Unterstanding Carbon Offsets

Posted on by Anjuschka

(last revised Sept 2022)

I have been researching emissions trading and carbon markets for the better part of 20 years. For a few years, they almost disappeared from the political agenda. But in the last years, carbon offsetting has come back with full force.

In this piece, I’m trying to summarize and explain to non-experts what I have learned over the years about offsetting, which is one particular type of emissions trading. 

If you are just interested in knowing if you should buy carbon offsets to compensate for your own carbon footprint, then jump to Should I buy offsets?

In theory offsetting works

Offsetting means paying someone to reduce their greenhouse gas emissions in your stead. This can be done by governments, companies, organizations and individuals. The markets can be divided into two types: Frist, the compliance markets. These are regulatory markets in which companies or governments buy offsets in order to comply with their reduction targets. Second, the voluntary markets, where companies and individuals are buying offsets in an effort to neutralize their greenhouse gas emissions. Many of the observations discussed below apply to both markets.

Offsetting—and the trade of emissions reductions in general—are based on two principles:

  • Since climate change is a global problem, it does not matter where reductions occur.
  • It is better to invest in the cheapest mitigation options, because that way we can pay for more emissions reductions.

However, in order for offsetting to work, the following needs to be ensured:

1. No double counting

The traded emission reduction can only be counted once, i.e. only by the buyer and not also by the seller.

2. Offset credits must represent actual emission reductions

An emission reduction project should only be able to generate offsets if:

  • It is solely implemented because of the offset revenues and not because of other substantial revenue streams or a regulatory requirement;
  • The amount of greenhouse gases reduced through the project are not over-estimated; and
  • The emission reductions are permanent.

3. No perverse incentives

  • Trading only makes sense if it does not incentivize the seller country to set weaker reduction targets in order to be able to sell more reductions.
  • A buyer country also should not postpone its own mitigation actions just because it can purchase reductions more cheaply abroad.

If all these requirements are met, the trade of offsets can help protect the climate.

If, on the other hand, these requirements are not met, the sale of offsets ends up harming the climate because neither the seller nor the buyer ends up reducing their emissions.

In this case, buying offsets is also a poor investment (i.e. economically inefficient) because the buyer has in effect bought nothing. This means the costs for lowering emissions rise because we end up paying twice: once for the offsets and once to actually reduce emissions. The impacts of climate change increase because emissions do not go down. With that, the costs to adapt to the changes also rise.

In practice, offsetting has mostly failed

Research shows that, for the most part, it is really difficult to meet all three conditions[i]:

Double counting not addressed

Under the Paris climate agreement, all countries pledged to reduce their emissions. Consequently, ensuring that traded reductions are only counted once is especially important. But this is technically and politically difficult [ii]. The rules that were decided in the fall 2021 under the Paris agreement are not bad but they cannot fully address the issue. In the voluntary market, double counting is also an issue.

Most offset credits do not represent actual emission reductions

Under the Kyoto Protocol—the international climate agreement that preceded the Paris agreement—about 13,000 offset projects have been registered. These projects range from distributing solar cookers to building hydro power dams to destroying highly potent greenhouse gases in industrial processes. By the end of 2020, they generated close to 3 billion offsets.[iii]

The most in-depth research on these projects and the offsets they generated found that 3 out of 4 offsets did not reduce the emissions they claimed to have reduced.[iv]

A large number of low quality offsets have been used by countries and companies to meet their climate goals.  Global greenhouse gas emissions are roughly about 1 billion tonnes of CO2 higher than they would have been, if these countries had reduced their emission directly.[v] That is about as much as Brazil emits in a year.

Perverse incentives are hard to avoid

Sellers: A country that host emission reduction projects may delay certain climate policies in order to profit from carbon markets. On the other hand, countries with ambitious climate targets have little incentive to sell their emissions reductions in the form of offsets, because they will need them to meet their own target. And remember, we need all countries to have ambitious targets.

Sellers have an incentive to maximize profits. This incentives the sale of offsets with little climate value, for example from projects that have been running for years and no longer need the offset revenue to be viable.

Buyers: Offsetting is by its very nature letting buyer countries, companies and individuals perpetuate their own activities instead of reducing their own emissions. This is no longer a defensible option, because of the very small remaining CO2 budget we have, as explained below.

Why offsetting should be a thing of the past

The Paris climate agreement allows for countries to trade emissions reductions, but the rules have not been finalized yet. The fight over these rules has gained quite a bit of notoriety, which is somewhat strange because only very few countries still want to buy emissions reductions from other countries. The EU, for example, will not allow such trading after 2020 (thus restricting trading to within the EU).

