The voluntary carbon offset credit market has the potential to play a major role in allowing society to continue to emit greenhouse gases, while striving to keep global warming under 1.5 degrees Celsius (2.7 degrees Fahrenheit) as stipulated in the Paris climate deal.
HISTORY OF OFFSETS
The first, and so far largest, carbon offsetting market, the United Nations’ clean development mechanism (CDM) was set up under the 1997 Kyoto Protocol, through which around 190 countries agreed country-by-country emissions reduction targets.
More than 8,100 projects in 111 countries have registered with the scheme, which has handed out more than 2 billion carbon credits, called Certified Emission Reductions (CERs), representing 2 billion tonnes of carbon dioxide reduction or avoidance.
HISTORIC PRICE CRASH
Around 45% of the Kyoto credits were awarded to a handful of projects, mainly in Asia for cutting industrial gases.
Concerns over the environmental integrity of the gas project credits that were cheap to generate led the European Union in 2013 to ban their use for compliance in its Emissions Trading System (ETS). It has said it does not intend to accept any international credits from 2021.
With no clear signals about the future marketplace for CDM credits, prices crashed to levels below 1 euro per tonne in 2013 where they have remained.
Companies still use some CDM credits to help meet emissions targets, and some newer credits, issued from 2016 can be used under the aviation industry offsetting scheme CORSIA.
UNITED NATIONS CLIMATE TALKS
International negotiators are working to agree at this year’s climate talks in Glasgow a market-based mechanism that could allow countries to use international offsets to help them meet goals set under the 2015 Paris climate agreement.
Progress on this, referred to as Article 6 of the negotiations, broke down at the last talks in Madrid in 2019 largely because countries failed to agree on how to treat the millions of old credits, created under the CDM, and whether they should be allowed under the Paris agreement.
VOLUNTARY OFFSET MARKET VERSUS COMPLIANCE
The voluntary carbon offset market differs from compliance, or cap-and-trade schemes, enshrined in law, such as the EU ETS, which set a finite carbon budget and allow emitters to trade allowances.
Buyers in the voluntary market are mainly corporate clients seeking to meet internal targets to reduce their carbon footprint.
Theoretically, the number of offset credits can grow as long as there are new projects to feed into the market.
Critics of carbon offsets say they allow emitters to continue to release greenhouse gases.
Proponents say offsets are a useful tool even if the priority must be cutting emissions.
There are no rules on how many offsets a corporation can use in any given year.
Critics of forestry-based offsets say landowners that charge for submitting part of their land for carbon offsetting can still cut down another part of their forests to sell timber or allow for agriculture in what is referred to as leakage.
Proponents say any protection of forests or wetland is positive for the climate.
NO SINGLE GLOBAL STANDARD
There is no single globalised carbon offset standard. Instead, a handful of registries issue credits according to a specific set of criteria checked by third-party verifiers.
Local communities typically work with western-based developers and brokers to set up projects to underpin credits, which range from renewable energy sites in Asia to clean cook stoves in Africa, forestation in South America and waste management in eastern Europe.
The carbon offset market has been defined by bilateral, project specific deals, whereby the marketing of certain projects is instrumental in determining the price of the credit.
Beyond the carbon sequestration potential of a project, additional socio-economic or biodiversity benefits can dictate the price.