Carbon offset

A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO₂e). One ton of carbon offset represents the reduction or removal of one ton of carbon dioxide or its equivalent in other greenhouse gases.

There are two types of markets for carbon offsets, compliance and voluntary. Compliance markets are those that are mandated by a regulatory body. They create legally binding caps on the total amount of carbon (or CO2e) that countries, companies, and other entities are legally permitted to emit. Offsets have historically been viewed as an important policy tool to support a transition to a lower emission market. The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) established a cap-and-trade system that imposes national caps on the greenhouse gas emissions of high-income countries that ratified the Protocol. The European Union Emissions Trading Scheme is a regionally regulated trading scheme regulated by the European Commission.

Within the voluntary market, demand for carbon offset credits is generated by individuals, companies, organizations, and sub-national governments who purchase carbon offsets to mitigate their greenhouse gas emissions to meet carbon neutral, net-zero or other established emission reduction goals. The World Bank was a leading entity to develop the early voluntary carbon offset market and related certification methodology. There are several offset standards. The World Bank recommends Voluntary Carbon Standard (VCS), Gold Standard (GS), Community Climate Biodiversity Standard (CCB), ISO 14064-2 and W+ Standard. There are a multitude of smaller entities developing novel voluntary carbon offset concepts.

Carbon offsets typically try to match the offset in a similar timeframe as when the offset occurs (generally within 5 years).

Minimum characteristics

Quality carbon offsets need to meet several criteria.

Carbon offsets

A carbon offset is a planned action to counterbalance the adverse effect of emitting carbon dioxide into the atmosphere because of business or other individual endeavours, particularly when measured and operated as part of a business-related agenda.

Minimum characteristics

Quality carbon offsets need to meet several criteria.

Primarily, a quality offset credit should represent no less than a metric tonne of surplus, perpetual, and otherwise available CO2 emission removals or cutbacks (i.e., measurability). Next, a quality offset credit should emanate from activities that do not substantially add to environmental and social harms.

Other criteria for quality carbon offsets include:

Additionality: Projects cannot exist without revenue derived from carbon credits

Verification: Monitored, reported and verified by a credible third party.

Permanence: Carbon removal or reduction will not be repealed.

Avoid Leakage: An increase in emissions should not occur elsewhere or account for any that occur.

Types

Four main types of carbon offset projects exist, namely forestry and conservation, renewable energy, community projects, and waste to energy.

Forestry and Conservation

These projects maintain or redevelop natural carbon sinks (e.g., planting trees, safeguarding surviving forests at high risk of deforestation, etc.). These projects also present several benefits in addition to carbon reduction, such as biodiversity and ecosystem protection, and broader economic and social benefits, such as job creation and health care for local communities.

Renewable energy

Renewable energy offset projects avoid GHG emissions by replacing fossil fuel-derived energy with renewables (e.g., solar, wind, biomass, hydro sites across the world, etc.). These projects offer regions and communities the opportunity to benefit from renewable technology while also creating jobs locally.

Community projects  

A community-based offset project introduces energy-efficient methods and GHG emission reduction technology to undeveloped communities around the world. Hence, these projects become beneficial to whole constituencies from education and empowerment perspectives.  The projects make these sections more sustainable, while also prospering the people.

So, not only are projects purely philanthropic but also able to offer direct benefits like carbon credits to organizations. For instance, Ethiopia's female-led Water, Sanitation, and Hygiene (WASH) project offer hygienic water to neighborhoods by repairing and financing longstanding upkeep for wells.

This results in carbon emissions reduction because families stop burning firewood to boil water, which will protect local forests, prevent carbon emissions, and reduce indoor smoke pollution.

Female-led groups that offer work to community women oversee the project, besides the environmental and health advantages.

Long-established cooking methods such as charcoal and burning wood often inside the home have given way to the use of low-smoke stoves as exemplified by the Darfur Sudan Cookstove Project in Darfur, Sudan. The benefits include reducing the damaging health effects and emissions of indoor smoke, including the effects of deforestation. The regional women and girls now spend less time collecting firewood, and cooking as they become more empowered and educated.  

