Sustainable Views: Should you offset your carbon emissions?

It's January and it's cold and grey here in London. Let's plan a holiday to cheer ourselves up. In fact, let's book the flights right away. But if, like me, you are a climate-conscious traveller, you'll also need to bear in mind the carbon emissions of that flight. If you are the CEO of a company, you will likely be under not only your conscience's pressure, but also that of investors and customers and everyone else around you. They will likely want you to keep your company's carbon footprint in check. Wouldn't it be nice to be able to reduce your carbon liabilities with some carbon credits? Meaning you offset your CO2 emissions by giving money to activities that help suck them out of the air. In a nutshell, this is the idea behind the carbon markets. But how do they actually work? And do they work? This is what we will be discussing in today's episode. I'm Silvia Pavoni, your host, and this is Sustainable Views.

The podcast.

There are two different types of carbon markets: the compliance ones, created and governed by the public sector. The EU's emissions trading scheme is the most well-known. Things are pretty well defined there. Companies are given a carbon allowance and they must keep within it, trading credits if needed. Then there are the voluntary carbon markets, and here things get more complicated. There is a lot of demand for carbon offsets. McKinsey says that they could be worth $50 billion by 2030. Some political heavyweights, like the US climate envoy John Kerry, support their use to channel much-needed funds towards deserving projects. But there is mounting criticism over the quality of carbon offsets, what is being traded. Essentially, there is concern about whether the solution offered by voluntary carbon markets, or VCMs, is just sophisticated greenwashing. My colleague Marie Camply has looked into VCMs for an article that you can find on Sustainable Views. Marie and I had a chat earlier.

Okay, so let's, yeah, let's start at the beginning with these. And the clue a little bit is in the name with these voluntary carbon markets. You know, unlike the compliance markets which are managed by governments. So we're thinking of things there like the EU's emissions trading system or, you know, China's emissions trading system as well, and where participation in those is compelled by regulatory requirements. As the name suggests, participation in the voluntary carbon markets is just that, it's voluntary. And we see entities such as companies, you know, they're voluntarily seeking to offset their greenhouse gas emissions via the purchase of carbon credits and carbon projects on the other side of the transaction, such as, for example, a scheme to plant new trees, so reforestation schemes, they will sell carbon credits in order to fund their work. That's the basic premise there. And a common thread is the idea that each individual carbon credit should represent 1 tonne of carbon emissions removed from the atmosphere or a tonne of carbon emissions that have been prevented from entering the atmosphere. That's the kind of basic idea.

First thing to notice, Marie mentioned that 1 credit equates to 1 tonne of CO2 removed from or prevented from entering the atmosphere. We will go back to this point later as not everyone is convinced about this equivalence. So VCMs can be useful if offsets are used judiciously?

