How to choose a good carbon offset?

This is the second in a series of posts summarising?Arbon’s view on the state of the voluntary carbon market, and introducing our unique approach to taking verifiable, additional climate action. Please follow us on?LinkedIn?and?Twitter?to keep up with updates, and reach out to?[email protected]?if you are interested in an early preview of what we are building.

There have been major shortcomings in how carbon offsets have historically been created and sold that make it very difficult to know which offsets are robust. In January, several major news organisations published claims that the vast majority of forest carbon credits (specifically avoided deforestation, or “REDD+” credits) sold in previous years had overstated the amount of carbon they reduced. More recently, cookstove credits, another mainstay of the voluntary carbon market, were revealed to have low monitoring standards which led to apparent overstatements of carbon impact. For sustainability teams trying to get to net zero, the risk associated with choosing the wrong credit has increased: not only might the money be wasted, but activists have begun suing companies who made claims based on credits which later turned out to be overstated.

Methodological complexity and analogue business processes made it difficult for third parties to scrutinise registries who issue credits. Organisations such as Sylvera and BeZero have grown in influence as independent assessors of credit quality, but some buyers are backing away from offsets altogether.

This is a shame. As we outlined in the first post in this series, carbon offsets are a key tool in the fight to keep global temperature rises under 1.5C. But it is understandable that buyers are hesitant when established quality standards have been found lacking.

The ICVCM has stepped into the vacuum with the publication of its Core Carbon Principles, a framework we think is badly needed. It evaluates dimensions of quality including the governance procedures for a credit program (blockchains are set to make major improvements in this area), and the emissions impact of a credit, in particular the additionality and permanence of the carbon removal. In the rest of this post, we want to deep dive on these two concepts which are critical to evaluating a carbon credit’s quality.

Additionality

The key claim of a carbon credit is that the activity it funded (planting trees, growing algae, switching cookstoves…) led to less greenhouse gases (mainly CO2, but also methane and nitrous oxide) in the atmosphere than if no credit had been sold.

“Additionality” is this incremental impact of a carbon credit purchase on levels of atmospheric greenhouse gas. And it is this concept that has made most of the headlines around trustworthiness in recent months. Measuring the amount of CO2 in the atmosphere today is pretty easy. Measuring the amount of CO2 a tree can absorb, or a cookstove emits, is a little harder, but also doable to a reasonable degree of precision. But what’s hard to measure is the counterfactual: how much of this reduction would have taken place without the credit purchase? If the counterfactual baseline emissions are understated, then the additional carbon impact is artificially boosted.

A project that plants new trees on previously desertified land might seem fairly straightforward: if we count the carbon absorbed by the trees and the soil, it is all additional as no trees were present before. But what if the trees are a fruit plantation which is profitable for the farmers? Perhaps the farmers would have planted the trees anyway, and so paying them for the carbon absorbed does not lead to any additional carbon absorption.

Similarly, switching a household’s electricity supply from a diesel generator to a solar cell will reduce carbon emissions, but perhaps the cost of solar is so low the household would have done it even without the carbon credit, in which case the funding is not achieving additional impact. To know whether this is true or not, we need to measure the baseline likelihood of the household switching energy source.

When looking at credits, ask yourself (and your supplier) what would have happened if nobody bought the credits, and how the issuing body is measuring that impact. This will give you a feel for the additionality of the credit. Only credits that can make robust additionality claims are worthy of consideration.

Permanence

Perhaps the factor that most affects the price of a credit is the permanence of the carbon reduction. In other words, how confident can we be that the carbon that was removed or prevented from entering the atmosphere will still not be there at some time in the future? How long is the expected time before the reduction is nullified?

Many nature-based credits are prone to permanence issues. Avoided deforestation can only be guaranteed as long as landowners have an ongoing incentive not to log the land. Other projects may be prone to fire or other kinds of catastrophe that threaten to release the carbon that was stored away in biomass.

Even newer engineered carbon removal (CDR) projects which appear to have long half-lives for stored carbon (100+ years) are making these estimates using data that is only a few years old. While hopes are high for CDR (and prices correspondingly so), there are a multitude of methodologies being developed, and it’s still possible that some will turn out to have shortcomings.

While short-term credits can have some impact - it’s better to spend the next five years without the CO2 in the atmosphere than not - we shouldn’t make strong claims to carbon neutrality off the back of such credits.

Price

Given the complexity of evaluating additionality and permanence, not to mention “leakage” and other factors we won’t go into here, you’d be excused for throwing up your hands and walking away altogether (as many are). But carbon credits do exist in a (imperfect, intransparent) market, and the collective wisdom of hundreds of carbon buyers does have (some) impact on price. Since the revelations about REDD+ credits earlier this year, the prices for those have plummeted. Projects with higher permanence command premium prices.

But more important than the collective wisdom embedded in the demand signal that shapes prices, is the impact that a carbon credit has on an organisation’s speed of decarbonisation. Cheap offsets make it easy to continue polluting. The true social cost of carbon has been estimated at somewhere between $44 and $413 per tCO2e, with the mean at $185. If you are buying credits at $10 per tonne, you are definitely not internalising the cost of the emissions you are creating, and thus are under-incentivised to reduce them faster.

Setting an internal carbon price equal to some estimated social cost of carbon is a good first step. Buying quality offsets with that budget is the true way to ensure you are correctly incentivising your teams to decarbonise faster, and taking full responsibility for residual emissions (even if you only make claims for a fraction of those offsets to comply with the Science Based Targets Initiative’s recommendations).

To summarise:

• think about whether the carbon reducing activity would have happened if nobody had bought the certificate;
• think about the permanence of the effect;
• allow both of the above considerations to influence the price you are willing to pay for a credit.
• And if each tonne of your own carbon emissions is costing you less than $185, through a combination of external offset purchases and internal carbon pricing, you are likely not to be fully internalising the cost that you are imposing on society through your carbon emissions, and thus are insufficiently incentivised to decarbonise faster.

#esg #sustainability #carboncredits