Carbon Offsets & Carbon Markets
- What are carbon offsets or carbon credits, and how do they work?
- What do I need to know about carbon credits?
- How are offsets and carbon markets related?
- What is REDD (+) and what does it have to do with the carbon credit market?
- What is the disagreement surrounding carbon credits?
- What is the future for carbon markets in the USA?
- What is the difference between a carbon offset and a renewable energy certificate (REC)?
What are carbon offsets or carbon credits, and how do they work?
The United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol are landmark international treaties to address climate change. The UNFCCC, signed in 1992 set the stage and was followed by the Kyoto Protocol in 1997 which put operational procedures to the UNFCCC. The Kyoto Protocol will be phased out at the end of 2012, and replaced by the next iterative evolution of international cooperation – which will be based upon the EU Roadmap presented in Durban, South Africa in 2011. All of these international diplomatic efforts have vested a process that led to the emergence of carbon credit markets and carbon offset programs. The result of countries around the world joining cooperatively to consider how to deal with rising average global surface temperatures and mitigate the effects of climate change have sought to set binding limits on greenhouse gas emissions in an attempt to redirect the trajectory of atmospheric greenhouse gas concentrations. Unfortunately, since the signing of the Climate Change Convention, the Kyoto Protocol and the forthcoming European road map, atmospheric concentrations of greenhouse gases continue to move alarmingly above 350 parts per million, which is deemed to lead to a restively stable future climate regime. The ineffectual and incomplete cooperation of international governance has demonstrated that while governments are vitally important to solving this problem, they are also woefully inadequate to do so, on their own.
The Kyoto Protocol was adopted in 1997 as an international and legally binding agreement that established rules for 37 industrialized countries and the European community to reduce their greenhouse gas emissions (note that the U.S. signed the Treaty, but did not Ratify it in the Senate, and is therefore not an active party to the Treaty). The Kyoto Protocol introduced three market-based mechanisms, thereby creating what is now known as the first compliance “carbon market.” Kyoto mechanisms are: Emissions Trading, the Clean Development Mechanism (CDM), and Joint Implementation (JI). These mechanisms are established to: 1) stimulate sustainable development through technology transfer and investment; 2) help countries with Kyoto commitments to meet their targets by reducing emissions or removing carbon from the atmosphere in other countries in a cost-effective way; and 3) encourage the private sector and developing countries to contribute to emission reduction efforts. Most of these reductions occur through renewable energy, energy efficiency, and fuel switching projects. While mitigation activity may occur in developed countries, the CDM is designed to encourage mitigation in developing nations through the transfer of improved technology. The primary focus of the CDM is to promote clean development in developing countries where environmental regulation is generally weaker than it is in developed countries. It is widely thought that there is greater potential for developing countries to reduce their emissions than developed countries.
Carbon offsets (also commonly referred to as “carbon credits” or “certified emission reductions”) are generated by carbon sequestration or emissions reduction activities that are quantified, reported, verified, validated, and certified via the regulatory or voluntary market. Offsets are a form of climate change mitigation that provide assurance that a given amount of greenhouse gas emissions will be avoided, reduced, or actively removed from the atmosphere, thereby balancing or compensating for unavoidable emissions generated through activities such as industrial production or deforestation. A carbon offset developed to reduce greenhouse gas emissions or sequester carbon may be generated from activities such as: retrofitting a power plant to burn coal more efficiently, developing alternative and less polluting energy sources, or establishing a large-scale forest conservation project which serves to both sequester existing carbon in the forest and absorb ambient carbon in the atmosphere. Carbon offsets are commonly quantified in units called carbon credits, defined as 1 metric ton of carbon dioxide (CO2) equivalent. The “equivalent” is included because other greenhouse gases, such as methane (CH4), may have a much stronger ability to trap the sun’s heat as the same volume of CO2 (called the global warming potential). Based on this potential, other gases can be converted to an equivalent amount of CO2, which is much more prevalent and used as the common unit in greenhouse gas calculations. (Using the global warming potential of a metric ton of a particular greenhouse gas to the global warming potential of a metric ton of CO2, is akin to converting US Dollars to Euros).
Carbon sequestration or emissions reduction projects do not need to occur within the same geographic location. The atmosphere is considered a shared global resource because the overall concentration of greenhouse gases is what drives climate fluctuations. This basic idea justifies carbon offsets as an appropriate solution for mitigating climate change, because the actual location of emissions reductions is not important. For example, capturing 400 tons of methane in Iowa has the same effect on the climate as capturing 400 tons of methane in India. Further, in some cases it can be more beneficial to implement an emissions reduction project in locations other than where emissions have occurred (e.g., restoring a forest in Panama might also serve to protect rainforest species and boost local livelihoods).
