Carbon Offsets: Past, Present, and Future

Past: Why offsetting has dominated corporate climate action

Offsets have emerged as a popular mechanism among firms seeking to tackle emissions that are challenging to abate. This is especially true for industries that lack viable emissions-reducing technologies on a large scale, known as “hard-to-abate sectors.”

Take air travel. The aviation industry, which is responsible for 2 - 3%  of global greenhouse gas emissions (and around 8 - 10% of the global warming we are experiencing today), faces limited options when it comes to reducing its carbon footprint. While reducing air travel or switching to alternative modes of transport are obvious solutions, the absence of a viable substitute for jet fuel at scale has made it difficult for airlines and travelers to effectively lower their emissions without resorting to offsets. Even for emerging fuels that are much less polluting to make, the majority of the emissions associated with jet fuel are from burning the fuel, not making it. Jet fuels made from plants, or recycled carbon dioxide, for example, will still generate huge amounts of greenhouse gas pollution. Given the relatively high costs associated with creating alternatives like new fuel sources or more efficient planes, offsets represent a more cost-effective short-term solution for the aviation sector until technological advancements become available on a commercial scale.

Offsets have been integrated into policies globally, and form part of both voluntary and compliance markets across dozens of countries. At the voluntary level, companies that are not regulated may decide to purchase offsets as a way of meeting a voluntary target or commitment on climate change cost-effectively. Doing so demonstrates to the public, their shareholders, investors, and consumers that they take climate change seriously. Voluntary offsets are one tactic for meeting aggressive emissions reductions targets as public pressure mounts to address climate change.

Compliance markets, on the other hand, operate at the global, national, or subnational level where companies or entities are regulated and required to meet an emissions reduction target mandated by law. A notable example is California’s Global Warming Solutions Act of 2006, also known as Assembly Bill 32 (AB32), which was signed into law in 2006. Under AB32, the California Air Resources Board (CARB) established mandatory caps on emissions beginning in 2012, as well as market mechanisms that allow regulated entities to trade emissions reduction credits. Through the cap-and-trade market mechanism of AB32, companies in California that emit more than 25,000 or more tons of carbon dioxide equivalent per year can purchase offsets for up to 8% of their emissions reduction targets. The 8% cap prevents regulated companies from relying exclusively on offsets to meet reduction targets.

With both voluntary and compliance offsets, buyers tend to seek projects that are cost-effective and maximize benefits to biodiversity and local communities. Offset investments have resulted in measurable and often transformative change in communities around the world. For instance, the Proyecto Mirador in Honduras has employed local community members to establish and maintain a program that has distributed thousands of clean cookstoves to rural families, alleviating the need for cutting down trees for fuel and reducing the negative health consequences of inhaling toxic smoke. 

In order to generate verified carbon credits, projects like Proyecto Mirador are required to meet technical, social, and environmental standards. Standards and methodologies for offsets are well-established for nearly all sectors and can help ensure that projects deliver genuine emissions reductions and respect social and environmental safeguards. Careful thought is also given to land use projects that may undermine the rights of already marginalized and vulnerable communities. Projects are usually required to acquire third party validation of their offset projects in order to ensure those impacts are audited and verified by an independent expert group.

Additionality can be relatively straightforward to demonstrate. For example, the Mare Chicose landfill gas-to-energy project in Mauritius captures methane gas from decomposing waste and converts it into energy for local communities that otherwise source electricity from coal-fired power plants. The project is additional because it was started, established, and sustained only by revenue from the sale of offsets.

Additionality also applies to forestry projects, usually with the use of a deforestation baseline, which can be much more complicated. Through AB32, indigenous tribes such as the Yurok have been able to earn millions of dollars of income from the protection of their Pacific coastal forests which were under threat. Not only has the funding enabled the Yurok to sustain their livelihoods and ways of life without destroying their natural resources and forests, but much of the additional income has been used to buy back thousands of acres of land seized from them by the government in the 19th century. 

Present: Backlash to offsetting

Despite the positive planetary and social outcomes from offset projects, vocal and often legitimate criticism of offsets is prevalent—both on the “demand” (buyer, often a corporation) and “supply” (project developer) side of the equation. 

