Background
The utilization of fossil fuels (such as coal, natural gas, and oil) is the biggest driver of greenhouse gas emissions, especially in power generation, cement, steel, and textile industries. The greenhouse gases (e.g., carbon dioxide) emitted by these industries increase the atmosphere’s ability to trap infrared energy, leading to global warming. Greenhouse gases are truly a global problem: Carbon dioxide has the same impact on the climate no matter where it is emitted and what the source. On the other hand, a tonne of carbon dioxide that is absorbed from the atmosphere in one part of the world could cancel out a tonne of the gas emitted in another. That is of particular interest for hard-to-decarbonize sectors such as aviation, steel, cement, and agriculture. Reducing emissions to zero is not (yet) possible in these sectors – and may not be in the foreseeable future. Today’s chemical processes behind steel and cement making, for example, will always release carbon dioxide.
Carbon Offsets
Therefore, hard-to-decarbonize sectors could cancel out the impact of (some or all of) their emissions by investing in projects that reduce or store carbon in other places. This so-called “offsetting” refers generally to all initiatives that reduce emissions (or remove carbon dioxide from the atmosphere) in one place to make up for emissions in another. Done well, it lowers the costs of reducing emissions. Done badly, it can result in greenwashing and create negative unintended consequences for people and the environment.
Today, most offsetting programs are “voluntary” carbon offset programs (run by private providers / NGOs), rather than being part of mandatory systems, like the European Union Emissions Trading System. Some providers / NGOs develop their own projects and sell the resulting credits. Others make use of the already existing market where they acquire credits and sell them to their customers. Among the many different types of offsetting initiatives are forest preservation, tree planting, wind farms, solar cookstoves, or better farming methods.
If, for example, a cement plant emits carbon dioxide into the atmosphere during its production process, its operator may buy carbon credits from a provider (e.g. from a reforestation project) to offset its carbon dioxide emissions and still become “net zero” without reducing its own emissions from operations to zero. That is why offsets are very popular. But of course, offsetting does nothing to change the fact that the carbon dioxide from the cement plant is warming the atmosphere. So everything depends on the effectiveness of the carbon credits purchased by the plant operator from the offset provider. And that may well be questionable:
Criticisms of Carbon Offsets
Carbon offsets are often criticized by the press and environmental groups. Some object to market-based approaches for solving environmental problems in general and favor stricter regulatory tools (we politely disagree). But even those who are open to market-based approaches have reservations about many carbon offsets in practice. Their concerns fall into two categories:
- Distraction: Carbon offsetting is a way for polluters to avoid real emissions cuts, hence avoiding real climate action
- Greenwashing: Many carbon offsets programs are not as effective as advertised, and some are outright greenwashing (aka fraud)
We believe that both concerns have merits:
Distraction
Offsets can distract from much-needed climate actions. The focus of any initiative to limit global warming must be the reduction of emissions. Regardless if the initiative is on a corporate or country level, we believe that the journey towards net zero should start with “quick win” greenhouse gas reductions (such as the improvement in energy efficiency, “green” electrification, and the elimination or reduction of eligible GHG emission sources. Offsets are no such “quick wins”). They should be followed by the more difficult, more expensive greenhouse gas emission reductions; however, where reductions are not technically feasible or prohibitively expensive, offsets can (and should be) the last resort. Suppose the most expensive (or technically not yet feasible) abatement measures are replaced by carbon offsets for relatively cheaper emissions reductions. This would lead to lower cost (for a given emission reduction) or a higher reduction (for a given spend). Which sounds brilliant, in theory.
However, in practice, companies could “buy their way out” of climate trouble cheaply with low-quality, low-cost carbon credits, while in reality delaying structural reform and misleading about progress made in decarbonization. And that is a real issue. Carbon credits must not be used as an excuse to put off structural reforms to our energy generation and usage that are urgently needed. Ultimately, we must reduce emissions drastically to prevent catastrophic climate change, and offsetting alone can never achieve that.