In order to be legitimized in the marketplace for sale or resale, an offset provider must certify that their carbon offset project has prevented a specified quantity of greenhouse gases from being released into the atmosphere, or they must demonstrate they have sequestered that same quantity. This action is taken on behalf of the offset buyer, who may be working toward compliance with a regulatory framework or through voluntary action and personal responsibility. Offsets are created through a formal and rigorous process to guarantee reliability for buyers and sellers. Projects claiming to reduce or avoid greenhouse gas emissions and sell them in the marketplace must be certified under a quality standard (e.g., Verified Carbon Standard, Climate, Community, and Biodiversity Alliance, or Gold Standard) whereby the project is examined to determine whether the calculations and methods used by a project in fact generate the claimed amount of offsets. These components are verified by an independent auditor as part of the certification process. Offsets are then sold and traded under binding contracts and purchase agreements that stipulate the amount of emissions credits to be delivered and the schedule for delivery. Offsets are often tracked in an independent registry to ensure they aren’t double-sold or used beyond their valid lifetime (e.g., Markit Environmental Registry, Climate Action Reserve, etc.).
The main purchasers of carbon offsets are typically governmental entities and corporations. Corporations such as Fiji water and Google, for example, have announced plans to go “carbon neutral.” But individual consumers seeking to reduce their overall carbon footprint also have the option to pay towards balancing the amount of carbon emissions they generate from daily activities such as driving, and buying food and commercial goods (calculate your personal carbon footprint here).
Pushed by selective buyers and market competition, carbon offset providers are striving to demonstrate that their emissions reduction projects meet high expectations for legitimacy and effectiveness. More than 20 certification standards from around the world have been developed to establish quality control in the marketplace, actively specializing in niche areas of the market to evaluate CO2 offsets using existing, sometimes shared, and new methodologies (e.g., Verified Carbon Standard, Climate, Community, and Biodiversity Alliance, or Gold Standard). These standards have been established by international bodies like the United Nations, conservation organizations like the World Wildlife Fund, and some have even taken input from large corporations like Weyerhauser and BP. Some certification standards apply only to the regulatory markets, while some are strictly for voluntary markets. For a thorough description and comparison of several common standards, as well as more explanation of CO2 offset terms, we recommend reading Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards by World Wildlife Fund. Depending on how carefully an offset project is designed and whether a formal certification standard is used, some projects carry more credibility than others.
It should be noted that while most carbon offset projects work within the marketplace and use formal certification standards, there are some projects that work “off the grid” and do not seek formal certification; this is typically the case if carbon offset project developers only seek credits for internal use or have a prearranged agreement with an identified buyer.
It may be difficult at first to discriminate between one project and another, but there are a few key criteria that you should look for before purchasing offsets:
- Real greenhouse gas emission reductions – Carbon offset projects should depend on tested and transparent methods for establishing a baseline and calculating the greenhouse gas reductions due to the project activity. Also, offsets should be sold based on documented emissions reductions – that is, emissions reductions should have already happened, and you should not be paying for promises of future action. The best way for a buyer to gain assurance that this has happened is by buying carbon offsets through the carbon market—whether voluntary or regulatory—and ensuring those offsets have been formally certified by available carbon standards.
- Additionality – Any carbon offset project should generate emissions reductions that are above and beyond business as usual, meaning they should be “additional.” For example, if it can be demonstrated that a swath of land is faced with either planned or unplanned deforestation, a project would be considered “additional” if land conversion is avoided by the realization of a carbon forestry project. The objective of finance from carbon credits is that such financing catalyzes action that wouldn’t have happened otherwise.
- Permanence – If there is the potential for a project reversal (that is, a project reverts to its original projected use, such as a deforestation outcome) in which emission reductions are returned to the atmosphere during the life of a project, insurance must be held to protect against those scenarios. For example, a forestry project can insure against the risk of a forest fire by maintaining extra forested acreage not included in emissions reduction calculations. This reserve can then be allocated in the event of a problem.
- Leakage – The project activity should not simply shift emissions from one location to another (i.e., halting logging in one area but spreading logging to other areas). A project must address this question and demonstrate to buyers how the potential for leakage has been addressed.
- Certification – Certification standards exist for both the voluntary and regulatory carbon markets, so all offset projects should be certified to a high-quality standard. The certifying body is a third party that will critically evaluate a project’s merits. There are no such guarantees with uncertified offsets or offsets that have been certified by the same agency that developed the project. Barring special circumstances or arrangements between a buyer and seller, we strongly discourage non-certified purchases.
- Verification – As a part of the certification process, a third party verifier (approved by the certification standard in advance) is required to examine the project and perform an audit of the stated emissions reductions, as well as other project components that must be reviewed. Verifiers are trained to work in particular sectors and provide another layer of scrutiny for offset reliability.
