Understanding Carbon Offsets

Carbon Offsets after 2020: the World Under Paris

The practice of carbon offsetting has arisen in a world where far too little is being done to address climate change. At a global level, relatively few organizations have taken meaningful action to reduce GHG emissions. As a result, for companies committed to taking action, it has not been hard to find low-cost carbon offsets. The potential supply of GHG reductions is huge, because there are so many sources of GHG emissions that face no legal or economic incentives to reduce.

The 2015 Paris Agreement could change this. For the first time, nearly every country in the world has identified explicit actions (i.e., “contributions”) they agree to make to reduce GHG emissions and adapt to climate change. This approach is a major change from the Kyoto Protocol, where only industrialized countries committed to reducing emissions. Under Kyoto, offsetting was an explicit and prominent strategy: industrialized countries could fund offset projects in developing countries, providing them with needed investment, and promoting sustainable development. In exchange, industrialized countries could more cheaply meet their obligations, by claiming the reductions achieved by these projects. Developing countries benefited from such an exchange because they faced no obligations themselves and therefore gave nothing up in allowing emission reductions to be “transferred.”

The Paris Agreement complicates this older picture considerably. The fact that every country has agreed to reduce emissions means there will be fewer opportunities for additional reductions – i.e., reductions that go beyond what countries have pledged (and would otherwise not happen in the absence of a carbon offset market – see Additionality). This does not mean the end of carbon offsetting. In fact, Article 6 of the Paris Agreement explicitly recognizes the possibility for international cooperation through the transfer of emission reductions. However, if a country allows an emission reduction to be claimed by another party (either another country or some other entity), it should no longer be able to count the reduction towards its own GHG target. The Paris Agreement has language expressly prohibiting such “double counting” among countries.

Currently, it is envisioned that double counting will be avoided through “robust” accounting methods (the language used in Article 6). Specifically, if a country transfers an emission reduction, it will adjust its GHG balance sheets so that the reduction is not counted toward its pledged “contribution,” while a country receiving the transfer can apply the reduction to its own GHG balance sheet.[1] Similar accounting will likely be done for emission reductions funded by the international aviation industry, which has pledged to offset any increase in its GHG emissions after 2020.[2] In principle, the same methods could be applied to backstop claims for carbon offset credits purchased by private voluntary buyers.

Players in the voluntary carbon offset market are still sorting out what this will all mean.[3] Whatever happens, the criteria for what makes a quality credit will not change. In the remainder of this guide, we highlight some common concerns about carbon offset credits, explain the essential criteria for a “high quality” offset credit, and indicate what buyers can do to avoid lower-quality credits.

[1] This kind of “double-entry bookkeeping” is referred to in international negotiations as “corresponding adjustments.” Detailed rules for how corresponding adjustments will be implemented are still being negotiated – see Schneider et al. (2019).

[2] The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), established in 2016, is expected to demand anywhere from 1.6 to 3.7 billion offset credits between 2021 and 2035 – see Warnecke et al. (2019). On the subject of avoiding double counting, see Schneider, Broekhoff, et al. (2019).

[3] See, for example, Kreibich and Obergassel (2019) as well as ICROA (2019) and Voluntary Carbon Market Working Group (2019).