The Pear Paradox: How can we leverage Carbon Offsets to actually help the planet?

The oft-cited image of pears grown in Argentina, packaged in Thailand, and then sold in the US serves as a stark reminder of the unsustainable practices that often underlie globalized trade. Despite the environmental costs associated with transporting these pears across vast distances, economic considerations often outweigh sustainability concerns. The economics that tilt towards such unsustainable pathways is that of energy stored in fossil fuels, more specifically extremely cheap bunker oil used for shipping. And in the end (from the consumer perspective), you are getting the same article at similar price. The fact that it travelled 180,000 miles before it reaches me is not my concern.

This is the problem of optimizing around a singular metric. If the system is optimized around cost metric, other metrics will be ignored, even though, there is something obviously wrong in this product choice. The paradox highlights the need for a paradigm shift in our approach to carbon offsetting, moving towards more sustainable and accountable practices.

This is a lesson in how real-world works and why being disconnected with the physical realities can be less-optimal in our fight against climate change.

There are basically two types of carbon markets. Compliance markets are regulated markets where companies are obligated to reduce their greenhouse gas emissions. The government decides on the allowance and companies comply with it, either by reducing or trading emissions (via carbon credits). Familiar examples are EU Emission Trading System or policies like Cap-and-Trade and Low-carbon-fuel-standards in California. Voluntary Carbon Markets are unregulated and (you guessed it) voluntary (without government intervention). The voluntary market is all about offsets. Offsets could be either avoidance offsets, wherein you pay someone else to not emit carbon and make-up for your own emissions (like buying carbon credits from other greener companies), or removal offsets (remove tantamount carbon using technology). The latter is difficult to execute legally, and the world has become aware of the junk offsets doing the round now.

Accurate carbon accounting is essential to credible carbon offsetting. How do you account all the carbon emissions in your supply chain and downstream of the product. It turns out, the task is extremely difficult, and a lot of assumptions and models are built to come up with some numbers (as tracking emissions using measurements, across the entire value chain is nearly impossible). It is never perfect, but it’s the best we can do. GHG Protocol is the current state-of-the-art for carbon accounting in the US. GHG Protocol breaks down the total emissions in Scopes I, II and III. A simple explanation for these is as follows:

• Scope I: the direct emissions within the confines of the industry.
• Scope II: the purchased electricity, steam, heating or cooling, that enters the boundary of the industry.
• Scope III: All upstream (material) and downstream (use) emissions.

Not sure where to start with the issues I have with GHG Protocol, but I will try.

There is crazy potential of overcounting of emissions. Scope I of a certain industry may be Scope II of another. There is no way to correctly attribute the emissions. The memes around Scope III are doing the round so you already know what a mess the definition of Scope III brings. Because it is not clearly defined, the use of a product after its sold could be any (unintended) use resulting in emissions. For example, buying a phone and using it to push the accelerator of a car: will that account for Scope III emissions of the phone? I know it’s a stupid example, but you get the idea. To avoid the confusion, when industry say Scope III emissions, they usually refer to upstream Scope III emissions. The bigger problem is that under US Laws, you cannot hold someone responsible for something not under their control, so Scope III is at odds with the laws, and definitely non-enforceable. And if Scope III isn’t bad (in the eyes of law), oil companies aren’t doing anything wrong by pumping oil, their Scope I and II are definitely negligible in comparison. You cannot be selling a gun and then expecting it will be used as a prop in fancy-dress competition. The other difficulty is regional emissions. With the introduction of Cross-Border Adjustment Mechanism (CBAM) in Europe, there is accountability of CO2 emissions from more polluting countries as well, which messes up with the GHG Protocol.

And as long as there is no proper accounting, you don’t have a liability (GHG emissions) to match with the assets. Assuming most of it is CO2 emissions, which tends to stay for a long period of time in the atmosphere, this liability has to be matched with similar reduction. So, not thinking from any other perspective, but legal, trees (with their short carbon cycle) are not a quality asset, if the liability is for (let’s say) 1000 years. At each time, the assets have to match or exceed the liability, to achieve carbon solvency, i.e. no net CO2 emissions allowed.

Carbon offset market today is mostly bipartisan agreements, and often non-binding. For example, if offsets are bought in forests, there are no regulations to ensure that the forests were grown (or not cut). The offset-certification is all that matters, and the company buying the certificate does not have ownership of the forests. Once you have the certificate, the trees could be burning, and you wouldn’t care less. In its place, we need the liabilities to be verifiable and (third-party) auditable.

All this leads us to the best carbon removal asset, that ticks all the boxes: Carbon Dioxide removed via Direct Air Capture. With it, you can be certain that you are putting in 1 ton of Carbon (and not an arbitrary amount as in trees). You can also be sure of longevity of storage if it is sequestered underground. These make the Carbon removed via DAC a high-quality asset. Today buying carbon removal credits for 1000 years would be ~ $500/ton, which makes it expensive to pollute. The costs will come down with time, making it cheaper for companies to pollute.

The gist of it all is that DAC is poised well, because it offers a lot of companies a verifiable (near) permanent way to offset their emissions, i.e. high quality assets to match their liabilities. This brings me back to the pear picture we saw earlier. If you are looking from an offset point of view, yes it makes sense to use DAC, but everyone knows how terrible DAC are, when it comes to emission avoidance. Honest carbon accounting of DAC process itself is first step. Right now, if we use grid electricity and fossil fuel energy, it is no better than not having DAC gizmo. In future when all feed is renewable, the energy could be used elsewhere better. Unfortunately, we are headed in DAC direction though. If you ask a law maker or an economist on this, the answer will be simple: I don’t care where the reduction is coming from as long as I am able to match my liability, and DAC allows a pretty easy pathway to achieve that. Neither do I care about potential drop in cost of DAC allowing companies to pollute more, because they will suck the same CO2 out of the atmosphere. Remember, the costumer doesn’t care about the path Pear took to reach them. So, what can we do about it? I have an extremely difficult solution to tackling this problem:

It is common knowledge that the best reductions are achieved by displacing fossil power generation with renewable power generation. CO2 abatement from encouraging renewable electricity has to be quantified exactly (how much CO2 is avoided by switching from baseline grid mix to renewable electricity). Then these companies should be allowed to offset their emissions using renewable electricity addition.

This is much more difficult to regulate, and verify, than simply saying “I buried 1 ton CO2 underground, for 1 ton CO2 I emitted”. But if we are able to crack the framework around it, it will be really impactful. The issues with this strategy are quite clear.

• It is regional: Requires emission reduction from supplanting local grid emissions with those of renewable.
• It is transient: As the grid improves, the impact of adding further renewables also changes.
• It is complicated to enforce because the variable boundary conditions means there is no exact numbers on how much solar/wind generation will suffice
• , along with the problem of additionality (it is more likely the company does not engage in electricity generation, then how do they ensure additionality while working with utility companies).

I never said it was going to be easy, but I believe this is an approach worth pursuing. Eager to know where I might be thinking wrong.