I guess the biggest argument for them is really that they are a vehicle for channeling some much-needed, very-needed investment into technologies and initiatives that are going to have, you know, a positive impact on reducing emissions already in the atmosphere or preventing them in the future. And of course, you know, we don't need to say that that's an urgent area, you know, where there needs to be a lot more investment and a lot more activity. And to be, yeah, let's be honest about it, there is going to be this transition period. And even if all the companies right now put in as much investment and as much effort as they possibly could, you know, to get their emissions down as quickly as possible, which we would all love to see, obviously, even if that was to happen, they can't do that overnight. So there is this argument to say, okay, well, given that that's the case, why not allow them to at least invest some money in offsetting and to direct it towards these things? But you've already said it, you know, that leaves open some really big questions about the integrity of them in two main ways. One, that they're enabling companies to greenwash effectively. They're overstating the amount of positive action they're taking. So maybe they do X amount of carbon offsetting and they talk about that in a really positive way, but they kind of neglect to mention actually they're still doing a lot of bad stuff on the other side. Or perhaps even worse, you know, that companies— there's a risk that companies might offset and avoid actually taking the action that they need to take. So it's even worse than them just trying to market themselves as looking better than they are. They just don't do the stuff that they should be doing. That's obviously a clear risk because I don't think I said this already, these markets are largely unregulated at the moment. So that's something, there are no kind of set rules at the moment about how companies can talk about how they're using these carbon credits. And secondly, the other big issue is around the integrity of the carbon credits themselves. So, you know, as I said at the beginning, there's this idea that each carbon credit should be 1 ton, should equate to 1 ton of carbon that's, you know, not in the atmosphere. But, you know, that's obviously a very nice idea, but in practice, how you actually, you know, measure that and guarantee that that happens is very, very difficult. And similarly, you know, there isn't regulation about how carbon credits should be described and exactly how they should work, etc. But there are, you know, I don't want to be misleading, there are schemes, and there are people that would say, hang on a minute, there are processes that have evolved over— this is still a relatively nascent market, but still it's been going for a couple of decades now, at least in a very early sense, and these schemes have developed. So there are verification schemes. The biggest one is the Verified Carbon Standard, and that's managed by a nonprofit, Verra, but there are others such as the Gold Standard and the American Carbon Registry. And what they would say is, well, actually these processes have evolved over a number of years and there are these schemes such as ours, which do verify the quality of these carbon credits. And Verra in particular, they would say that although they manage that verification scheme and ultimately they are responsible for the integrity of it, what they are keen to do is they have enabled these methodologies for how the carbon credits are verified. They are approved via a kind of peer-reviewed process of open consultation. So what they say is actually the carbon credits are subject to verification via methodologies that have been approved and discussed among, you know, a lot of leading climate scientists. So they would say there is integrity in the market. There are a lot of people that also have concerns that there isn't enough integrity. So it's actually a very hot debate within these markets at the moment, I would say.

These markets are still relatively new. They are growing, but are they getting better? There are certainly initiatives to address their quality, most notably that by the Integrity Council for the Voluntary Carbon Markets, which evolved from an earlier project spearheaded by Mark Carney, the former governor of the Bank of England, and Bill Winters, the CEO of Standard Chartered.

So these markets are still pretty nascent, though, it has to be said, although they are growing pretty quickly. So according to the nonprofit ecosystem marketplace, the voluntary carbon markets almost quadrupled in value from around $500 million at the end of 2022 to be worth almost $2 billion at the end of 2021. And there's research by McKinsey, which suggests that actually their value could be worth as much as $50 billion by 2030. So this could obviously be a huge market. Yeah, so I say to go back to the integrity about the carbon credits themselves, this is, and as I said, you know, there are plenty of people within the markets that would defend the current situation. That's not my job. I'm just saying that there are people that would do that, but there are plenty of others that, as I say, do think that standards need to be increased in these markets to ensure they are actually having the impact that these carbon projects say they will. And it's interesting. So I'm sure you remember a couple of years ago, there was the Task Force for Scaling the Voluntary Carbon Markets that was set up by Mark Carney and was chaired by Bill Winters. So there's actually a successor body to that organization, which is called the Integrity Council for the Voluntary Carbon Markets. And really what that body is seeking to do is actually to introduce new standards for the quality of carbon credits precisely to address this point that people actually like, well, hang on a minute, we can't really prove what impact these credits are having. And actually they want to introduce what they call core carbon principles to actually, you know, in areas such as additionality, i.e., the idea that by someone purchasing a carbon credit that is actually leading to something happening rather than someone being paid for something that would have happened anyway. I don't know, an example being, okay, there's a tree that's already in existence. You're not just paying someone for the fact there's a tree there and that tree would have been there anyway. And that's a really basic example, but that kind of quite a clear one. There's also this risk around permanence. So again, you could pay someone today for them avoiding future emissions, but actually next week, again, I'm being dramatic to make the point, they could chop down this whole forest that you You know, there's risks there. And then again, just about the quantification of the emissions. As I said, this is a real challenge around actually guaranteeing that you're avoiding 1 ton of carbon being emitted is really difficult to prove. So this Integrity Council for the Voluntary Carbon Markets, these are some of the areas they really want to introduce new standards to make sure there is agreement about that. And it's very contentious because these rules would actually, a lot of different people I spoke to in the market were reasonably impressed by the kind of first draft that this body has come out with and thought that those principles were actually pretty strenuous really. But there is not a consensus in the market about whether these plans are good. So some of the existing bodies, some of the ones I mentioned earlier on like VERRA, they say what's being replaced, what their system where they have peer review and public consultation about how best to verify these credits is being replaced by a one-size-fits-all approach. But there are others that say that actually the reason there are so much objections to these new core carbon principles is the standards are, they are setting a very high benchmark. And actually, it's debatable whether any carbon credits that are currently in the market would hit these new standards that the ICVM is coming up with. So it's a kind of classic tension between making the market, not making the market so strenuous that nothing is able to happen, but The risk is if these standards aren't very, very high, then there isn't going to be market confidence there. And actually, as these markets expand, people will actually say, hang on a minute, this is all just a big load of greenwashing that's going on. So there's a real pressure to actually come up with some pretty high standards, but we'll have to see how that plays out. The ICVM is due to come up with further proposals later this year. So I'm very interested to see what happens there because I think that will actually be very important. For how these markets develop going forward.

