The False Promise of Carbon Offsets

As the world prepares for the 28th round of global climate negotiations, which will take place in Abu Dhabi in late November, the climate crisis is intensifying. Wildfires, droughts, and other extreme weather events are becoming increasingly common. But governments are not acting with the necessary speed, despite the fact that a UN report published last week found, yet again, that the world is far from meeting the 2015 Paris agreement’s goal of limiting warming to 1.5 degrees Celsius. Scientists fear that, if temperatures rise beyond that, the planet could reach irreversible tipping points.

Decarbonizing the economy at the speed that the climate crisis requires is an inordinately complex task. There is, however, one straightforward step that can help speed this transition: countries should phase out the use of all temporary carbon offsets. Carbon offsets are activities that reduce greenhouse gases and that are then used to compensate for emissions that occur elsewhere. Temporary, or non-permanent, offsets include planting or preserving forests, building solar installations, and capturing methane from landfills or coal mines. Temporary offsets may succeed in storing carbon for decades or even a century. But eventually, they will release the stored carbon and atmospheric concentrations of greenhouse gases will rise.

The standard argument for offsets is that they reduce emissions and allow firms and governments flexibility in how they achieve their reduction goals. But offsets are not and never have been a real climate solution. Although a good idea in theory, they have largely failed to reduce emissions, and, in some cases, they have likely resulted in increases.

Offsets suffer from various problems. Their highly technical nature makes them prone to gaming and accounting tricks that often inflate the estimated emission reductions. If all offsets worked on a scale of thousands of years, they could effectively lower global concentrations of greenhouse gases. But virtually all offsets sold today are temporary, generally working on a scale of decades or a century. These only delay emissions, rather than abating them entirely. Politically, offsets are a false solution. They distract from the urgent task of decarbonization, providing cover for big emitters who can claim climate progress while using offsets to green their portfolios. They are also morally unjust, shifting the responsibility for emission reductions away from those countries that have contributed the most to climate change.

Real reform of temporary offsets has proved impossible because everyone involved—investors, governments, businesses, and project verifiers—has a vested interest in their expanded use. When everyone gains, there is little incentive for reform. Instead of continuing to pretend that temporary offsets are a viable policy, it is time for governments to phase them out altogether. Only those offsets that remove or permanently sequester carbon dioxide and other greenhouse gases should be permitted to continue. This phaseout should extend to offsets created in the growing voluntary market, which is entirely self-regulated. Rather than relying on temporary offsets, governments should use their funds to invest in permanent removal technologies and contribute to international funding mechanisms, including the Green Climate Fund, that benefit the developing world.

A GOOD IDEA

Carbon offsets, although well intentioned, are deeply flawed. In theory, they commodify the absence of greenhouse gas emissions. But in practice, the commodity is actually the hypothetical absence of emissions. This creates an enormous accounting challenge.

That is because offsets are estimated by calculating the quantity of emissions that would have occurred without the funding for a given project. The difference between the “would-have” world, in which the project does not exist, and the “project” world, in which it does, is the amount of emissions that are offset. This amount is known as “additionality.” Accurately estimating additionality depends on the baseline estimate of emissions in the would-have world. Although there are many complex methodologies that justify those baselines, they are fundamentally unverifiable claims and are, therefore, open to broad interpretation if not outright abuse. If baselines are overestimated, then buyers receive credits for hypothetical reductions that likely did not occur. Overestimations are rampant.

In addition to the problem of baselines, there is the delicate matter of determining which types of projects should be considered additional in a world that is already moving away from greenhouse emissions. For example, in the international offset market, companies can receive credits for funding projects that switch from using coal to natural gas, since they technically reduce emissions in the short term. But natural gas has no place in a decarbonized economy. There are also questions about giving credits to projects that avoid deforestation. These can create perverse incentives for landowners to claim that forested areas are under threat in order to receive funding to preserve them.

Offsets are not and never have been a real climate solution.

Some offsets are sold through internationally regulated markets, such as the Clean Development Mechanism (CDM). More than half of all offsets in 2022, however, were sold through the voluntary market, which is not regulated by governments. This market was created by nongovernmental organizations (NGOs) in the late 1990s and allows firms and organizations to purchase offsets to reduce their emissions. The voluntary market has grown exponentially since its creation, increasing in value by 600 percent from 2018 to 2021 alone. It is currently worth $2 billion, funded largely by private project developers and investors, and will likely continue to grow. The voluntary market is entirely self-regulated and has been repeatedly criticized for its lack of project quality and reliability. It also has limited protections against double counting, meaning that two entities can potentially claim the same offset credit.

There are two classes of offsets: temporary and permanent. Temporary offsets last a century or less and comprise 99 percent of those offsets sold. They include renewable energy, agricultural, waste, and forestry projects. Permanent offsets operate indefinitely and include direct air and ocean capture, enhanced mineralization, and the use of bioenergy with carbon sequestration. These are generated by emerging technologies that seek to either directly remove carbon dioxide or sequester it indefinitely.

