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The Price We Pay: Unpacking the Pros and Cons of Carbon Offsetting

Updated: Jun 27, 2022

By Bharath Tripuram

The concept of carbon offsetting, which allows countries, companies, or individuals to reduce emissions abroad where it is expensive or unavailable to do it themselves, first arose in the late 1980s, as policymakers began grapple with how to mitigate climate change. In 1997, the UN Kyoto Protocol introduced Clean Development Mechanism (CDM), the first global, environmental investment and credit scheme.

Since then, carbon offsetting has been widely adopted. At least 36% of S&P 500 companies buy carbon offsets, despite uncertainty of their place within net-zero strategies. Below, I will explore the role technology can play in accelerating carbon reduction on site (hence reducing the need for carbon offsetting), before discussing how carbon offsetting can occur where technology is not advanced enough, or too expensive to be implemented. There are two kinds of markets for this - compliance or voluntary markets, and two kinds of projects within these markets – emission reduction and carbon removal – which will be explored in this article.

It is important to note that while a focus on carbon emissions is an essential part of moving towards a better future for upcoming generations, we must remember it is one of many materiality issues that contribute to our biosphere health.

Why do we need to cut down on Carbon Emissions?

Simply put, when greenhouse gases are released; carbon dioxide, methane, nitrous oxide, and fluorinated gases, sulphur hexafluoride, hydrofluorocarbon, and perfluorocarbons, ozone, and water vapor - they trap the sun’s heat and consequently cause the average global temperature to rise, for instance, global warming. Cutting these emissions requires a reduction of emissions using low carbon power sources, achieving a lower output of greenhouse gasses.

As awareness of global warming increases, technology has been a catalyst for change and is rapidly being implemented as a solution to carbon emissions. For example, Mootral, a British-Swiss AgriTech company has developed a natural feed supplement that significantly reduces methane emissions from cattle. While others, such as Carbon Engineering and Climeworks, use Direct Air Capture (DAC) methodology to remove carbon emissions from the atmosphere for underground storage.

Carbon offsetting v Carbon Credits

Where the right technology is not available, or too expensive, companies and individuals can account for unavoidable emissions by embarking on carbon offsetting. This is based on calculating how much CO2 is emitted by a certain activity and then funding a project designed to reduce emissions by the same amount elsewhere, for example as part of a renewable energy or forestry project. This is supposed to “neutralise” the effect of emissions. In simple words, it is the compensation of emissions that cannot be avoided, by paying someone else to save – sequester – Greenhouse gases. The tradable unit for carbon offset projects is carbon credit. One carbon credit is equivalent to one tonne of CO2 emissions.

Carbon markets work in a similar way to financial markets. A “carbon trade” agreement is made between a buyer and seller of carbon credits. Those who reduce emissions or sequester carbon, receive payments and those who decrease emissions can buy carbon credits to offset their emissions.

Types of Carbon Markets

There are two types of carbon market: compliance market, also known as regulatory market and voluntary market. According to Ecosystem Marketplace, the market for voluntary offsets came close to US$300 million and traded almost 100 million metric tons of carbon dioxide equivalent in 2018, the latest year for which data is available. Estimates of the size of the global carbon compliance offset market range between US$40 billion and US$120 billion.

Compliance schemes are currently aimed at the most “energy intensive” emitters (at a company level). These include power generators, oil refineries, iron and steel production and processing companies, those who produce commodities such as cement, glass and ceramics and the paper and pulp industry. On the other hand, the voluntary market serves businesses (typically blue-chip corporations), government departments, NGOs and single individuals wanting to be accountable for their carbon footprint and help drive the transition to a low-carbon future.

Whether a compliance or voluntary market, the concept of “additionality” (among other criteria) is key for carbon-offset projects. To qualify as a genuine carbon offset, the reductions achieved by a project need to be ‘additional’ to what would have occurred if the project had not been carried out. If a project is viable in its own right, for example through the sale of electricity, or because of government funding, regulation, or other policies, then it cannot be used as an offset project as it would have been undertaken regardless of the investment secured through carbon markets.

Emission Reduction v Carbon Removal

There are two types of carbon offsets: emissions reduction (or emissions avoidance) and carbon removal. Most offsets you see being offered today are emissions reduction. Here are some examples of both types of offsets:

Emissions reduction projects:

- Renewable Energy

- Energy Efficiency

- Carbon Capture and Storage (CCS) during industrial processes

- CCS on industrial facilities

- CCS on fossil-fuel power plant

- Cleaner Cookstoves

- N2O abatement

- Methane abatement

Carbon removal projects:

- Enhanced Weathering

- Afforestation/Reforestation

- Soil carbon enhancement

- Ecosystem restoration

- Direct Air Carbon Capture and Storage (DACCS)

- Bioenergy with carbon capture and storage (BECCS)

- Mineralisation

- Enhanced weathering

Advantages of Carbon offsetting

Carbon offsetting helps environmental projects that can’t secure funding on their own. Importantly, it gives businesses the opportunity to reduce their carbon footprint where they can’t directly cut emissions at their project site. Some industries, like heavy equipment or ocean shipping do not have low-carbon options available to serve their markets at the present time. By helping fund environmental projects that reduce emissions, businesses can make up for the emissions they can’t eliminate themselves. In other cases, their footprint is already small, but they want to do more.

Carbon offsetting provides valuable resources to projects that generally either sequester carbon, through forest growth and other mechanisms or avoid emissions, such as renewable energy generation or clean energy appliances. By focusing on projects that are less likely to attract other types of funding, they provide a valuable alternative to conventional finance mechanisms.

Disadvantages of Carbon offsetting

Offsets alone are not enough to deliver the rapid and deep decarbonisation that is required to avoid the worst effects of climate change and limit global warming to 1.5°C pathway. Although carbon offsets are useful for claiming individual or organisational carbon neutrality, not all projects have the same credibility. Some projects have a less permanent effect on carbon removals and there are additional risks associated with certain types of carbon offset projects. For example, carbon offset projects relevant to afforestation or reforestation, soil carbon enhancement, ecosystem restoration may have less permanent effect in storing carbon if not properly maintained and implemented. These kinds of projects may have a high risk of reversal of CO2 into the atmosphere. Whereas carbon offset projects relevant to direct air carbon capture and storage, bioenergy with carbon capture and storage, mineralization, enhanced weathering have long-term permanent effect in storing/removing CO2 from atmosphere. Therefore, choosing the right carbon offset project is very important for claiming a credible carbon neutrality and net-zero targets.

Forward looking Ultimately, eventually moving away from carbon offsetting will be a good thing, with a best case scenario being less carbon produced at a site for starters. This will happen naturally where the tax on carbon is higher. In the future, we may see prices of one carbon credit reaching as high as $120 or as low as $70 in 2050 compared to the present prices ($3 to $5/tonne). The imposed criteria for credibility of the projects is becoming more rigorous and strict, and I believe we will see a shift in the kinds of projects eligible in the future.

Furthermore, while cutting down on carbon has a vital role to play in helping protect our planet and leave a healthy home for the generations of the future, it is important to remember that biosphere health goes much further than carbon as a standalone factor for consideration. Some of the fundamental, and as important, elements we help our clients to understand, measure and forecast are around energy use, water management, waste, and pollution, biodiversity.

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