Carbon offsets are all the rage again. But can they be used to raise global climate ambitions?

Carbon offsets are all the rage again. As recently as two years ago, one might have written off the voluntary carbon market as yesterday’s answer to climate change. Today, evidence suggests a 180-degree turnaround. Growing awareness of the effects of climate change, the flight shaming movement, and what might be called the Greta Thunberg effect are all driving a major uptick in voluntary offsetting. Absolute numbers are hard to come by, but for a general indicator, the recent announcement that alumni of an iconic (but defunct) offset firm from 10 years ago are now getting their band back together is illuminating. Recognizing this trend, SEI and GHGMI – building on prior collaborations going back to the same time period – have published a new guide to using carbon offsets.

All of this renewed interest is probably a good sign. It suggests public attention to climate change is growing, at a time when action to address it is more urgent than ever. But, along with greater demand for carbon credits come a lot of familiar criticisms. Does buying carbon credits really make a difference? Won’t letting companies and consumers buy offsets just let them off the hook, instead of compelling them to reduce their own emissions? Or, worse, allow them to feel like they are solving the problem when what is really needed is strong national and international policy action?

As outlined in our new guide, these are valid concerns. Not all carbon credits are equal, and simply buying credits rather than taking steps to reduce your emissions – by flying less, for example – is not a defensible approach. A responsible approach to offsetting requires a strong plan for first reducing one’s own greenhouse gas emissions, and then spending time to understand and seek out high-quality credits. Furthermore, while an interest in accelerating action on climate change is great, consumers should never lose sight of the need for ambitious governmental policy responses.

However, these are familiar points. Less well-recognized, but just as important, is that the whole global landscape for voluntary carbon offsetting is about to get much more complicated.

Paris Agreement rules for offsets on the horizon

In December, international climate negotiators will be meeting in Madrid for the UN climate change conference (COP25) with the goal of hammering out rules for international cooperation under Article 6 of the 2015 Paris Agreement. In the language of Article 6, “international cooperation” refers to the possibility for countries to collaborate through international carbon markets. In effect, this means countries may offset their national greenhouse gas emissions by acquiring emission reductions (also known as “mitigation”) achieved in other countries.

Such offsetting is not new. Under the Kyoto Protocol, for example, offsetting was an explicit and prominent strategy: industrialized countries could fund offset projects in developing countries, providing them with needed investment and promoting sustainable development. In exchange, industrialized countries could more cheaply meet their obligations, by claiming the reductions achieved by these projects. The difference under Paris is that, now, every country – developed and developing alike – has offered an explicit pledge to reduce emissions. The fact that every country has agreed to reduce emissions means there will be fewer opportunities for additional reductions – i.e., reductions that go beyond what countries have pledged (and would otherwise not happen in the absence of a carbon offset market).

Negotiators have yet to resolve a range of issues related to how and under what circumstances international “transfers” of reductions will take place under the Paris Agreement. A top priority, however, is ensuring that emission reductions are not double counted. Specifically, if a country allows an emission reduction to be claimed by another party (either another country or some other entity), it should no longer be able to count the reduction towards its own GHG target. The Paris Agreement has language expressly prohibiting such double counting among countries.

Currently, it is envisioned that double counting will be avoided through “robust” accounting methods (the language used in Article 6). Specifically, if a country transfers an emission reduction, it will adjust its greenhouse gas balance sheets so that the reduction is not counted toward its national pledge, while a country receiving the transfer can apply the reduction to its own balance sheet. Similar accounting will likely be done for emission reductions funded by the international aviation industry, which has pledged to offset any increase in its GHG emissions after 2020. And, in principle, the same methods could be applied to backstop claims for carbon offset credits purchased by private voluntary buyers.

Two options to avoid double counting

Avoiding double counting is where the complication comes in. Currently, offset project developers make their investments expecting to claim emission reductions and sell carbon credits. But, if those reductions occur within the scope of a country’s Paris pledge, they will be double counted – unless the country formally agrees not to count them and then adjusts its UN reporting accordingly. This constraint creates a true dilemma. If the country refuses a transfer, then for an offset project developer – who may have been investing in mitigation projects for many years already – it could look like an unfair appropriation of their emission reductions. From the country’s perspective, however, it could seem like project developers are trying to make off with the country’s low-cost emission reductions, making it more expensive for the country to meet its Paris pledge.

Can this dilemma be reconciled? With appropriate guardrails, the voluntary offset market has the potential to drive significant mitigation in the near term; it would be a shame not to harness the energy and goodwill of carbon credit buyers to achieve this promise. Doing so, however, will require some explicit accommodation of the voluntary market in the new regime being constructed by UN negotiators. There are two options, either or both of which could be formally encouraged:

1. Recognition for voluntary offset claims. One option could be for countries to formally acknowledge the voluntary offset market, and indicate their willingness to transfer emission reduction claims to voluntary credit buyers, following the basic accounting rules agreed under Article 6 (whatever these turn out to be). This option could look very much like arrangements to accommodate the international aviation industry’s carbon offsetting scheme (CORSIA). Voluntary buyers should be aware that this approach is likely to raise the price of carbon credits. Countries would be within their rights, for example, to charge a fee for such transfers, with the idea of raising funds to invest in more expensive mitigation measures. From a global perspective, however, this outcome could be desirable. A higher price for carbon credits would be a signal that the world is starting to take climate change more seriously.

1. Recognition of voluntary contributions to countries’ mitigation efforts. This option would require something of a paradigm shift, in that it would redefine what it means to buy a carbon credit. Rather than buying an offset, for example, a credit buyer could instead claim to be supporting a country’s efforts to meet its Paris mitigation target. Under this option, no formal transfer would be required, because the country would still count the reductions towards its national target. The catch is that voluntary buyers would not be able count the reductions against their own targets. Carbon credits would instead represent a kind of charitable contribution to the country’s mitigation goal. At least two voluntary offset programs have explicitly entertained this patriotic concept and offered proposals for how it could work. So far, however, the market has not been enthusiastic. The result has been an inclination to muddle through these issues until there is greater clarity.What could change the game is if there were a formal recognition at the UN level of the value of voluntary climate action by private sector actors and the benefits achieved through “charitable contribution” carbon credits. Such recognition could steer the voluntary market towards raising the ambition of countries’ climate pledges. The biggest roadblock is arguably the mindset of credit buyers, who remain enticed by carbon neutrality claims. Perhaps these buyers will eventually come around, but a formal endorsement of this paradigm under the Paris Agreement could accelerate the transition.

The rules for Article 6 have yet to be agreed. It is not too soon, however, for parties to actively consider how to leverage the surging voluntary demand for climate action to help drive greater ambition.