Emily Benson and Catherine Puga
Carbon offsets have exploded in popularity as companies and governments make carbon-neutral and net-zero pledges. Offsets are often seen as a win-win situation: emitters can invest in needed environmental projects, and environmental projects can receive the necessary funding, leading to declining greenhouse emissions. However, carbon offsets are often misunderstood and poorly regulated, may not offer advertised carbon benefits, and can disincentivize decarbonization.
Carbon Offsets: An Easier Path?
Emissions and net-zero goals are measured in absolute terms. Carbon neutrality means that for every single ton of greenhouse gas (GHG) emissions, one ton either has to be removed from the atmosphere via sequestration or stored in natural carbon sinks such as soil, forests, and oceans. The more an individual, company, or country emits, the more GHG emissions must be captured and sequestered. However, the math requires consideration of which emissions an emitter regards as “theirs.” Scope 1 emissions are those that an emitter is directly responsible for, such as the carbon emissions from fuel combustions in a factory. Scope 2 emissions are indirect emissions associated with the purchase of electricity, steam, heat, and cooling. Scope 1 and 2 emissions are accounted for when calculating an organization’s total GHG emissions. There is debate about whether the math should include Scope 3 emissions, which are often much harder to measure. Scope 3 emissions cover indirect emissions found along an emitter’s value chain. For instance, a company selling a t-shirt would count the emissions from the factory as Scope 1 emissions, the electricity powering the headquarters and retail locations as Scope 2 emissions, and emissions generated in purchasing the raw cotton and transporting the finished product as Scope 3. The Environmental Protection Agency’s GHG Corporate Protocol does not mandate that organizations disclose Scope 3 emissions, but environmentalists argue that they need to be included, as they often make up the bulk of an organization’s emissions.
Even if an organization appropriately calculates its total GHG emissions and chooses to measure and incorporate Scope 3 emissions, achieving carbon neutrality is easier said than done. Carbon capture and artificial sequestration are expensive and difficult to deploy on a large scale. Natural carbon sinks, such as those in soil, forests, and oceans, are under threat from climate change and human activity. In essence, there are not enough capture, sequestration, and carbon sinks to go around. In principle, emitters should be motivated to reduce their overall GHG emissions. After all, the less one emits, the less one needs to sequester or rely on carbon sinks. However, it is nearly impossible for GHG emissions to be eliminated from every single industry. Offsets present a convenient solution—they can account for emissions that cannot be eliminated and support the development of carbon sinks and carbon sequestration tools.
The principle is simple: for every ton of CO2 emitted, the emitter purchases an offset worth one ton of CO2. Offsets are normally derived from projects that either stop an equivalent amount of carbon from entering the atmosphere or remove it from the atmosphere.
There are two separate categories of offset projects. Avoidance and reduction projects are ones where emissions are avoided or mitigated at the outset. Removal projects support the capture and sequestration of GHG emissions, such as through reforestation or carbon capture projects. Oxford University has established a taxonomy of different kinds of carbon offset projects based on how it is generated, its storage capacity, and its estimated longevity (see Figure 1).
In 2019, the most popular offset projects were in forestry, renewable energy, energy efficiency and fuel switching, household devices, waste disposal, chemical processes and industrial manufacturing, and transportation. Forestry projects, Category IV on the Oxford taxonomy, can range from projects that plant trees to projects that pay to prevent deforestation in a certain area. Renewable energy projects, Category I, include building wind and solar farms. Energy efficiency projects and household devices projects support the use of more energy-efficient technology, usually falling into Category I, such as projects that distribute gas stoves to communities that still rely on emission-intensive wood and coal burning stoves. Waste disposal projects, also Category I, support the destruction and sequestration of methane gas that is generated as waste decomposes in a landfill. Direct industrial carbon capture and sequestration fits into Categories III and V.