- Environmental and social benefits – Carbon offset projects should have demonstrably positive impacts on the local environment and on human communities in the project area. These ancillary benefits could include protecting habitat for endangered species, creating green-collar jobs, or providing a clean water source
For a complete discussion of how offsets should be judged and definitions of these increasingly common terms, we recommend reading A Consumer’s Guide to Retail Carbon Offset Providers, a report by Clean Air/Cool Planet. Another great resource, published in 2009, is the Responsible Purchasing Guide for Carbon Offsets, published by the Center for a New American Dream.
While carbon taxes are seen by some supporters as a better way to reduce greenhouse gas emissions, most carbon markets in operation today operate in a baseline-and-credit or cap-and-trade fashion. Technically, CO2 offsets can only be generated in a baseline-and-credit system, where individual projects create offsets for removing greenhouse gas emissions (or preventing the release of greenhouse gas emissions) in a manner that would not have occurred under status-quo action. This last piece, referred to as “additionality” is the crucial element in creating CO2 offsets. Establishing the status-quo sets the baseline for a project, and action above and beyond this baseline generates credits.
In a cap-and-trade framework, a finite number of carbon allowances (not the same as offsets) are distributed to market participants, and they are allowed to trade these allowances, or credits, among themselves. The number of allowances/credits is determined by emissions reductions goals and political negotiations, and set low enough to drive market demand. Parties are therefore encouraged to reduce their emissions to the level of the allowances they possess, or purchase additional allowances/credits from members that are below-target. Cap-and-trade systems often allow members to purchase a small proportion of offsets from outside the regulated market to meet allowance assignments.
Several markets have developed to meet the mandates imposed by the Kyoto Protocol, most notably the European Union Emissions Trading Scheme. This is an example of a regulatory market, in which participants are legally required to meet certain standards for greenhouse gas emissions. The California Climate Action Registry and the Climate Registry are other regulatory market based activities in the United States that are pioneering carbon emission standards and cap-and-trade policies in the absence of U.S. commitment to the Kyoto Protocol. As an alternative to regulatory markets, voluntary markets have also developed to meet the growing demand for greenhouse gas emissions reduction credits and trading in the United States (Markit Environmental Registry, based out of the UK is one example). Regulatory and voluntary carbon markets trade slightly different offset products (certified emissions reductions for regulatory markets, verified or voluntary emissions reductions for voluntary markets). The World Bank report State and Trends of the Carbon Market 2011 and Ecosystem Maketplace’s State of the Voluntary Carbon Markets 2011 are up-to-date resources about regulatory and voluntary markets.
Carbon emissions from deforestation are estimated to represent 16-20% of all global greenhouse gas emissions. According to the Food and Agriculture Organization of the United Nations (2005), deforestation – mainly conversion of forests to agricultural land – continues at an alarming rate of approximately 13 million hectares per year (for the period 1990–2005). Deforestation results in the immediate release of the carbon originally stored in the trees as CO2 emissions. Small amounts of CO and CH4 are also released as trees are burned and then left to experience a slower release of emissions from the decay of organic matter.
Forests, especially in the tropics, are considered important carbon “sinks” that sequester carbon by keeping it out of the atmosphere and in the forests and soil. Reducing Emissions from Deforestation and forest Degradation (REDD) is an international effort, orchestrated by interests both public and private, to create a financial value for the carbon stored in standing forests, offering incentives for developing countries to reduce emissions by maintaining forested lands and invest in low-carbon paths to sustainable development. The “REDD+” concept goes beyond deforestation and forest degradation, and includes the role of conservation, sustainable management of forests (community forestry) to explicitly promote the enhancement of forest carbon stocks. Integral to successful REDD program implementation is the full inclusion of Social, Environmental and Governance Safeguards – such as Free Prior Informed Consent, stakeholder engagement, active participation in project design, and respect for the rights of Indigenous Peoples and other forest-dependent communities, transparent benefit distribution mechanisms, etc.
The first commitment period of the Kyoto Protocol excluded forest conservation and the avoidance of deforestation from the Clean Development Mechanism for a variety of political, practical and ethical reasons. There are growing calls for the renewal of the Kyoto Protocol with the inclusion of forests (REDD program) in Clean Development Mechanism schemes for a second commitment period. The idea of REDD entered into formal international discourse at the Conference of the Parties in Montreal in 2005, where forest conservation was linked to greenhouse gas mitigation strategies. The hope had been that prior to the Kyoto Protocol’s expiration in 2012, an agreement would be reached to formally include REDD as a mechanism under the Clean Development Mechanism. Importantly, at the Conference of the Parties in 2011, there was significant agreement to include REDD in the next phase of international diplomacy regarding UNFCCC. While the Kyoto Protocol was ultimately left to expire, international consensus is to include REDD in future climate negotiations– as the countries agreed that REDD is part of the solution to the climate problem and that there should be market mechanisms in place to support this form of climate mitigation.
