Carbon offsets represent greenhouse gas emissions reductions that have been achieved through voluntary implementation outside of capped sectors as a result of the financial incentives provided by the carbon market. The role of offsets continues to be an important, but sometimes contentious, strategy for addressing climate change. As an important cost-containment mechanism for compliance programs, offsets bring much-needed flexibility to avoid excessive price increases, yet some jurisdictions such as California (and others) have limited their role and geographic reach. In voluntary markets, offsets continue to offer an array of options for companies seeking to mitigate beyond their own operations, yet there can be pushback on the choices made. As the world contends with opportunities and responsibilities to address climate change, offset developers, registries, and regulators are pushing forward the compliance and voluntary offset markets, including emerging market opportunities, development of new offset protocols, actions to increase market uptake of existing offsets, and education surrounding misconceptions about offsets.

The North American Carbon World 2019 conference brought together a distinguished panel of speakers to address this topic. (video: https://www.youtube.com/watch?v=osNNHKrNl4c) Special thanks to Jon Costantino, Tradesman Advisors Inc; Chelsea Bryant, ClimeCo; Jason Gray, California Air Resources Board; and Max DuBuisson, Climate Action Reserve for sharing their insights.

Offsets are a financing tool driving significant emissions reductions

In California’s Cap-and-Trade program, compliance entities are currently able to meet compliance targets using offsets for up to eight percent of their emissions profile (this limit reduces to four percent during 2021-2025 and six percent during 2026-2030). In California, compliance offsets have resulted in the reduction of over 154.8 million metric tons of carbon dioxide equivalent (CO2e) emissions to date. Offsets in the voluntary market are used by companies, subnational governments and individuals outside of capped programs. An Ecosystem Marketplace analysis found that by 2018, voluntary carbon projects have helped to reduce, sequester, or avoid over 435.7 million tons of CO2e, which is equivalent to not consuming over one billion barrels of oil.

Private capital has played a key role in the historic success of offsets to achieve significant emissions reductions. Offset projects involve considerable costs for installation of best available technologies, project registration and monitoring, training of staff, and independent third-party verification. Billions of dollars of private capital have been driven into carbon markets, and market participants report seeing an expansion of investments into emissions abatement initiatives, especially in markets with strong regulatory leadership and robust ancillary services that help provide the protocols, resources, and guidance to support the creation of these environmental commodities.

“Roughly, the conservative estimate after subtracting out our buffer pool for forestry is about a billion and a half dollars in value for climate action that would not have otherwise occurred,” said Jason Gray, California Air Resources Board. “These all represent real, additional, permanent, verifiable, enforceable actions and reductions. Cleary more needs to happen, as the IPCC mentions in their recent report, in all different sectors, but this is one important financing tool that is robust, that’s actually representing real action.”

“In absence of incentivizing private capital to invest in these emission reductions, we’re simply not going to get there in terms of hitting the aggressive targets that we need to hit in order to mitigate climate change,” said Chelsea Bryant, ClimeCo.

Addressing the rumblings about offset credits

Offsets have faced opposition from environmental justice communities, which argue that offsets provide a loophole for polluters to continue emitting harmful pollution into communities as they pay for reductions elsewhere. More criticism occurred when a recent policy brief pointed to alleged calculation flaws in addressing leakage in forest carbon projects. And during the early years of offset program development, project failure – especially in communities with governments that appeased and condoned the willful violation of carbon offset project goals – hindered the integrity of the carbon market.

AB 398, the legislation to extend California’s Cap-and-Trade program beyond 2020, addressed environmental justice concerns over offsets by restricting usage limit in the California compliance program and creating a new provision that no more than half of the usage limit can come from projects that don’t provide direct environmental benefits (DEBs) to the state.

“There’s an additional benefit beyond the greenhouse gas emissions that are credited. The legislation defined that in terms of watershed benefits and air pollution benefits. Our assessment in the rulemaking was that the projects located in state are directly providing those benefits to the state beyond the GHGs that are credited. For projects located out of state, we are developing the process for what scientific information and evidence would need to be assessed to show a direct environmental benefit to the state,” said Jason Gray. “There’s a lot of questions on that so stay tuned. We will have some process to help walk people through that.”

In response to concerns about appropriate forest leakage calculations, Jason Gray explained, “Our protocols go through a robust public process where the best available information at the time of adoption and during protocol updates are assessed. In the protocol, we acknowledge that leakage is a complicated thing to assess. Our protocol assesses two different types of leakage – activity shifting leaking which relates to mill deliveries and timber, and market shifting leakage which relates to movement of wood projects. Our protocol is using the best available information to assess these two different types of leakage. The policy brief uses two studies that were quite unrelated to our protocol, they were conducted for a different purpose, makes some assumptions not using the leakage assessments that are in our protocol, misunderstands how we set baselines and how leakage is assessed, and develops a view that’s just really not comparable – an apples to oranges comparison. We’ll continue to get the correct information out and to continue to learn – so as there’s new information we’ll take that into account.