This is perhaps a sign that countries have come to realize that it is time now to move on. Although we have learned much from these offsetting mechanisms, there are fundamental and pressing reasons why offsetting can no longer be considered a solution.

There is only a sliver of the pie left

As of mid 2022, we can emit less than 300 billion tonnes of CO2 if we want to have some chance of limiting warming to 1.5° Celsius.[vi]  This CO2 budget will be eaten up in about six years, if we continue emitting as usual. If we want to avert the most catastrophic effects of climate change, all countries need to be on a pathway to reach zero by mid-century at the latest (the richer the country, the sooner). We simply have no CO2 pie left for offsetting.

It matters who gets to eat the last sliver of the pie

Given the massive challenge we are facing, who should pay for it? Who should do the heavy lifting and who gets to eat the last bit of the CO2 pie?  Carbon offsetting enables buyers to purchase cheaper reductions instead of reducing their own emissions. But is it fair for an industrialized nation or a consumer from the Global North to continue their high-consumption economy or lifestyle? Not all activities that create CO2 emissions are equally important to ensure our basic needs. Sufficiency (reducing our consumption levels) and degrowth (fundamentally rethinking and reshaping our economies) are very challenging and unpopular topics – but without addressing them, we will not succeed in protecting our futures.

Fairness does matter. The vast majority of profits from offset projects do not go to local populations but to consultants and offsetting companies (usually from the global North).

Carbon pricing cannot match the scale of change needed

Emissions trading schemes, carbon taxes and levies, and offsetting mechanisms all put a price on greenhouse gas emissions. They make emitting greenhouse gases more expensive and therefore less attractive. This is a good thing. But it has its limits.[vii] The price signal they create, even if high and not compromised by fossil fuel subsidies, is insufficient and therefore not suitable for the large-scale infrastructure changes needed to get to net-zero.[viii] 

Carbon pricing can identify low-cost options over the low and medium time frame, but many of the changes we need to get to zero emissions require fundamental infrastructure changes. These changes are not sufficiently susceptible to a carbon price. Therefore, as argued by Thomas Spencer of The Energy and Resources Institute, ”the cost-optimizing potential of carbon trading has been wildly overstated. The ‘cheap abatement potential’ in developing countries is not ‘cheap’. Massive abatement in developing countries requires grinding governance reforms, market reform, and policy reform. Carbon revenues are not a pixie dust that can remove the need for this.”

Let’s not forget the lessons learned

Nevertheless, everything we learned from offsetting – what worked and what did not – can be put to good use to inform how countries do results-based finance. Richer countries have an obligation under the Paris climate agreement to help finance climate action in poorer countries. We need a lot more finance if we want to get anywhere.

Smarter and much higher investments are needed

Turning again to Spencer’s argument, “we need targeted, strategic, catalytic international public finance, in greater quantities than we have today. The best thing that developed countries can do is innovate an attractive, low-carbon development model for themselves. The 20 billion Euro per year that Germany has spent on paying back high-cost, early-stage solar was better spent than all the money spent on [offsetting], if the criteria is increasing access to mitigation options for developing countries. Time to do the same for batteries, hydrogen etc.”

One more thing: if we want to bring back global temperatures to safer levels, we will need a lot of so called negative emissions. Because we will not only need to go to net zero, we will likely have to go to net negative. This means taking CO2 back out of the atmosphere and storing it somewhere. This can be done the natural way, e.g. by protecting and planting forests, and it can be done through technologies, such as carbon capture and storage. All these solutions have pros and cons, e.g. permanent storage can be an issue for both types, tree plantations can absorb a lot of carbon but they are ecological deserts and take up land that may be needed for food production, technologies are expensive, etc. It’s complicated. I’ll only add: Negative emissions should not be thought of as offsets. In other words we need to think hard about which types of emissions cannot be avoided, what the best policies are for financing negative emissions and which types of negative emissions technologies and practices we want.

 

What should I do? Should I buy offsets?

Many people have asked me if they should buy offsets to compensate, say, for their air travel or their carbon footprint in general. Here’s my advice in 5 points:

1. Stop thinking you can lower your carbon footprint by offsetting

You cannot. This is not just because the chances are slim that you will buy good offsets that actually reduce emissions; it’s also because we have already gobbled up most of the global CO2 budget that would allow us to remain in a safe climate.