The REDD concept has seen significant attention over the years as regulatory and non-regulatory entities have sought to help countries become “REDD ready,” drawing significant international attention, and public and private investment. Pilot REDD projects have emerged all over the world, and the voluntary market is experiencing a surge of activity for forest conservation mitigation efforts, transacting 19.5 MtCO2e in 2010. By some estimates financing for REDD+ development could reach up to US$30 billion a year, with significant funding meant to reduce carbon emissions while supporting new, pro-poor development. But as many involved in the process assert, REDD+ activities in developing countries must complement deep cuts in developed countries’ emissions. Both activities are critical to successfully address climate change. To read more updated information on this topic, please see our Other Resources section.
Carbon offsets are sometimes critiqued as a way for wealthy nations or corporations to easily (and cheaply) pay for their pollution rather than actually changing the way they do business. This is sometimes compared to buying papal indulgences, or argued against in even stronger terms (see http://www.carbontradewatch.org for a look at these criticisms).
In most cases, these are honest arguments that boil down to a central idea: if CO2 offsets are used irresponsibly without simultaneously reducing greenhouse gas emissions, ending our global addiction to fossil-fuel consumption, and correcting the injustices in our systems of production and resource extraction, then they might actually do more harm than good.
At ClearSky Climate Solutions, we sincerely agree with this concept. We do need to re-engineer our energy generation systems around the globe and commit to leaving fossil fuels in the ground, in combination with a sincere and effective approach to reducing demand – through reducing consumption and increasing efficiency of the energy we do use. ClearSky also believes that we need to be attentive to past and current injustices that harm the livelihoods of human and natural communities.
Using carbon markets and carbon offsets to combat climate change is complementary to these ideas. Offsets can allow individuals and companies to take action beyond what is required by law (often necessary in the absence of strong political leadership), by acting immediately to compensate for unavoidable emissions. Also, including offsets in regulatory markets can encourage helpful investment in poor nations. Carbon offset projects are increasingly under scrutiny to advance the objectives of sustainable, equitable development and biodiversity conservation, and standards that emphasize these ancillary benefits are one way that offset buyers can dictate their preference for multiple-benefit projects. Climate, Community, and Biodiversity standards, which certified ClearSky’s work in Panama, are one such example of a standard that demands action beyond simple carbon sequestration.
Although there has been a painful lack of meaningful action regarding climate change in the United States, several signs suggest that we may soon join the rest of the industrialized world on this issue. California took the first bold step, as it often does, by legally establishing a compliance, regulatory cap and trade carbon market for large emitters operating within California. This development is vitally important, as it will provide a concrete example of actual economic impacts (positive and negative) of enforcing a carbon market in one of the largest economic blocks in the US. Given the current political climate in the US, it appears unlikely that there will be consensus on national climate change legislation and a consistent policy approach. That said, if sub-national jurisdictions move forward with compliance, legally binding carbon markets – and enough experience accrues in those systems – it would follow precedent that the national level will eventually catch up with the states. Some recent developments include:
- State governments are charging ahead of the federal government to adopt binding agreements for greenhouse gas reduction (see the Center for Climate and Energy Solutions, the Western Climate Initiative, and the California Climate Action Reserve, among other sites).
- The USA formally submitted a voluntary climate action pledge, in accordance with the Copenhagen Accord provisions agreed upon in December 2009. Currently, the USA’s stated goal is to reduce emissions 17% from 2005 levels by 2020, and 83% by 2050. You can keep track of all of the national pledges at the Climate Action Tracker website.
- The USA broke records by installing more than 10,000 megawatts of wind energy capacity in 2009, boosting our nation’s overall wind capacity to more than 35,000 megawatts. See more figures from the US Department of Energy.
- Numerous attempts at climate change legislation have been drafted and presented in the Senate and House of Representatives. There currently appears to be little hope of any comprehensive legislation passing, but there is good potential for portions of a climate change legislative package to be split off and passed. Examples include: increased efficiency standards, renewable power portfolio standards, automobile corporate average fuel economy standards, and smart grid infrastructure.
The Environmental Defense Fund offers the following comments on this difference:
Carbon offsets are verified tools to achieve greenhouse gas emission reductions. Buying a carbon offset allows you or your company to claim a reduction of your carbon footprint.
A renewable energy certificate, or REC, is proof that a megawatt hour of renewable energy has been supplied to the market. Purchasing these certificates helps develop the renewable energy supply by subsidizing the higher cost of renewable energy. While renewable energy certificates provide proof that renewable energy has been supplied, they do not offer verified proof that greenhouse gas emissions are reduced.
Purchase offsets when you want to by an emission reduction to reduce your net carbon footprint. Purchase renewable energy certificates when you want to buy “green power.”
While both products are ways to stimulate change toward a green economy, only certified carbon offsets can result in fully accountable benefits in the effort against climate change.
Back to Top