Figure 1: Oxford Taxonomy of Carbon Offsets
Source: Myles Allen et al., The Oxford Principles for Net Zero Aligned Carbon Offsetting (Oxford, UK: University of Oxford, September 2020),
However, not all offsets are created equal. In order to be effective, an offset project must meet four general criteria: additionality, permanence, non-leakage, and being counted only once. These are standards that are broadly articulated in the field, including by the State of California for their offset program. While these four standards are generally agreed on, there remains significant disagreement over how to apply them to assessing carbon offset projects and whether they are appropriately measured. In other words, the challenge is less in the definition than in the implementation.
Additionality requires that the offset leads to a reduction in GHG emissions that would not have happened without the financial support of the offset. Many renewable energy projects, such as developing solar or wind farms, are often already well funded, and funds from offsets do not offer additional benefits. Permanence requires that the benefits from the project be consistently available. This is particularly challenging with forestry schemes; many trees need to thrive for close to 100 years to develop their sequestration capabilities, and extreme weather events such as wildfires threaten forestry projects. Leakage occurs when the behavior that an offset is trying to prevent moves to a different area. If an offset protects an area of a forest, deforestation shifting to an unprotected area represents leakage. Finally, in many offsetting projects, offset sellers and licensers often rely on the same piece of land or same renewable energy project to support multiple carbon credits, making it easy for the carbon saved to be double counted.
The prices of carbon offsets need to strike a delicate balance. They need to be high enough to incentivize pursuing achievable decarbonization rather than buying large amounts of cheap offsets but also low enough to motivate purchasing in lieu of doing nothing. In order to meet Paris Agreement goals, the International Monetary Fund (IMF) estimates that carbon prices will need to be between $50 and $100 per ton of CO2 (tCO2). The IMF estimate is already on the low end. The Bank of England increased its forecasted price to $150 by the end of the decade. The price in voluntary schemes ranges from $0.45 to $47. Compliance schemes tend to have higher carbon prices. The European Union’s Emission Trading System (ETS) carbon price reached €59 ($70) this year.
A History of Offset Schemes
Offsetting schemes are either voluntary or compliance based. Compliance schemes are created and regulated by government authorities. The very first offsetting scheme was compliance based and established in the wake of the Kyoto Protocol. The United Nations established the Clean Development Mechanism (CDM), which granted emission-reduction projects in developing countries’ credits equivalent to one ton of CO2. These credits could then be sold to industrialized countries to meet some of their emission reduction goals under the Kyoto Protocol. This was the first and largest offsetting system. Mandatory compliance systems have since evolved, with CDM and other mandatory schemes serving as a springboard for voluntary offset markets.
The largest carbon market today is the European Union’s ETS. The EU ETS is a cap-and-trade system. The ETS in part establishes rules for how many tons of CO2 emissions are permissible for a selected group of sectors on an annual basis. Offset projects used to be a component of the EU ETS system. Until 2020, the European Union allowed ETS participants to use international offset credits outside of the CDM to meet their obligations, but that practice ended, partly due to concerns over the efficacy of offsets and out of a desire to see a more robust framework for carbon markets under the auspices of the Paris Agreement. California implemented a statewide offset registry for companies operating in California’s cap-and-trade system. Globally, there are 61 carbon pricing initiatives in place or scheduled for implementation, with 14,500 associated registered crediting or offset projects.
Voluntary schemes are popular among companies that have set net-zero emissions goals. Decarbonization is often easier said than done, particularly for companies for which goods and services are particularly carbon intensive. The business model of Lyft, a popular ride-sharing app, is entirely predicated on using vehicles as transit. Most cars still rely on fossil fuel. A zero-carbon Lyft that does not use carbon offsets to achieve that goal would require every single ride to occur in an electric vehicle. In the short term, this is implausible and unlikely to be profitable. Instead, Lyft purchases offsets equivalent to the amount of emissions from every ride to meet its net-zero goals. Businesses account for 75 percent of the voluntary market. For instance, companies such as Amazon, BP, and Google also have met or intend to meet carbon-neutral goals through offsets. In 2019, the voluntary offset market reached a value of close to $300 million, with purchased offsets accounting for almost 100 million metric tons of CO2 equivalent. By contrast, the mandatory carbon market has a traded value of $45 billion. Governments have more funding available for offsetting, in part because mandatory schemes have much higher carbon prices, which raises the cost of mandatory offsets. However, the voluntary market is growing. In 2019, the CO2 tonnage claimed to have been offset doubled from 2017.