“We have over 100 forest compliance projects in 21 states. We have seven tribes throughout the United States, two Alaskan native corporations participating. And these projects (tribal and nontribal) are really resulting in a lot of cobenefits for habitat, biodiversity, and watershed protection.”

Risks for the offset market

Citing how a change in government leadership in Alberta ended the first carbon market in North America, which was a robust system that drove a lot of private capital into emissions reductions, Chelsea Bryant argues, “Regulatory stroke of pen risk is the single most important aspect when you look at investing into offset market and having a robust offset market. If you have regulatory stroke of pen risk, then people that invest millions of dollars in early action suddenly are the first ones to get aggressively burned. There’s always the concern of what stroke of pen risk would look like, what the next regulatory changes could look like, and then what are the implications to the market participants who’ve invested substantive resources and assets into these projects because again private capital is very concerned when you have the real significant stroke of pen risk that leads to the eradication of the underlying environmental attributes or their associated value.”

“The risk that most concerns me is if these programs aren’t working. The risk of not addressing emissions is the big risk here.” said Jason Gray. “We’ve learned a lot from experience and we are working to make sure we get the correct information out and make sure it’s understandable because it is a complicated program. That’s on us to make sure that the information risk is minimized so folks actually understand the protocols and the actions that are being taken.”

What to expect for offsets moving forward

“In terms of the compliance market, we’re interested to see over the next five to10 years as the cap starts to come down, is that going to start to put more pressure on the need for offsets, are we going to start to see prices coming up, is that going to expand the number of projects that are viable,” said Max DuBuisson, Climate Action Reserve. “On the voluntary side, I feel like we’re also seeing more activity and we’re seeing more interest. I think the pool of people that are potentially looking at offsets are getting bigger. We’re seeing more carbon neutrality interest from sectors like universities and cities. And we’re also seeing more interest in innovative approaches, not just going out and buying offsets but maybe finding projects that they want to partner with or insetting – looking within their own sphere of influence, and really trying to tell a story through the offset project.”

The opportunities for growth and expansion of offsets markets exist on several levels. There is much buzz over the potential for new protocols to be adopted, both for the compliance and voluntary markets – such as existing voluntary protocols for grassland and nitrogen management being adopted for compliance use or research and development into voluntary emissions reductions in biochar and adipic acid production. Existing protocols continue to be updated to help give more opportunities and new pathways for crediting. And registries and project developers are tapping into opportunities to expand into new geographies, including Mexico and Canada.

“The other focus for us in terms of offsets would be our neighbors to the north and south. We’re seeing a lot of excitement in Mexico. Under the Mexico Forest Protocol, we’ve now got six projects in the system. We’re having a lot of success with our staff going down and helping train the local community into supporting the projects, creating jobs in the community to support those projects,” said Max DuBuisson. “And we’re also working in Canada. Canada’s obviously had some ups and downs – and heartbreak for us, too. We were developing the Ontario protocols and the Ford administration came in and said to stop. But there was so much interest from the stakeholders that we have been able to continue the work in Avoided Grassland Conversion with the Canadian Forage and Grassland Association. And I hope it’s just the tip of the iceberg, especially because we started work on more than a dozen protocols so we’ve got a lot of half-finished files.”

Offsets have global benefits

Because greenhouse gas emissions have a global impact based on the total aggregate global emissions, the solutions to address greenhouse gas emissions can have a global viewpoint. Regulators work hard to balance the global benefits of offsets with the local benefits for immediate communities and environmental justice concerns.

“The purpose of offsets – at least in the regulatory program – is to address emissions that aren’t otherwise being addressed. How do you incentivize technology, incentivize action that is otherwise not occurring?” said Jason Gray.

Offsets expand the reach of compliance programs to sectors of the economy that aren’t directly regulated in order to find opportunities to address those emissions, jumpstart technological innovations in new sectors, and bring cobenefits to communities. Offsets also incentivize climate action in geographies that may not otherwise reward climate action, which is important when thinking of the climate crises from a global aggregate perspective.

“We have issued credits to projects in 35 states, which is quite an incredible climate diplomacy effort. Not all these states have robust climate programs, but this is an area where we’re actually able to engage with a lot of different people in a lot of different states on carbon mitigation,” said Jason Gray.

“California has developed such a wide suite of complementary policies to drive toward its emission reduction targets, while also creating conversations, memorandums of understanding, and helping to inform how other countries can do this – linkages, fungibility of instruments,” said Chelsea Bryant. “Without having jurisdictions like California who are demonstrating this type of environmental leadership, you would not have private investment to the same extent driving into these emission reduction projects, they would have no mechanism to monetize the emission reductions, to invest. You are now having them really set the blueprint and show other jurisdictions how you can design programs effectively, what works, what doesn’t work, and they can too adopt similar regulations and programs.”