Sometimes, so-called permanent offsets are not, in fact, permanent. For example, the preservation and expansion of forests are generally considered to be permanent offsets. But as recent wildfires across North America and Europe have starkly illustrated, they are not. The Canadian wildfires this summer alone released two billion tons of carbon dioxide, which is roughly four times the country’s annual emissions. Such burns will become a greater problem because of the increasing likelihood of fires and droughts resulting from the intensifying effects of climate change. Some 46 percent of the voluntary market is made up of forestry-related projects, which are therefore at widespread risk and cannot be regarded as permanent. Any offset that can go up in flames should not be labeled as permanent.

IT’S BEEN TRIED

There have been many attempts to reform both the CDM and the voluntary market. The CDM has changed its rules about acceptable projects, earmarked funds for developing nations, and revoked the accreditation of project verifiers who fail to observe standard operating procedures.

Similarly, the voluntary market has tried to improve offset integrity through multiple self-directed efforts. In 2008, the industry association that promotes emission trading created the International Carbon Reduction and Offset Alliance to advance best practices in offsets. Those projects that meet its requirements earn the ICROA seal of approval. More recent efforts include the 2021 Voluntary Carbon Markets Integrity Initiative and the Integrity Council for the Voluntary Carbon Market. The latter created ten “core carbon principles” to ensure that projects meet the highest standards for additionality, sustainability, and governance. It, too, will have methods that offset developers can use to improve offset quality. It is telling that these reform efforts come every few years, indicating that these problems have never been adequately addressed.

Meanwhile, the use of offsets continues to grow. In 2015, the Carbon Offsetting and Reduction Scheme for International Aviation was introduced to cap aviation emissions at 2020 levels beginning in 2027. Since no carbon-free alternative to aviation currently exists, almost all these reductions will come from offsets. Recognizing that this will generate enormous demand, governments agreed in 2020 that certain offsets from the voluntary market could be used for compliance purposes, which boosted the use and size of this market.

REFORM IS IMPOSSIBLE

Although the system has plainly failed, there is little enthusiasm for meaningful reform. That is because all the actors involved in the growing ecosystem of offset markets have a vested interest in their continued expansion. Governments want to ensure that they have the backup option of outsourcing emission reductions if domestic measures get too economically or politically costly. NGOs creating offset standards and administering the markets want to expand their authority. As such, they have been lobbying for a larger role in developing and implementing new international regulations. Project verifiers, who are paid by project developers, have an incentive to keep their clients happy by approving projects and maximizing the number of credits for sale. And firms can continue to make claims about reducing emissions and even going net zero with the luxury of knowing that offsets can fill any holes in their plans. Everyone wants the numbers to add up, even if it does little to address the climate crisis.

But three decades of ineffective reforms have shown that nonpermanent offsets cannot be fixed. Instead, it is time to get rid of them. There are three steps that governments should take to phase out nonpermanent offsets.

Baseline emissions estimates are unverifiable claims open to broad interpretation if not outright abuse.

First, no new non-permanent offsets should be permitted. This step would force governments and businesses to abandon false solutions and instead get serious about their near-term emission-reduction strategies. Although eliminating such offsets might sound like a radical change, phaseouts have been common practice in international environmental law for decades. In 1987, for example, governments acted to gradually reduce the production of—and eventually the trading of—ozone-depleting substances. Other multilateral agreements have been signed to eliminate the production and use of harmful chemicals and restrict the movement of hazardous waste across borders.

Second, countries should create an accelerated timetable for the retirement of problematic offset credits, many of which do not correspond to actual emission reductions. The EU has already begun this process, and other countries should follow suit.

Finally, the voluntary market must be regulated. Governments should end the practice of accepting credits generated by the voluntary market in domestic compliance markets. They should also tighten regulation around offset trading. The U.S. Commodity Futures Trading Commission is currently exploring ways to regulate both derivatives and spot markets for offsets. Other governments should pay careful attention. Such measures can help delegitimize the use of dubious offsets, which is already driving some firms to reduce their reliance on them.

Any forestry-related carbon offset that can go up in flames should not be labeled as permanent.

It is possible that limiting the use of offsets could deprive developing countries of much needed funding. To ensure that this does not happen, firms and governments should redirect their funds to contribute to international climate aid schemes, including the woefully underfunded Green Climate Fund, which provides funding to developing nations to meet their climate pledges. These contributions can provide real, tangible benefits to those countries that need them most.

At the same time, prioritizing permanent offsets will have two key benefits. It will force those firms and governments using temporary offsets to rethink their strategies by removing access to the cheap credits that they use to postpone real decarbonization efforts or, worse, greenwash their practices. In addition, phasing out temporary offsets should drive investment into direct air capture and other permanent forms of carbon removal. Currently, these technologies are extremely expensive and cannot operate at scale. If governments and firms are serious about reducing emissions, then investments to reduce the costs and increase the diffusion of these technologies will be critical. New offset rules could help catalyze this important shift.

It is time for governments to end the use of temporary offsets, which allow firms and governments to claim that they are acting responsibly when they are not. The numbers cannot be fudged any longer. It is time for real reform. Phasing out all nonpermanent offsets and regulating the voluntary market are the necessary first steps.