What’s the Catch?
Offsets seem like an easy win. However, the mandatory compliance market is moving away from carbon offsets, even as the voluntary market explodes in popularity. Offsets are hard to monitor and manage, and they often incentivize bad behavior. Revisiting the example of Lyft, the concern is that, by using cheap offsets, Lyft will not have the incentive to invest in directly reducing their emissions through encouraging carpooling, establishing alternate transit options such as bicycles and electric scooters, and investing in electric vehicles. This is not even considering Lyft’s Scope 3 emissions. If Lyft purchases electric scooters from a manufacturer, how should the emissions generated in the production of the scooter be counted by Lyft? Environmentalists argue that climate goals excluding Scope 3 emissions often ignore a necessary measure of climate impact. Companies would obviously prefer not to count their Scope 3 emissions because it increases the amount that needs to be offset or neutralized. Practically speaking, even companies that want to include Scope 3 emissions in their GHG balance sheets have a difficult time measuring Scope 3 emissions.
Assuming that a company has exhausted every other means of decarbonization and has appropriately calculated its emissions, offsets can be useful since they can directly contribute to the absorption and storage of carbon. The European Union stopped the use of CDM offset credits in their ETS in 2013 after a report found that most CDM projects did not pass the test of additionality, meaning that the European Union found that most projects would have happened or were already happening without the CDM payment. For instance, if there was already a deforestation law on the books that was being enforced and protecting an area of land, a CDM certificate was not going to make an area of forest any more protected. A European Commission survey found that 85 percent of offset projects had no environmental benefits. An extensive ProPublica investigation into deforestation offsets in Brazil found projects did not offset the amount of carbon they were supposed to, were quickly reversed, or could not be accurately measured.
A major problem is in how carbon offsets are monitored and measured. There are five main players involved in a carbon offset transaction: (1) project developers, such as developers building a renewable energy plant; (2) retail traders, who buy large amounts of credits from the supplier and bundle those credits into portfolios; (3) brokers, who purchase from a retailer trader and market them to an end buyer; (4) end buyers; and (5) standard-setters and auditors that certify projects according to internal criteria. There is no single accreditor or monitor for voluntary carbon offsets. Instead, companies rely on third-party monitors and auditors such as Gold Standard, Green-e, Verra, and the International Carbon Reduction and Offset Alliance (ICROA). In essence, these organizations identify different projects, such as tree planting schemes, quantify the amount of carbon offset, package and sell offsets, and then engage in auditing to ensure consistency. Some organizations, such as ICROA, do not actually sell offsets but certify other organizations against their internal standards.
However, every organization has its own standards and best practices, making it difficult for companies and individuals to fully assess whether or not a purchased offset is actually beneficial. Big companies such as Unilever and Microsoft have in-house teams that assess potential offset projects, while smaller companies need to rely on third-party auditors, further contributing to a mishmash of standards, policies, and projects. This multitude of parties makes it easy for an offset project to be double counted.
Reporting becomes even more challenging when considering reporting conflicts between the private and public sectors. The Paris Agreement requires that governments make an annual GHG inventory report. The private sector clearly contributes to a country’s emissions but does not always align its climate goals with the country’s climate goals. Even if there is harmonized reporting, it is unclear if private sector carbon offsets count toward a country’s nationally determined contribution (NDC) under the Paris Agreement. Without some sort of uniform measurement of GHG emissions and offsetting projects that is inclusive of the private sector, it is extraordinarily difficult to have a real picture of global decarbonization needs and efforts.