Where to draw the line between reduction and offsets?
The real – and more difficult – question is in our opinion “where to draw the line” – i.e., from what cost level for incremental reduction initiatives offsets are superior to reduction initiatives.
On the one hand, it would seem common-sensical to make a cut at “break even” on the “abatement curve” – a widely used tool to establish a potential pathway to net zero (link). In abatement curves, companies identify the changes that could eliminate emissions from their value chain and rank them in ascending order of cost per ton of abated carbon.
On the other hand, this is a short-sighted approach, because it is typically based on current abatement cost, hence disregarding the trend (and the necessity!) of lowering “green premiums”. It is also disregarding the “quality” of carbon offsets, the lack of transparency, and the dysfunctional pricing mechanism for voluntary carbon offsets.
The short answer to the question “where to draw the line” is, therefore: Somewhere significantly higher than the current cost of carbon credits.
Greenwashing
There is another, even bigger problem than distraction with many offset programs, and that is “greenwashing”. Not all offset programs keep their promises, and some may even be fraudulent – or in essence, “pay criminals for committing less crime”. There is plenty of evidence that carbon credits with dubious climate value have been issued in many parts of the world, even in California (link), Australia (link), as well as in many developing countries. There are issues in several areas:
- Some offsetting schemes have been criticized for crediting offsetting activities that are not “additional”. This “non-additionality” refers to activity that would have happened anyway, such as rewarding a landholder for maintaining vegetation that was never going to be cleared or rewarding a manufacturer for investing in low-emissions technology when that would have occurred anyway, e.g. due to regulatory requirements. A recent report from the University of Oxford showed that more than half of approved carbon offsets for >1000 wind farms in the dataset were allocated to projects that would very likely have been built anyway (link). Not only is this a waste of scarce resources, but the sale of these “offsets” to regulated polluters has probably substantially increased global carbon dioxide emissions. Carbon offset schemes can also create unintended (“perverse”) incentives for excessive emissions, deforestation and other rather undesirable behavior.
- Furthermore, even programs that are “additional” do not always provide audit-proof evidence that they are being used only once. The current level of auding and controlling of offsets is, nicely put, nonexistent.
- Last, but not least, depending on the type of program, the amount and time allocation as well as the accounting of offsets can be challenging. For example, there are timing differences between the accounting of certain offsets (e.g. planting of trees) and the actual carbon reduction, potentially leading to a “frontloading” or reported emissions reduction that have not (yet) occured.
To offset… or not to offset?
Despite the substantial shortcomings of current offset programs, there is a practical need to make these programs successful. Without carbon offsetting, it will be practically impossible for hard-to-decarbonize sectors – such as aviation and steel – to achieve net zero. Some of these sectors are rather dear to us. In our opinion, better regulation could help to achieve environmental goals efficiently while avoiding the shortcomings of current offset programs:
- There is a lack of clear and mandatory standards for offsets, as well as a lack of controls. National and international regulators, especially on EU level, should tackle this asap.
- Ex-ante auditing and certification of projects could improve the quality of offset programs
- And ex-post controlling of carbon credits could make greenwashing with carbon credits very difficult.
We believe that stricter standards and better regulation are the answer to this problem – but not avoiding carbon credits as a whole.
In the meantime, there are strategies for avoiding lower-quality offset credits for companies who are serious about tackling climate change, while being unable to reduce emissions from operations to zero. The University of Oxford recommends four key elements to credible net zero aligned offsetting (link):
- Prioritise reducing own emissions first, ensure the environmental integrity of any offsets used, and disclose how offsets are used
- Shift offsetting towards carbon removal, where offsets directly remove carbon from the atmosphere
- Shift offsetting towards long-lived storage, which removes carbon from the atmosphere permanently or almost permanently
- Support for the development of a market for net zero aligned offsets
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