Waste to energy

These projects use municipal, industrial, or agricultural waste as a resource or raw material and transform it into a usable form of energy. The conversion cuts emissions from deforesting land and/or burning fossil fuels (e.g., methane capture and conversion to electricity), offering local communities access to clean and affordable energy while also avoiding the air pollution caused by burning solid fuels, such as firewood.

Outlooks for voluntary carbon markets

The voluntary carbon market (VCM) is a decentralized market where private actors voluntarily buy and sell carbon credits that represent certified removals or reductions of greenhouse gases (GHGs) in the atmosphere. The VCM started in the 1990s.

The voluntary carbon market (VCM) has been growing rapidly in both the volume of carbon credits and in interest from project developers, investors, and buyers looking to meet corporate climate commitments. The volume of VCM credits could increase by 15 times from 2020 to 2030.

At the UN Climate Change Conference in Glasgow, COP26, where consenting Delegations to the Paris Agreement conclusively settled on Article 6, Carbon markets received much attention regarding how to use and trade carbon credits under the Agreement.  Charitable and personal initiatives drive the VCM rather than government regulations.

Governments' involvement with the VCM is through establishing guidelines, rules, and safety measures that affect VCM endeavours, producing environments that favour VCM programs or projects, and supporting VCM programs or projects within their territories.

How the voluntary carbon market links to the Paris Agreement and Article 6

Private standards rather than international or national regulatory bodies govern the VCM.  Yet, VCM-related programs and projects may help nations attain their obligations as in the Paris Agreement.

To do so, VCM activities will need to comply with the Paris Agreement Article 6 rules that were finalized in November 2021.

How greenhouse gas reductions and removals are accounted for in the voluntary carbon market

Clear and commensurable greenhouse gas (GHG) audit is fundamental to guarantee the trustworthiness of VCM events. Robust GHG accounting follows common principles and is supported by credible and robust standards. GHG emission reductions and removals from VCM projects are accounted for at the activity level and used to meet climate (e.g., net zero or carbon neutrality) targets of companies. Governments that engage in jurisdictional programs, in particular in Reducing Emissions from Deforestation and Degradation Plus (REDD+), account for GHG emission reductions and removals associated with land use change in a certain area.

Challenges in the carbon offset markets

The voluntary carbon market is experiencing rapid growth and a surge in interest from stakeholders around the world. Its challenges are among those typical for developing initiatives: insufficient governance, distrust, and the missing link to the compliance market.

Insufficient Governance

Distinct from carbon allowances in the compliance market, where the international or national community authorities set the rules, there is no governance body for the voluntary carbon market. However, this means that the methodologies and process may be negotiable, in contrast with extensive and inflexible legislative procedures that are foundational for compliance with carbon markets. Often, the private sector sets the standards for generating carbon credits and project certification.  Also, VCCs go by different names Gold Standard, VERRA, and Plan Vivo.

Insufficient governance causes problems in legally qualifying voluntary carbon units, leading each member state of the European Union, for example, to treat VCC as each chooses to do it.

Distrust

The lack of unified standards, qualification criteria for offset projects, and absence of governance make it arduous for market participants to compare apples to apples and authenticate the quality of a given carbon credit.  

Missing Link to Compliance Market

Carbon credits from compliance and voluntary markets are both transferrable rights for achieving emission reduction targets.  

The private nature of VCCs makes it impossible to use VCC to satisfy supervisory requirements.  VCCs can hardly be used to comply with emission reduction obligations such as EU Emission Trading System or the recent European Commission Proposal for Carbon Border Adjustment Mechanism. Article 6 of the Paris Agreement aims to integrate voluntary international cooperation for carbon emission reductions.

References

https://www.eic.co.uk/4-types-of-carbon-offset-projects/

https://info.eco-act.com/hubfs/What%20is%20Carbon%20Offsetting%3F.pdf

https://www.ey.com/en_pl/law/voluntary-carbon-market

https://www.ecoideaz.com/expert-corner/the-pros-and-cons-of-carbon-offsetting-programs