Even assuming strong and uniform standards and measurements, monitoring offsets is difficult. For forestry projects—the most popular kind of voluntary offset project—it is almost impossible to determine if an offset paying for one tree not to be chopped down results in another tree being chopped down in its place, which would negate any amount of carbon saved. For reforesting schemes, data is often very fragmented, and it is challenging to map the growth of new trees. For renewable energy projects, even if they pass the test of additionality, there are other issues. Solar panel production is often carbon intensive, and the question of whether or not carbon inputs should count against the carbon saved when calculating carbon offset is not clearly resolved. Additionally, the amount of energy generated by renewables is not consistent, and efficacy can drop as the technology ages. In other words, solar panels produced in certain parts of the world may be far less carbon intensive than others, further complicating the carbon offset market. If offsets have a lower carbon benefit than they claim and the company is still emitting because they believe that their emissions are covered by an offset, then there are more net emissions than there were before the offset. In other words, absolute emissions rise.
Another major challenge is that many projects are based in the developing world and in remote areas where monitoring is particularly difficult and auditors run into issues with rule of law. For instance, a reporter visited an offset project that ostensibly paid for deforestation protection in Brazil and found that local political leaders reversed conservation measures amid plans to expand agribusiness, leaving project managers with little recourse.
Of active offsetting projects in the voluntary market, 44 percent are based in the developing world. Beyond monitoring challenges, this reality leads to deeper questions about the broader impact of offsets in developing countries. Most voluntary offset buyers are from the United States, France, the United Kingdom, and Germany—home to some of the world’s biggest emitters. These companies purchase offsets in developing countries that are extremely vulnerable to climate change. Projects that fund cleaner cookstoves in a developing country seem to place the burden of decarbonization on people who already emit very little compared to the organizations paying for those cookstoves. On the one hand, offsets could be an important source of funding. Gabon is approximately 85 percent rainforest, and as a result, it is one of the world’s few net sequesters of carbon. The Gabonese government has partnered in selling carbon offsets at $10 a ton, receiving payments not to deforest and then using that funding to pay down sovereign debt.
Other countries along Africa’s Atlantic coast have suffered deforestation as forests are cleared to make way for cash crops such as cocoa, palm oil, and rubber. However, cash crops provide more reliable income for residents than carbon offset payments, which trickle down through multiple stakeholders. Schemes that pay workers not to do something struggle to be successful. In some circumstances, people receive the payment and then choose to deforest anyway to accrue additional profits from agribusiness. Proponents of such offset schemes argue that the system could work, but the payments simply are not high enough or reliable enough for local residents. In other words, more funding is needed. Critics believe that developing countries should receive climate financing to support energy transitions, but offsets are not the best way to achieve funding. Most carbon offset schemes do not account for the fact that residents need to have income alternatives. Oxfam reported that, in 2004, approximately 20,000 Ugandans, many of them farmers, were evicted to make way for a company selling carbon offsets on their timber plantations. This illustrates why the offset is not always effective and not always monitored and measured correctly. It is easy to see how carbon offsets can be out of sight and out of mind for many of the world’s major emitters that rely on carbon offsets to meet carbon neutrality goals. In the meantime, this delays pursuing emission reductions through changes in production, business models, and supply chains.
Carbon Offset Futures
Even as mandatory ETS systems reconsider the use of certain carbon offsets, more companies are making net-zero pledges and embracing carbon offsets. The Institute of International Finance estimates that the voluntary market could reach $100 billion annually by 2050. There is a private sector task force headed by Mark Carney, a former governor of the Bank of England, that is working to scale voluntary carbon offset markets. In the eyes of the task force, carbon offsets will be a necessary part of reaching climate goals, as the size of voluntary markets remains too small. After all, 18 oil majors have net-zero goals and will need to erase 3.3 billion metric tons of annual emissions, 18 times the amount offset in 2018. On the other hand, climate groups argue that oil majors should not be relying on offsets to meet their net-zero goals and should instead focus on reducing emissions within their supply chains and introducing renewable energy sources when possible. The Science-Based Targets initiative (SBTi) disapproves of the use of carbon offsets for short-term climate plans until a company has tried every other available option, such as switching to renewables or making supply chains more efficient.
