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Carbon Offsets and Credits - are they necessary for a low-carbon future?

Many countries and companies have pledged to reduce their carbon emissions to net zero by the middle of this century. To be able to achieve this, many companies including those within the oil and gas and mining industries, will need to use carbon offsets.


While the market for carbon offsets and credits has boomed in the last ten years, there are still questions as to how effective a tool they are in addressing climate change.

 

What are Carbon Credits and Offsets?


Both carbon credits and offsets are marketed as a tool to help reduce global carbon emissions.


Carbon credits are a mandated or regulated allowance of carbon dioxide (CO2) assigned to a company which decline over time. One credit is worth the equivalent of one metric tonne of carbon dioxide and if a company uses less than their allowance then they can trade or sell the surplus as credits and vice versa - part of the scheme known as "cap-and-trade". Credits are typically applied to emissions that occur directly through the company.


Carbon offsets are reductions or removals of CO2 generated by a verified project. These reductions occur outside of a company’s own activities. While credits typically involve behavioural changes at the source of emissions, offsets are often generated far from the source.

 

Current state of the market


The voluntary carbon market is rapidly expanding. It was worth $473 million in 2020 and exceeded $1 billion in November 2021 for the first time, with an average weighted price of $3.37 /t CO2e.


Forestry and Land Use, Renewable Energy and Energy Efficiency are the most popular project categories for carbon credits to date, and nearly 60% of the globally transacted voluntary carbon offset volume is produced in Asia.



The vast majority of offsets available are those that create reductions in CO2 emissions. There are calls for more focus to be placed on offsets that actively remove CO2 from the atmosphere from groups such as the Oxford Principles for Net Zero Aligned Carbon Offsetting and the Institutional Investors Group on Climate Change (IIGCC).


Guidance from the Science-Based Targets Initiative (SBTi) suggests that companies should focus on reducing their own carbon emissions first before looking to offset the remainder.

 

Key components of carbon offsetting


For a carbon offset project to be successful it needs to meet the following four objectives:

  • Additionality - ensuring that offset projects generate a true reduction in greenhouse gas emissions that wouldn’t have otherwise occurred.

  • Permanence - what is the longevity of any carbon reductions or removals? To address climate change, carbon offsets need to remove or reduce carbon permanently - however 'permanence' in carbon credit terms is only 100 years.

  • Double-counting - how can you be sure the same offset cannot be sold to multiple buyers? This complex accounting issue is something the Article 6 agreement at COP26 in Glasgow has aimed to address. One other tool to address this is blockchain technology (see below).

  • Leakage - ensuring that offsets aren't just relocating the original carbon emitting activity to another location or exacerbating existing local environmental or social issues.

 

Challenges within carbon offsetting


Carbon offsets have not been immune to problems. The industry has come under scrutiny for projects where the promised carbon reductions were never met, and regulation has been difficult.


While several different accreditation schemes exist, none are watertight, and all have had examples of projects not delivering on their promises. There have been strong calls to prevent unregulated schemes from making it to market.


The price of offsets has also been a highly debated topic. If offset prices are too low, then they don’t apply enough pressure on companies and governments to change their own behaviour and address their own emissions. However, if prices become too high it can reduce the number of companies and individuals willing to buy them voluntarily. Offsets need to be affordable but also costly enough to encourage behavioural changes.


The market for offsets has been criticised for enabling companies to delay cutting their own emissions as they give an option for them to reach net-zero without making meaningful changes to their own behaviour.



Offsets have also allowed the burden of carbon emission reduction to shift from those in the global north to the global south, allowing the wealthy to maintain their carbon emitting lifestyles while placing the burden of adapting to climate change on poorer nations, so called “Green Colonialism”. Others argue it helps reduces global inequality (SDG 10) by transferring wealth from developed to developing countries.

 

Going forward


One of the main uncertainties surrounding carbon offsets is the question of permanence.


A suggested solution to the permanence problem could be for pricing to reflect shorter increments of storage. Expecting a one-off payment to store carbon for centuries isn’t feasible, whereas payments over time would give projects an incentive to store the carbon permanently as well as providing a stable, long lasting revenue stream for project owners.


Blockchain technology has been proposed as a solution to the verification and double-counting difficulties of carbon offset projects because of its highly secure and auditable recording system. If (like us) you are struggling to work out what Blockchain actually is, then stay tuned for an upcoming post where we try to explain what it is and how it can be used for better accounting and auditability in projects such as carbon offsetting.


For offset schemes to be truly effective they not only need to reduce carbon emissions but also to improve our ability to deal with the consequences of climate change. A study from the University of Oxford suggests that the focus shouldn’t just be on the removal of CO2 but also on the social and economic impacts offsetting can have on local communities, with the best solutions helping populations adapt and become more resilient against the negative effects of climate change.


There is a balance to be struck between the environmental, societal and economic impacts of climate change solutions that allow for increased climate change resilience in the long term.

 

So is offsetting a necessary part of a low-carbon future?


sustain:able's view is that absolute zero should be the ambition. But realistically for oil & gas companies, they won't be able to achieve zero emissions without offsetting.


However, almost all companies, particularly in the oil & gas industry, have a huge opportunity to improve their energy efficiency and reduce Scope 1 and 2 emissions before considering offsetting.


And there are lots of social and environmental projects that companies can support that will help to address the other challenges (aside from emissions) we face today, without needing to buy offsets.


To buy offsets and claim net zero before you have done everything possible to reduce your operational energy usage and emissions will be viewed by the public and investment communities as "greenwashing". So companies need to carefully consider their long term strategy and commitment to net zero goals.


There is no easy or quick fix, but we want to support you in this transition.

 

sustain:able's knowledge of the oil & gas industry means we can help you assess and quantify the current state of your company's emissions and energy footprint, and then work with you to improve efficiency and reduce emissions using the principles of Transition Engineering.


We can also help you identify social and environmental projects that will make a positive impact on the communities in which you operate.


Get in touch today to discuss how we can help.

 

Acknowledgements

Thanks to Gabby Watson and Alison Isherwood for help with researching and editing this topic.


Sources

  • https://www.naturebasedsolutionsinitiative.org/news/new-nbsi-publication-mapping-the-evidence-of-nature-based-solutions-for-climate-change-adaptation

  • https://restored.cc/our-reading-list-sources

  • https://www.ecosystemmarketplace.com/publications/state-of-the-voluntary-carbon-markets-2021/

  • https://carbonfund.org/difference-carbon-offsets-carbon-credits/

  • https://www.vox.com/2020/2/27/20994118/carbon-offset-climate-change-net-zero-neutral-emissions

  • https://www.theguardian.com/environment/2011/sep/16/carbon-offset-projects-carbon-emissions

  • https://www.carbonbrief.org/cop26-key-outcomes-agreed-at-the-un-climate-talks-in-glasgow

  • https://www.forbes.com/sites/forbestechcouncil/2021/08/16/the-near-term-future-of-blockchain-tracking-carbon-offsets/?sh=43605e1c5790


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