Overview
Today's Deep Dive is 1,479 words and a 9-minute read.
In 2021, industry leaders estimated that the market for carbon offsets could be worth upward of $50 billion by 2030. Instead, the industry has faced headwinds in recent years, dogged by accusations of ineffectiveness, opacity, and greenwashing. Once touted as a potential golden ticket to reduce global emissions and remove carbon from the atmosphere, downside risks have piled up, leading regulators and offset vendors to refocus on transparent, effective carbon markets. Still, carbon offsets remain a potent tool for balancing emissions and financing the expansion of emissions-reducing or removing technologies, and will be a vital component of the global effort towards net zero.
What are Carbon Offsets?
Carbon offsets are an element of carbon markets – like carbon credits or emissions allowances, they are a fungible credit that represents a real-world unit of carbon. In economies with cap-and-trade carbon markets, carbon credits or emissions allowances represent a unit of emissions and which companies buy and sell to reflect increased or decreased emissions from their own activities. Carbon offsets, on the other hand, represent the opposite - a unit of carbon emissions that has been avoided, reduced or removed. Offsets are usually calculated as a ton of CO2 or CO2 equivalents and are sometimes also called carbon credits or carbon certificates (as a young field, the carbon offsetting industry often lacks standardized language). By financing projects that reduce greenhouse gas emissions elsewhere, companies can reduce their net emissions, bringing them closer to emissions reductions targets, and those selling offsets can raise money for green projects or conservation.
There are two primary types of carbon offsets: emissions avoided and reduced or emissions removed. Emissions avoided and reduced are produced when an entity compensates for an increase in emissions in one area by decreasing them in another, such as the construction of renewable energy projects. The renewable project represents reduced or avoided emissions compared to a hypothetical alternative, and produces units of avoided carbon emissions that can be sold as certified offsets. Another common emissions reduction offset stems from paying to protect forests that otherwise would have been cleared or degraded. The second major group of offsets, emissions removed, involves permanently (or semi-permanently) removing already created CO2 from the atmosphere, such as in the case of reforestation or sophisticated carbon capture and storage technology, which are a promising emerging technology, but are currently limited on the market. A third and less common type of offset is unique to cap-and-trade systems: if an entity does not use its allotted emissions allowances, it may consider unused credits as offsets or sell them to other entities, who will also not use them.
There are two venues wherein carbon offsets are traded: regulated compliance markets, or cap-and-trade systems, which are in place in industries or regions where emissions reductions are mandated by law. An example is the EU Emissions Trading System, where power plants and factories are subject to limited carbon allowances. The second (and more popular) forum are voluntary carbon markets, where offsets are purchased or traded by corporations and individuals that are under no legal obligation to reduce emissions, but may do so as part of business strategy and/or social responsibility. An analysis of the relatively scant publicly-available information on purchasers of carbon offsets by Carbon Brief found that oil and gas companies and car manufacturers were responsible for three-quarters of identifiable offset purchases. The single largest provider of offsets in this analysis was the Katingan peatland project in Indonesia (a peat swamp restoration and conservation project that generated 5.4 million offsets for the identified companies, the equivalent of taking two million cars off the road), followed by forest conservation efforts under the umbrella of “reducing emissions from deforestation in developing countries plus” (REDD+). Only 8% of offsets purchased in this analysis belonged to the emissions removed category of carbon offsets (where carbon capture technologies would fall), and most were tree-planting.
Rethinking of Carbon Offsets
In recent years, criticism of carbon offsets from climate activists and scientists has grown. Those opposed to the practice call it green-washing, arguing that lowering net emissions via offsets is being used as an easier, insufficient replacement for cutting direct emissions – allowing many companies to maintain business as usual. Proponents argue that emissions reduction is a difficult and long-term goal, and carbon offsets provide a way to reduce emissions in the short term (even if imperfect), as well as to encourage much-needed financing for low-carbon and renewable projects worldwide.
However, recent years have been rocky for the carbon offset market, with two major bodies that regulate and study corporate emissions strategies removing their support in just the last two months. In July of this year, the Science Based Targets Initiative (SBTi), an NGO backed by the Paris Agreement that sets science-based net zero standards for the private sector, withdrew its previous support for carbon offsets, saying that the majority of offsets on the market today were “ineffective” and that many are actually damaging to carbon mitigation goals. While SBTi left the door open to businesses potentially using some offsets as part of their emissions reduction mix, the decision was a blow to proponents of the system. In August, the Integrity Council for the Voluntary Carbon Market, a largely pro-offsets nonprofit which seeks to establish clearer standards for the use of offsets, issued new guidance ruling that the Council would not approve carbon offset methodologies tied to renewable energy projects (previously a third of offset credits recognized by the Council).
Individual companies engaged in carbon offsetting have been accused of greenwashing and have sometimes faced legal consequences. In 2023, Delta Airlines was sued in a $1 billion class action suit that argued its claim to be “carbon neutral” misled consumers and investors because Delta used “junk offsets.” The same year, a Swiss advertising body ruled that FIFA misled fans by claiming that the 2023 Qatar World Cup was carbon neutral, while using offsets that did not comply with Swiss compliance standards.
Issues for carbon offsets date back further than the last year. One major offset market is the Clean Development Mechanism (CDM), a compliance mechanism established by the Kyoto Protocol in 1997, was phased out in the 2010s after scientists argued that the mechanism had hindered, rather than helped, global climate action. A 2016 study found that 85% of CDM projects likely overestimated their emissions reductions and that most of the low-carbon projects that it offered as emissions reduction offsets would have happened without financing from offsets, either because they were already profitable or legally mandated – meaning that CDM offsets led to no additional reduced emissions beyond what already existed. One study even argued that the CDM may have increased emissions by six billion tons.
The Road Ahead for Carbon Offsets
Nonetheless, global optimism momentum for carbon offsets remains. Following the collapse of the CDM, Paris Agreement signatory countries have established new carbon markets referred to as Article 6 markets, including important new safeguards such as a requirement to cancel out 2% of all credits on the market (leading to a confirmed reduction in emissions) and prohibiting double-counting of emissions reductions (wherein both the entity selling the offset and the one purchasing it record an emissions reduction). Trade on this system was set to begin in 2024 at the earliest, but has been delayed by prolonged negotiations. Formalizing Article 6 markets will be an important agenda item at November COP29 talks in Baku, Azerbaijan – although hopes for an agreement are low, given that Article 6 negotiations have collapsed at the past two COPs. Despite setbacks, the push for continued progress on Article 6 trading mechanisms reflects the promise of carbon offsets and sustained enthusiasm for them.
Despite recent concerns about their effectiveness and regulatory stumbles, climate scientists agree that carbon removal must be a part of any successful plan to keep global temperature rise below 2 degrees Celsius above pre-industrial levels (the goal set out by the Paris Agreement). Once properly designed, carbon offsets present significant promise as a mechanism to finance renewable projects and technologies and reduce global net emissions – especially as carbon capture and storage technologies become more sophisticated and available. As the UN, governments and NGOs work to establish effective mechanisms governing the sale and administration of offsets, proponents caution that narrowing offset methodology too much could make the process too onerous on corporations, limiting enthusiasm and demand for offsets before they have had the chance to reach their full potential. Their discreditation by some NGOs could also discourage companies from pursuing net zero targets at all: following the SBTi decision that carbon offsets were “largely ineffective,” anonymous business leaders told some news outlets that they may need to pare back or scrap net zero targets. Without the use of carbon offsets, previous emissions reduction targets may simply not be possible, and not meeting them risks exacerbating emissions, falling afoul of government-mandated net-zero targets, or losing consumer trust.