Policymakers are faced with a quandary. There are significant problems with how carbon offsets are measured, monitored, and traded. However, reforming and streamlining the system could make it even more popular when the goal should really be to encourage decarbonization strategies from some of the world’s biggest emitters. It would also be difficult to implement standardization across the 14,500 carbon offset projects that currently exist.
There have been proposals to extend the European Union’s ETS system to incorporate voluntary commitments. The European Union used to allow international carbon offsets but banned them in 2021 due to concerns about their effectiveness and integrity, leading to concerns about whether bringing them back for voluntary commitments would have a positive effect. California established an offset registry for companies participating in their cap-and-trade system. However, it has been subject to multiple criticisms that the offset registry does not appropriately monitor or manage projects, leading to systemic over-crediting. Extending this system to cover other states or requiring companies in the United States to only use offsets approved by California would likely not have the desired impact. Despite these challenges, lawmakers continue to move forward on supporting carbon offset systems. The Senate passed a bill asking the U.S. Department of Agriculture to create a certification program for farmers, ranchers, and foresters wanting to participate in voluntary carbon offset projects. The path forward in the House is unclear, but there appears to be bipartisan support in the Senate.
There have also been attempts to develop some sort of global system for carbon offsets. Article 6 of the Paris Agreement would establish a new international carbon market for the public sector that is also intended to engage the private sector and voluntary markets. If established, it would replace CDM. At COP24 (COP shortened for Conference of the Parties), negotiators could not reach an agreement on implementing Article 6. Developing a rulebook and setting implementation goals for Article 26 is a priority going into COP26. This will be challenging, despite the fact that it is generally agreed that there needs to be a standard framework of rules, accounting, and monitoring for carbon markets.
Conclusion
Voluntary carbon offsets sit right at the intersection of many of the problems plaguing wide-sweeping environmental policy and environmental political economy. While it is obvious that the voluntary offset market needs to be reformed, it is not at all clear how it should be. Offset markets are messy from beginning to end. It is difficult to quantify the total amount of offsets needed because it is difficult to calculate the total GHG emissions of an organization. It is difficult to ensure that every other avenue for decarbonization has been exhausted. It is difficult to reach a fair and balanced price for the offset, particularly in the context of the debate surrounding global carbon pricing. It is difficult to pick an offset project to support based on the multitude of standards. It is difficult to assess whether a project will have the intended effect and if the benefits will remain consistent. It is difficult to monitor an offset project once it has been implemented and paid for. In sum, relying on offsets to meet global decarbonization needs is risky. True decarbonization will require major shifts across infrastructure and industry.
Offsets should play a role, but that role will not be as large as proponents hope. Oxford has proposed four new principles for carbon offsets in the lead-up to COP26. First, the number one priority should be to prioritize reducing company emissions first and then ensuring the environmental integrity of any offsets used with strict disclosure rules. Second, for the offsets that are used, offset projects that support carbon removal should be prioritized. Third, among projects that support carbon removal, emphasis should be placed on long-term storage, removing carbon from the atmosphere almost permanently. Fourth, governments should support the development of a market for net-zero aligned offsets. In the figure above, projects fitting in boxes III and V of the Oxford taxonomy should be the highest priority offsets. Companies should also have to prove that they pursued other decarbonization strategies before turning toward offsets to meet their goals.
Voluntary carbon offsets are also too cheap, and pricing is too inconsistent. The voluntary carbon offset market should be included in ongoing discussions about global carbon pricing and emissions trading systems. While some projects such as cleaner cookstoves provide important benefits, they should not be treated as something that counts against a company’s emissions. Climate finance for developing countries should not be funneled through offset projects, and projects in the developing world should be assessed with a much more critical eye toward broader social impact. More broadly, offsets should not be the primary tool used to finance climate projects. Climate change is a global crisis, and every possible tool should be deployed; after all, something is better than nothing. Offsets, without reform and without a narrower scope, do not meaningfully contribute to climate action and detract from other, more long-lasting decarbonization strategies.
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