On the demand side, perhaps the most compelling objection to offsets is the displacement of the burden of acting on climate change from polluters and industrialized nations to vulnerable communities and developing countries, where the lower-cost offset projects are often located. By allowing an individual, company, or country to get closer to carbon neutrality through an offset, there is a possibility that offsets will distract from or delay decarbonization. This is particularly concerning given the expanding footprint of industries, which is at odds with the emissions reduction pathway demanded by the latest climate science. Does providing an offset option disincentivize urgent emissions reductions where they’re most needed? 

For companies, in particular, the proper and fair accounting of offsets has become increasingly important as public pressure to address climate change continues to mount. As a result, many companies are eschewing offsetting. While this shift may result in driving more decarbonization, it actually may just reduce climate action in the form of offsetting, and cut off funding to programs beyond a company’s value chain.

On the supply side, the effectiveness of offsets in reducing emissions is often called into question, given the lack of transparency and accountability in the carbon offset market. Many reports have revealed quality concerns with carbon credits transacted in the carbon market due to lack of regulation, making it easier for low-quality or fraudulent credits to enter the market. Further, poor verification processes with misaligned incentives, methodological weaknesses, and lack of comparability between different types of credits make it difficult to assess and standardize quality for carbon credits being traded. 

Moreover, nature-based projects may involve local communities or property rights, which must be carefully managed to prevent land grabs. Free, prior, and informed consent from affected communities is crucial to avoid conflicts and ensure that the projects benefit local communities and the environment.

Future: The way forward

Neutralizing today’s emissions requires avoiding creating those emissions in the first place, or offsetting them with a project that can deliver that neutralizing offset in the near term, not months or years from now. At the same time, decreasing the total concentration of greenhouse gasses accumulated over the past few centuries requires a balanced approach of deploying those removal solutions that are ready today, and at the same time investing now in removal solutions that will require years or even decades to achieve full scale. Looking ahead, taking carbon emissions “off” the ledger of a polluter with an offset is not going to be enough.

Here’s what’s needed to make sure offsetting can work for companies and the planet:

1. Carefully vet carbon credits for quality to ensure that they deliver genuine and additional results, are implemented in a way that does not perpetuate social and environmental injustices. This will require robust regulations, transparency, and accountability in the carbon offset market, as well as a concerted effort to prioritize genuine emissions reductions over the pursuit of offset credits. A portfolio approach that aggregates projects from various project types can be particularly helpful in managing risk and project diversification.

2. Use offsets to go beyond, not replace, decarbonization. Offsets will only work at a global level if every polluter limits the actions that result in emissions in the first place - whether this means travelers flying less, utilities transitioning to low- or no-carbon technologies, or companies halting the growth of unsustainable business lines. As companies prioritize decarbonization, offsets can be used to go beyond—by neutralizing emissions on the way to net zero emissions.

3. Prioritize research. There is little evidence to prove many of the widely held assumptions today. For example, can we definitively conclude that carbon offsetting reduces the incentive for companies to prioritize decarbonization? On the other hand, does the claim that companies that voluntarily buy offsets are the very ones that are decarbonizing hold true? There may be self-selection bias that alters our perception of corporate behavior. Collectively, we need to prioritize research that can inform the types of guardrails needed without impeding action. 

4. Don’t stop investing in climate. Legitimate criticism of the underlying premise and accounting of offsets need not undermine the advancement and future potential of climate projects. As individuals, companies, and nations act on climate change, immediately available and investable solutions will be needed on an increasingly large scale. What the world needs now is a system capable of directing the scale of resources needed for a net-zero and nature-positive economy to become a reality. That means exploring alternative models, market-based or not, through which companies can finance beyond value chain mitigation.

Carbon markets have energized a large number of projects, paving the way for deeper cuts and systems-level shifts. But offsetting should not be viewed as a panacea on its own. Let’s treat (and focus on) offsets as what they are: one tool in our climate action toolbox with a lot of potential—and a lot of risks that we can and must manage.