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Explaining voluntary carbon offsets

If we lived in a utopia then the energy we used would be cheap, limitless and have a negligible environmental impact. In the real world, the perfect combination of these rarely apply—and the environmental impacts of energy are particularly worrying given the worsening effects of climate change. The energy transition aims to solve this problem, in terms of carbon emissions at least, by eliminating greenhouse gases from the system. At present, however, clean energies are nowhere near pervasive or flexible enough to address all our energy needs.

What can eco-conscious companies and individuals do to get around this? One increasingly popular option is to join voluntary offset schemes or markets. The idea behind voluntary offsets is simple: if your activities lead to the release of X tonnes of greenhouse gases a year, then you pay to offset an equivalent amount. The emitter purchases carbon credits generated by projects that aim to avoid, remove or reduce emissions, for example by planting trees or developing renewable energy projects. The credit is turned into an offset when it is used to compensate for emissions and is then removed or retired from the market so it cannot be traded further.

Voluntary carbon markets differ from compliance markets such as the European Union Emissions Trading System (ETS). Compliance markets are legally mandated and governed by a set of regulations that control the number of credits, as set by a government or region. Voluntary markets are not legally mandated and include companies and individuals that choose to offset their emissions. Voluntary markets are, in theory, open to all as they are not administered by a government or region, but by the sector.

Who is using and providing offsets?

A growing number of businesses see voluntary offsets as a way of accepting responsibility for greenhouse gas emissions in regions of the world where there are no mandatory emissions charges or for achieving emissions reductions goals when other options for decarbonisation are limited. These businesses include heavy industries, airlines and oil and gas players of all sizes. Offsets can be used for various purposes—for instance, reducing a company’s carbon footprint to zero, offsetting activities (for example to produce ‘green barrels’) or decarbonising operations in a location where no compliance markets are present.

The global voluntary offsets market has been estimated by some to be worth more than $600 million in 2021. The Taskforce on Scaling Voluntary Carbon Markets (TSVM) forecasts it could rise to between $5 billion and over $50 billion by 2030, depending on how market structures and pricing evolve.

Serving this market is a teeming ecosystem of offset providers, with companies such as 3Degrees, Clear, myclimate, Native, Sustainable Travel International and Terrapass cropping up regularly in this years’ ‘best of’ lists. The voluntary offset market also has a bewildering array of privately governed standards and certifications, such as the Voluntary Gold Standard and the Voluntary Carbon Standard. Despite this plethora of rubber-stamp options, critics still say voluntary offsets are prone to irregularities.

What are the challenges with offsets?

The fundamental challenge for voluntary markets today is in how to scale a market that has uncertainty in both supply and demand, leaving it with “low liquidity and limited data transparency” according to TSVM. While there are numerous areas that need to be addressed, an overarching problem is in proving that the money spent on schemes really goes to remove the amount of atmospheric carbon it is supposed to. This is especially the case for so-called nature-based solutions, which involve expanding natural carbon sinks such as forests and wetlands. Nature-based solutions are relatively inexpensive and have the additional benefit of safeguarding natural habitats, but their long-term decarbonisation potential is open to question.

A tree-planting programme, for example, can indeed help remove carbon from the atmosphere if the trees remain standing for hundreds of years. But if the trees burn in wildfires or die out from drought—both situations that are hard to foresee but are getting more common with climate change—then most of the stored carbon will be released back into the atmosphere.

Critics argue that nature-based solutions give polluters a low-cost licence to produce greenhouse gas emissions, with little or no guarantee that carbon removal methods will be permanent. Another problem is additionality: how can you prove that the carbon removal mechanism you are funding would not have appeared anyway?

This criticism is often levelled at offset schemes that finance renewable energy projects, which help to cut emissions but are increasingly favoured over fossil fuel plants anyway because they are cheaper and easier to build. Offset providers are aware of these criticisms and with the market’s rapid growth drawing scrutiny there are moves to improve the transparency and accountability of schemes.

What is the outlook for offsets?

June 2022, for example, saw the launch of a Claims Code of Practice by the British government-backed Voluntary Carbon Markets Integrity Initiative (VCMI). The Code of Practice aims to provide “coherence and consistency across corporate claims around carbon credit use,” according to VCMI executive director Mark Kenber.

As with any emerging market, voluntary offsets will need to develop transparent rules and accounting processes to achieve their full growth potential. And it will be important to ensure that they do not just become large-scale pay-to-pollute schemes: the Science Based Targets Initiative, for instance, says companies using offsets to cover more than 10% of emissions should not be viewed as having credible decarbonisation plans.

Long-term, an efficient voluntary offset market could deliver significant funds to greenhouse gas reduction initiatives and, ultimately, remove the need for carbon offsets altogether. Proponents note this need not spell the end of offset markets, however. Instead, offsets could be directed to tackle other areas of corporate social responsibility concern, such as plastic waste, habitat preservation or access to freshwater. Until we live in a utopia, there will always be problems we might have to pay to get rid of.