an excess of supply in relation to demand. Some types of offsets are able to be created at very low costs under present standards. Without this surplus, current VCM prices could be at least $10/tCO2e higher.[116]

Some pricing forecasts predict VCM prices could increase to as much as $47–$210 per tonne by 2050. There could be an even higher spike in the short term in certain scenarios. A major factor in future price models is the extent to which programs that support more permanent removals can influence future global climate policy. This could limit the supply of approvable offsets, and thereby raise prices.[117]

Demand for VCM offsets is expected to increase five to ten-fold over the next decade as more companies adopt Net Zero climate commitments. This could benefit both markets and progress on reducing GHG emissions. If carbon offset prices remain significantly below these forecast levels, companies could be open to criticisms of greenwashing. This is because some might claim credit for emission reduction projects that would have been undertaken anyway. At prices of $100/tCO2e, a variety of carbon removal technologies could deliver around 2 GtCO2e per year of annual emission reductions between now and 2050. These technologies include reducing deforestation, forest restoration, CCS, BECCs and renewables in least developed countries.[118] In addition, as the cost of using offsets and credits rises, investments in reducing supply chain emissions will become more attractive.[116]

Co-detriments

Apart from reducing greenhouse gas emissions, projects may be detrimental to communities and ecosystems near the project site. An example would be a hydroelectric dam project such as the Three Gorges Dam, which displaced more than a million nearby residents and inundated local ecosystems. Continuation of emissions at the original site can also be detrimental to nearby communities.[119]

Effectiveness

Offset and credit programs have been identified as a way for countries to meet their NDC commitments and achieve the goals of the Paris agreement at a lower cost.[11] They may also help close the emissions gap identified in annual UNEP reports.[120]

These programs also have other positive effects. Experts call these co-benefits. Common environmental co-benefits include better air quality, increased biodiversity, and water and soil protection. There are also social benefits. These include community employment opportunities, energy access, and gender equality. Typical economic co-benefits include job creation, education opportunities, and technology transfer. Some certification programs have tools and research products to help quantify these benefits.[121][122]

Limitations and drawbacks

The use of offsets and credits faces a variety of criticisms. Some argue that they promote a "business-as-usual" mindset. This means that companies may use carbon offsetting to avoid making larger changes to reduce carbon emissions at source.[123][124] Using projects in this way is called "greenwashing".[125] In 2023 a civil suit was brought against Delta Airlines based on its use of carbon credits to support claims of carbon neutrality.[126] In 2016 the Öko-Institut analyzed a series of CDM projects. It found that 85% had a low likelihood of being truly additional or were likely to over-estimate emission reductions.[127] In 2023, the University of California all but dropped the purchase of offsets in favor of direct reductions in emissions. [128] An additional challenge is that carbon pricing and existing policies are still inadequate to meet Paris goals.[34][129] However, there is evidence that companies that invest in offsets and credits tend to make more ambitious emissions cuts compared with companies that do not.[130]

Researchers have raised the concern that the use of carbon offsets – such as by maintaining forests, reforestation or carbon capture – as well as renewable energy certificates[131] allow polluting companies a business-as-usual approach to continue releasing greenhouse gases[132][133] and for being, inappropriately trusted, untried techno-fixes.[134]

Oversight issues

Several certification standards exist, with different ways of measuring emissions baseline, reductions, additionality, and other key criteria. However, no single standard governs the industry. Some offset providers have faced criticism that their carbon reduction claims are exaggerated or misleading.[14] For example, carbon credits issued by the California Air Resources Board were found to use a formula that established fixed boundaries around forest regions. This created simplified, regional averages for the carbon stored in a wide mix of tree species. Some experts have estimated that California's cap and trade program program has generated between 20 million and 39 million forestry credits that do not achieve real climate benefits. This amounts to nearly one in three credits issued through that program.[135][136]

Determining additionality can be difficult. This may present risks for buyers of offsets or credits.[137] Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits are usually not considered additional. Another example is projects that are compelled by regulations. Projects representing common practice in an industry are also usually not considered additional. A full determination of additionality requires a careful investigation of proposed carbon offset projects.[138]

Offsets provide a revenue stream for the reduction of some types of emissions, so they can lead to perverse incentives. They may provide incentives to emit more, so that emitting entities can get credit for reducing emissions from an artificially high baseline. Regulatory agencies could address these situations. This could involve setting specific standards for verifiability, uniqueness, and transparency.[139]

Concerns with forestry projects

Forestry projects have faced increasing criticism of their integrity as offset or credit programs. A number of news stories in 2021–2023 have criticized nature-based carbon offsets, the REDD+ program, and certification organizations.[140][141][142] In one case it was estimated that around 90% of rainforest offset credits of the Verified Carbon Standard are likely to be "phantom credits".[143]

Tree planting projects in particular have been problematic. Critics point to a number of concerns. Trees reach maturity over a course of many decades. It is difficult to guarantee how long the forest will last. It may suffer clearing, burning, or mismanagement.[144][145] Some tree-planting projects introduce fast-growing invasive species. These end up damaging native forests and reducing biodiversity.[146][147][148] In response, some certification standards such as the Climate Community and Biodiversity Standard require multiple species plantings.[149] Tree planting in high latitude forests may have a net warming effect on the Earth's climate. This is because tree cover absorbs sunlight. This creates a warming effect that balances out their absorption of carbon dioxide.[150] Tree-planting projects can also cause conflicts with local communities and Indigenous people. This happens if the project displaces them or otherwise curtails their use of forest resources.[151][152][153]

See also

References

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Carbon offsets and credits
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