What is a Carbon Offset?

Since the vast majority of institutions, countries or individuals continue to produce greenhouse gas emissions from their operations even as the world is decarbonising Many prefer to offset these emissions that are ‘residual. The most commonly used method of doing this is to purchase carbon credits. It is also known as offsets, using offsets as well as carbon credits often being used in conjunction.

However, differences over technical issues and the notion of compensation, exacerbated by the use of ambiguous terms – has led to debate over how carbon credits should be utilized to distribute resources for reduction in carbon emissions. (Offsetting is the process of trading credits on markets that are voluntary, and is similar but different from the legal emissions trading schemes which have participants who are subject to an obligation under law to compensate their emissions by obtaining the same amount of permit.)

Carbon credits: What do they mean? And where are they sourced?

Carbon credits are an indicator of the reduction or elimination emission of greenhouse gases which is measured as tonnes of equivalent carbon dioxide (tCO2e). Institutions or projects may register the effects of their work in reducing or eliminating emissions and can issue an equivalent amount of carbon credits for auction, provided that their positive climate-friendly actions comply with certain guidelines (see further below). A lot of offset activities are conducted in emerging or developing countries, while those who purchase offsets are generally located in more prosperous countries. Theoretically, this could give additional funds that can be invested in sustainability across the globe, as well as helping the recipients decarbonize faster than previously anticipated.

Did you know? You can access carbon credits through Axsess.

The distinction between emissions that are avoided (or reductions) and the reduction of emissions is significant from the point of view that of the atmospheric accounting. Renewable energy farms and energy efficiency measures in industrial facilities, or safeguarding forests from being destroyed decrease the amount of carbon dioxide released to the atmosphere, when compared to an scenario (‘baseline’) scenario in which a greater emission alternative was implemented (i.e. burning up more fossil fuels, or cutting trees down). Storage and removal of carbon whether it is achieved by natural means (planting trees on previously forested areas – afforestation or Reforestation) or through technological solutions (such such as air-to-air capture) remove emissions from the air. The majority of the credits that are sold today are for reductions (approximately 90 percent in the first half in 2021).

How do we determine the regulations for carbon offsets?

In 1997 The Kyoto Protocol established an international carbon market and the method of pricing emissions through making rules and norms for both private and government entities to trade. It also established the Clean Development Mechanism (CDM) allowed countries to finance projects in other countries and claim the consequent reductions in their emissions to their own goals for decarbonisation. In the Paris Agreement, Paris Agreement replaced the Kyoto-era provisions with new regulations that are mostly grouped under Article 6. These rules set out high-level standards that all actors – governments or private organizations – have to comply with if they purchase or sell carbon credits using any of the mechanisms established under the Agreement. Although discussions on the primary “rulebook” have been concluded the work to make these new markets operating is still ongoing.

Parallel to the gradual development in the public domain, a myriad of private organizations, referred to as programs, create and manage their own standards, and also compile an index of the previous and current projects which have issued credits. Some of the most influential bodies are Verra (which is the host of Verified Carbon Standard Verified Carbon Standard), Gold Standard, the American Carbon Registry and the Climate Action Reserve. The projects must be certified by an independent organization before they are able to sell credits via some of these schemes. If a third (usually private) company purchases the credit, it has the rights to claim responsibility for the reduction or avoidance of emissions. If the credit is used in order to reduce emissions purchaser must “retire” it which means it cannot more be sold or transferred.

When governments swap credits in accordance with the mechanisms of the Paris Agreement, the country in which the exchange was conducted must adjust the corresponding amount in the numbers for its emissions they report to the UNFCCC and show how they can no longer claim the emissions savings as their own, and that they are now owed to the purchaser country, as an entity has taken responsibility of the reductions. There is a issue about whether countries need to make this adjustment even when the purchaser for the credits is an individual entity or a multinational company or a foreign country.

The process of compensating for emissions is completely voluntary for the majority of companies There aren’t any laws that govern whether offsets are allowed or not, which is why they are referred to as the term “voluntary carbon market’. There are a variety of initiatives that are drafting guidelines and regulations, since the market is expected to expand rapidly due to the necessity of transitioning to net zero emissions becomes more popular. It is also worth noting that the Oxford Principles for Offsetting were released in the year 2020. In addition, the Science-Based Targets Initiative (SBTi) is a program that encourages companies to set short- and long-term emission reduction targets that are in line to the Paris Agreement, leaves space for offsets in its guidance regarding ‘beyond mitigation of the value chain’. Both groups emphasize that companies who seek to offset their carbon emissions must first try in reducing their personal emissions – across the entire supply chain for instance, of firms – prior to shifting to offsets. They also suggest an gradual transition from avoidance/reduction credits to credits for carbon removal as we move towards 2050.

High-level coalitions have formed to establish consensus-based standards that assure the integrity of carbon-based credit markets with regards to creating positive impacts on the environment and the people. In the Integrity Council for the Voluntary Carbon Market (ICVCM) is developing a standard for the credibility of credits in themselves, by establishing guidelines for programs and projects or programs to tackle the demand part that the market operates on. In the case of demand on the demand side, it is Voluntary Carbon Market Integrity Initiative (VCMI) is working on guidelines for non-state actors who want to present claims that are based on the use of offsets (for instance, “we are a carbon-neutral company”). In the summer of 2022, both organizations are seeking input on the drafts through an open public discussion (see ICVCM; VCMI). Even without legal conditions, the resulting standards for claims and credits could soon be adopted by the majority of people, due to the growing public, consumer and investor attention to institutions trying to offset their carbon emissions.

What role do offsets play in the global responses to climate changes?

Offsetting has drawn criticism from large non-governmental organizations, including Greenpeace. The argument is they believe that buying carbon credits used to justify the inability to reduce carbon emissions (encouraged due to the low cost per ton of CO2e) and encourages the commodification of nature and is detrimental to vulnerable communities by denying the land they rely on. It is possible to see the ICVCM and VCMI could be considered attempts to address and address these issues. If businesses follow either the SBTi guidelines or Oxford guidelines, offsetting would be a complement to, and not an alternative to the company’s own actions. VCMI is seeking to enshrine the practice of offsetting by making scientifically-based goals a requirement for any claims that are based on offsetting. The ICVCM’s draft fundamental carbon principles are designed to ensure that the projects are conducted with complete respect for human rights, and especially the rights of Indigenous Peoples (via the UN Declaration on the Rights of Indigenous Peoples), and to ensure that the benefits to local communities that come from carbon credits are evident to those who market. Both processes are still in process and a lot is dependent on their success in implementing them.

Alternatives to offset exist (encapsulated in the ambiguity of ‘beyond value chain mitigation’ in the terminology of the SBTi). Institutions can talk about their contribution to the global reduction in carbon emissions or their impact on global emissions, instead of claim to offset their carbon footprint or being carbon neutral. The idea of establishing prices for internal carbon emissions and charging substantial cost, the proceeds from which can be used to invest which would enable companies to raise funds to pay full compensation that takes into account the ‘social costs that carbon has to pay for’. Alternatives in the context of the carbon market which challenge the logic of market-based cost-minimisation as well as the drawbacks of a price-for-cost system that has a low price for carbon are being studied and developed.