2. Start thinking big

We have squandered the last 30 years with inaction on climate change. We are now in a world where we either go to zero emissions very fast or we will face incredibly painful consequences. We will have to reduce global CO2 emissions by at least 7% every year, starting now, if we want a 2 in 3 chance of not going beyond 1.5° Celsius of warming.[ix] That requires a herculean global effort for what is already pretty bad odds. (Would you get on an airplane that has a 1 in 3 chance of crashing?) In addition, the IPCC (the world’s largest group of climate scientists) makes it clear that even at 1.5° Celsius of warming, we will experience catastrophic impacts. Neither dilly-dallying nor tinkering at the margins is an option anymore. (I just added this sentence to be able to use “dilly-dallying” :-))

3. Be political

We can only address this immense crisis through politics: we need strong policies that change the way our economies function and how we live our lives. So first and foremost, if you want to spend money, spend it on those that work on getting climate legislation passed. And make your voice heard: with friends, with family, and as a citizen.

4. If you find a cool offset project, by all means support it

When you donate money to Doctors Without Borders, you don’t expect to stop wars, you just want to do something to alleviate suffering somewhere in the world. It is the same with supporting good offset projects. Just think of it as a financial contribution to a sustainable project and not as offsetting your own emissions. And research well: the poor quality projects far outnumber the good ones, as explained below. Your money may be better spent when you donate to a social or environmental NGO in the global South, this way you avoid spending money that goes towards paying consultants salary from the global North. (Nothing against consultants, I was one too, but they usually don’t need the money as much as people from disadvantaged communities).

5. Consume less

The only way we can reduce our personal emissions is by actually reducing them. Renewable energy and new technologies are a vital part of the climate solutions bouquet we need. And so is sufficiency: scaling down how much we consume and how much we travel.

 

A quick and dirty rule of thumb for offset types

Renewable energy

The overwhelming majority of renewable energy projects are unlikely to be additional; in other words, they are being built regardless of the offset revenue they generate.

Tree planting and protecting existing forests

Both are super important, but not very suitable as offsets: trees take a lot of time to absorb significant CO2. A forest may not be permanent because it may be cut down later or burn or be attacked by insects. A new or newly protected forest may just lead to another forest being cut down (e.g. to make room for pastures).  Tree planting may not be sustainable if done as monocultures or with non-native species.

Industrial gas and landfill gas projects

These are usually projects that are indeed only done because of the offset revenue. So that is good. But these projects rarely benefit the local population. More importantly, the destruction of these greenhouse gases should simply be required by law. Once companies can earn offsets, they will more likely oppose such regulatory action.

Solar cook stoves, clean drinking water, small solar heat and electricity, etc.

These projects should be thought of as development projects. Their CO2 benefits are usually not very big and easily overestimated.

For more info on how to identify good projects go to https://carboncreditquality.org/ and  OffsetGuide.org

 

*I am an independent policy analyst who has been working on climate change issues—in particular carbon markets—for close to 20 years. I can be reached at climate@anjakollmuss.com

[i] Schneider  L., Kollmuss A., La Hoz Theuer S. (2016). Ensuring the environmental integrity of market mechanisms under the Paris Agreement. SEI Policy Brief

[ii] Schneider, L., Kollmuss, A. and Lazarus, M. (2015). Addressing the risk of double counting emission reductions under the UNFCCC. Climatic Change 04/2015; DOI:10.1007/s10584-015-1398-y

[iii] See http://cdmpipeline.org/overview.htm

[iv] Research on this topic:  Cames M. et al. (2016). How additional is the Clean Development Mechanism? and Kollmuss A. et al (2014). Has Joint Implementation reduced GHG emissions? Lessons learned for the design of carbon market mechanisms. For a policy brief summarizing the findings, see here

[v] This is my rough and conservative estimate based on what we know about the EU. For the period from 2008 – 2020, up to 50% of the overall reductions required under the EU’s Emissions Trading System can be met by purchasing offsets (about 1.6 billion Tonnes of CO2e), see here. 1 billion offsets were already used in the period 2008-2012, see here. Assuming 70% of these were of poor quality, results in an excess of 700 Mio Tonnes of CO2 to the atmosphere for that period. Assuming that another 600 mio offsets will be used until 2020 and assuming that 50% of these are of poor quality (because the EU implemented additional quality criteria) this add another 300 Mio Tonnes of CO2 to the atmosphere, resulting in a total of 1 billion. The actual harm to the atmosphere is likely higher because it does not include all the other countries that have purchased offsets.

[vi] https://www.mcc-berlin.net/en/research/co2-budget.html

[vii] Joseph E. Stiglitz (2019). Addressing climate change through price and non-price interventions

[viii] For example, for variety of reasons carbon pricing alone cannot drive cost‐effective investments in renewable energy, see here and here

[ix] Höhne N. et al. (2020). Emissions: world has four times the work or one-third of the time