Reduce what you can, offset what you can’t

Despite their effectiveness as a stop-gap measure to reduce carbon emissions in the near term, the scale of abatement that can be achieved through carbon offsets is incommensurate with the problem of climate change

The Middle Ages saw a spurt in incidents of transgression of social and cultural boundaries. The then reformists attributed the spread of this moral turpitude in society to the ‘letter of indulgence’. The letter, upon its purchase from the Catholic Church, either by prayer or through donation of money, acted as a remission of sin and provided the buyer an easy way for atonement. Today, the criticism surrounding the voluntary carbon offset market is precisely this—it is offering polluters a convenient means to buy their way out of eco-guilt, giving them the right to the forgiveness of their sins of emissions.

A stop-gap solution

Carbon offsets can be understood as a credit obtained for abating one metric tonne of greenhouse gas emissions by paying someone else to absorb or avoid the release of an equal amount of emissions elsewhere. This is typically achieved by investing in renewable energy projects (solar, wind, hydro, or biomass), energy efficiency projects like distribution of LED bulbs, biosequestration through increased afforestation, capture and destruction of gases such as methane produced in industrial processes, and CCUS activities to utilise the captured carbon by converting it into plastics or biofuels, and store it in geological formations. However, despite their effectiveness as a stop-gap measure to reduce carbon emissions in the near term, the scale of abatement that can be achieved through offsets is incommensurate with the problem of climate change.

Holding the increase in global average temperature to well below 2°C and limiting the temperature increase to 1.5°C above pre-industrial levels, as envisaged in the 2015 Paris Agreement, would require peaking of the global greenhouse gas emissions by 2030 and reaching the stage of carbon neutrality by 2050. The nationally determined contribution proposed by signatory countries to cut emissions and the sheer volume of global capital chasing environmentally responsible investments in these countries is spurring the sustainability efforts of most corporations. Besides, addressing the growing investor demand for climate-related non-financial disclosures and stakeholder concerns on impact of material ESG (environment, social, and governance) issues on business sustainability has become an imperative. Voluntary carbon offsets have become arguably the most preferred pathway for accelerated decarbonisation, with polluters looking for cheap ways to make big claims about climate action and maintain their social licence to operate. 

This is not to say that voluntary carbon offsets have no role to play in emission abatement. Building integrity across the value chain from offset creation to aggregation to trading and retirement can not only help in realising the proposed emission reduction, but also setting up a funding mechanism to protect natural capital. For a carbon offset to be credible, it must fulfil the additionality criteria—whether the emission reduction would have happened without the offset. As an example, an offset project that pays a thermal power plant in India to procure biomass pellets for co-firing with coal, which the generator would have done anyway in compliance with government regulation, cannot be considered additional. Furthermore, the offset should demonstrate permanence and absence of leakage. Consider, for instance, a project to undertake afforestation with its carbon sequestration potential forecasted for a certain number of years. For sequestration to continue for the stated life span of the planted trees, the project must survive premature deforestation. 

On the other hand, if a logging company chooses to clear a forest somewhere else only to spare the one in question, the offset project will result in no net decrease in carbon emissions. Finally, the integrity of the carbon offset cannot be ascertained unless a credible authority independently validates and verifies the project’s baseline and its projected and achieved emission reductions. 

Making offsets work

The market for voluntary carbon offsets is plagued by information asymmetry. Potential buyers are seldom able to verify whether their money is actually being invested, or whether the investments are yielding the proposed emission reduction. This is where standards organisations are responsible for building trust between the buyer and the seller by providing transparency and credibility to the voluntary carbon offset market. These organisations develop standards that ensure offsets address the concerns about additionality and permanence, are backed by real emission reductions, and the retirement of the traded offsets is tracked on a registry so that they are not sold multiple times. 

The standards also provide rules regarding vintage—how recently carbon offsets must have been issued to remain eligible. Thus, if followed in spirit, the buyers can expect offset sellers to deliver on the quantity and quality of their claims. 

A few more suggestions are worth considering to deepen this rapidly growing market. Firstly, the price of a carbon offset should be suitably discounted to reflect the uncertainty around its permanence and ensure that buyers are not left feeling shortchanged by unscrupulous sellers making wild claims about the offset’s forecasted emission reduction potential. Secondly, emissions that can be abated by deploying existing feasible methods of decarbonization should not be put at par with hard-to-abate or non-abatable emissions. 

This will prevent corporations from taking the easy route of voluntary carbon offsets to justify their business-as-usual behaviour and, at worst, actually increase their emissions. Thirdly, standard development organisations should mandate, in their criteria, compliance with the UN Sustainable Development Goals to ensure offset projects, while mitigating emissions, also protect natural capital, improve health and education indicators, and spur economic growth. Fourthly, the geographic reach of offsets should be expanded so that countries that are developing their climate change mitigation and adaptation plans can unlock the true value of their underutilised carbon-guzzling assets. Finally, to dissipate concerns about greenwashing and prevent buyers from making exaggerated claims around emission reduction, all stakeholders should come together to develop a formal governance structure and harmonised accounting and verification standards for offset projects. This will also enhance the integrity of the offsets market.

Voluntary carbon offsets are increasingly becoming a source of criticism and controversy. Like indulgence of yore, they risk worsening the buyers’ energy-consuming ways. Yet, they can play an important transition role if paired carefully with a long-term emission reduction strategy.

Shreyans Jain is a sustainability consulting practitioner with Accenture. The views expressed in this piece are personal.

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