Carbon Offsetting – an important tool that needs some sharpening?


06 December 2021

The Cambridge English Dictionary defines ‘Carbon Offsetting’ as “the activity of trying to stop the damage caused by activities that produce carbon by doing other things to reduce it, such as planting trees”.

A simple enough concept, but one that in practice seems to divide opinions in the way that it is being implemented. As we all strive to achieve our climate goals, will carbon offsetting become an integral part of that journey or an unwelcome distraction?

Carbon offsetting is a model which allows companies to offset their carbon emissions by buying credits from projects that reduce or avoid the release of greenhouse gases (most commonly CO2) elsewhere. These carbon reduction projects include reforestation (the planting of large numbers of trees which absorb or breath-in CO2), renewable energy (investments in solar, wind and hydro sites), waste to energy (often involving capturing methane from waste and converting it into electricity) and Community projects (helping to introduce energy-efficient methods or technology to undeveloped communities around the world). All of these projects give rise to carbon credits which can then be traded in the market and used to reduce or offset a company’s carbon footprint.

Carbon offsetting is not without its detractors. For some, this is seen as a way for companies who purchase these carbon credits to avoid having to take the steps that they should be taking to reduce their own carbon emissions. There is no doubt that difficult decisions have to be taken if companies (especially those with large carbon footprints such as oil and gas companies) are to significantly reduce their carbon emissions and contribute to achieving climate goals. Those who argue against carbon offsetting say that purchasing carbon credits is just a way of putting off or delaying those difficult decisions.

Not surprisingly perhaps Greenpeace has called for an end to carbon offsets. Their view is that it is allowing big emitters like oil companies to put off cutting their own emissions and avoid divesting from hydrocarbons, a primary source of greenhouse gases that cause global warming. This is a legitimate concern where carbon offsets projects are being used to mask unethical or environmentally unfriendly activities elsewhere in the business. However, carbon offset projects do facilitate investment in valuable environmental and social projects, so carbon offsetting and carbon credits will likely see significant growth in the coming years.

Earlier this year a private sector task force (the Taskforce on Scaling Voluntary Carbon Markets) was created with the aim of scaling up the voluntary carbon offset market and turning it into a global standard that could direct billions of dollars from companies aiming to meet net zero targets into projects to cut emissions. It is made up of more than 50 members globally, representing buyers and sellers of carbon credits, standard setters, the financial sector and market infrastructure providers. The intention is to scale up to a market worth up to $50 billion by 2030 by creating more transparent, liquid and standardised contracts.

We will have to wait and see whether the task force succeeds in its aims. In the meantime, we are seeing more of our clients in the Cleantech sector becoming involved in the carbon offset market. That is sometimes as a supplier of carbon removal methodologies and processes, and sometimes as a purchaser of carbon credits or an investor in carbon reduction projects. We are also starting to see carbon credits (called voluntary emission reduction credits (VERs) or CO2 Removal Certificates (CORCs)) being traded as digital assets through platforms such as Puro.earth, allegedly the world’s first marketplace for carbon removal.

As the voluntary market for carbon credits develops, certain issues remain:

  1. It takes approximately 20 years for trees to be planted and absorb maximum levels of CO2. Accurate measurement of carbon absorption is essential if carbon credits are to properly reflect the amount of emissions they are supposed to be offsetting. Earlier this year, research by CarbonPlan, found that 29% of the forest carbon offsets it analysed in a $2 billion programme in California overestimated the amount of emissions they were offsetting, totalling 30 million tonnes or about $410 million.
  1. The carbon offsets that currently trade in the voluntary market are often calculated on a project-by-project basis with different standards and approaches being applied. Transparency and accountability are key elements that need to be addressed. The Voluntary Carbon Markets Integrity Initiative (VCMI) was launched this July with the aim of ensuring that carbon offsets are underpinned by real actions to reduce greenhouse gas emissions. The VCMI is developing guidance for businesses on how they can ensure that their claims around becoming ‘carbon-neutral’ or ‘net-zero’ using offsetting are credible.
  1. As the global market for voluntary carbon offset credits continues to grow, carbon offsets must be creditable. There have been too many recent examples of these being based on incorrect assumptions or involving misrepresentations (sometimes wilful) as to how much CO2 is actually available for offsetting. Adopting an official international standard for carbon offset accounting will help to eradicate this problem, but at the moment there are just too many different standards and protocols.

These issues will have to be addressed and quickly. Many companies have now pledged to achieve ‘net-zero’ greenhouse gas emissions by 2050 or earlier, and many of them will be relying on carbon offsetting to achieve this target. COP26 needs to play its part in finding a solution on carbon markets, one in which there is a robust and sustainable system of carbon credits that supports the move to net zero. When that happens we can all breathe a lot easier – in more ways than one!

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2021.

Author

Andrew Priest

Partner

+44 (0)7557 161211

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