Marie mentions a number of important points here, including additionality and permanence. In the research for her article, she also looked at the issue of measuring the environmental impact of carbon markets. Are VCMs actually useful in an environmental sense? Trying to answer this question, she spoke to Gilles Dufresne, who is the global carbon markets lead at Carbon Markets Watch. He's skeptical. He points to issues with the incentives behind generating carbon credits.

How do you measure the climate impact that your project is having? If you are going to protect a forest and you claim credits for reducing deforestation, then how do you measure against— like, against what do you measure your reduced deforestation? And a big problem, I think, on the market today is that, I mean, that's valid for baselines, for all the rules in general. The whole system is set up to maximize the quantity of credits that are being generated and not to maximize the quantity of emission reductions. And the assumption is every credit is an emission reduction. But the reality is, if you're a project developer and you have a fixed amount of impact that your project is going to deliver, all your incentives are aligned to do everything you can to generate as many credits for that quantity of impact. And that's where the baselines are the main factor that developers can, can play with, saying, yeah, well, without my project, you know, there would have been this huge amount of deforestation. And so thanks to my projects, I saved that much and I can get all the credits. It doesn't mean the project itself is bad. Probably many of those projects are good projects that have some impact in avoiding deforestation, but they just massively overestimate their impact. All their incentives are aligned to do that.

Gilles has also some views around the idea of equating every carbon credit with 1 tonne of carbon, which he says is flawed.

I think a lot of the market proponents are kind of trying to defend the impossible and explain why their carbon credits represent an exact ton of CO2. And that's, to me, is a losing battle and it's not the right argument. I think there is value in, to some extent, buying these credits and channeling the money to these projects, but not because these credits are worth a ton of CO2— they're not— but just because these are good projects. And yeah, it's just It's just unrealistic. I mean, if you can imagine about measuring on a per-ton basis the impact of an avoided deforestation project that generates a million or more than a million tons of CO2 avoided with— like, the level of uncertainty itself is uncertain for avoided deforestation projects. So like, it's just really, really difficult to quantify it with that level of detail. And if you want to be— so the solution to that would be to say, okay, we're going to be conservative. Right. And we're going to be conservative that maybe the credits don't represent a ton of CO2, but we know that they will represent at least a ton. And if not, then it's going to be more. But then if you do that, you're going to— because the uncertainty is so large with many of those projects, you're going to have to be so conservative that you're going to generate very few credits. And so again, you come back to this issue of the system being set up to reward the issuance, the creation of credits rather than the impact of the project. And so if you shift to a different mentality and logic and you say, okay, we're going to actually buy these projects to channel the finance and we're not going to say that it compensates for emissions, then sure, you want to have as good credit as, as you can, but it matters less if you have a lot of uncertainty and if you cannot guarantee that it's an exact amount of CO2, etc.

So the jury is still very much out on voluntary carbon markets. But as we've heard, in spite of the criticism, they will likely continue to grow. And we shall monitor this space as they do. For now, for a detailed analysis of the points mentioned in today's episode, head to sustainableviews.com, where you can find Marie's article and other useful content. I will add the links in the show notes. That's it for today's show. Thank you as always to my producer, John Rogers, and to Marie and Gilles for sharing their thoughts. With us. We will find each other again in 2 weeks for the next episode of Sustainable Views, the podcast.