What Are Carbon Offsets & Why Are They Controversial

Firms and startups selling offsets have proliferated in recent years, riding the wave of cutting-edge climate tech, and promising a way for ordinary people and organizations inexperienced with sustainability claims, but with dollars to spare, to reduce their footprint and combat climate change with the click of a button. The essence of an “offset” is ensuring that a company or a person can make a claim of canceling out their emissions by buying credits from projects around the globe that ensure carbon is reduced elsewhere (the most common method is by preserving forests) that may otherwise not have been, giving the new owners of these offsets the license to freely emit (while omitting this on the balance sheets). Offsets have been promoted as an essential tool in the fight against climate change, however, recent studies suggest that the actual effectiveness of these programs is more complex and perhaps even counterproductive. The latest findings on carbon offsets should pose serious questions for companies that either depend on or are looking into the use of offsets as part of their net-zero strategies and sustainability reports.  Companies who want to make good faith efforts towards reducing their carbon footprint should seriously consider their plans to make claims on reducing emissions using credits that represent questionable or even false emissions reductions, especially with regulated emissions reporting just on the horizon both in the EU, and U.S., which will add a level of scrutiny to their carbon accounting and greenwashing that corporations do not want to be under fire for. 

What are Carbon Offsets

Carbon credits are certificates indicating a reduction or prevention of greenhouse gas emissions.

Carbon offsets are certificates representing quantities of greenhouse gases that are either prevented from being emitted into the atmosphere (emissions avoidance/reduction) or removed from the atmosphere as the result of a carbon-reduction project. They form what is known as the voluntary carbon market (VCM): a decentralized space where people and businesses can choose to buy credits to offset their emissions. The most common offsets are centered around forests: some projects plant trees, while others pay those who own trees not to cut them down, avoiding the carbon emissions that otherwise might have occurred in the process of deforestation. 

Newer versions of offsets invest in technologies that decarbonize everyday life like renewables and landfill gas capture. All of these can be bought as projects to show that an entity is counteracting its own operational emissions and earning a minus on the global carbon ledger.

• • Offsetting project is set up
  • Credits are calculated: Carbon credits are calculated using dozens of methods. Avoided deforestation projects estimate what would happen if the project was not there. Projects claim the difference between what happens and what could have as credits.
  • Company makes net zero strategy: Firms work out the emissions they are producing every year from their own activities. In order to meet their net zero strategy, alongside efforts to cut emissions, some companies decide to buy carbon offsets.
  • Company searches for carbon credits: Firms get carbon credits through a specialist broker, others go directly to a project. Most offsets are approved by Verra and Gold Standard. These credits are used to offset emissions, allowing them to claim large net reductions
  • Company makes climate claim: Once a firm has worked out the amount of carbon they want to offset, they buy the equivalent amount of credits. Many then claim the company or product they are selling has become carbon neutral.

The Dilemma:

It has been revealed that more than 90% of rainforest carbon offsets approved by a leading carbon credit certifier, Verra, are largely worthless. The research into Verra, a certifier used by some of the world’s largest corporations, including Disney, Shell, and Gucci, indicates that their credits are likely “phantom credits” and do not signify genuine carbon reductions. As a leading certifier, the analysis on Verra begs the question of legitimacy for credits bought by many internationally recognized corporations using these credits to make carbon neutral or net zero claims on their products or services in sustainability reports. Verra disputes the results of the 3 studies and argues that their work has allowed billions of dollars to be funneled into the vital work of preserving forests.

Verra certifies credits that are linked to UN-REDD+ (Reducing Emissions from Deforestation and Forest Degradation), the UN’s flagship climate change program, which supports almost half of all carbon credits issued globally. REDD+ works by encouraging developing nations to conserve or restore carbon-sequestering forests through financial incentives. This approach to carbon offsetting has been the subject of controversy in the industry because it relies on hard-to-verify assumptions that a particular stretch of forestland would be cut down if it wasn’t being protected by a paid-for carbon credit. The foundation of these evaluations is often based on hypothetical scenarios, rendering the conclusions questionable at best. Such uncertainties can mislead companies and individuals into believing they are doing more for the environment than they genuinely are.

Another recent study conducted by UC Berkeley’s Carbon Trading Project and funded by Carbon Market Watch, also claims that many of the carbon credits delivered by Verra are not high quality and should not be used to make carbon neutral claims. Some of the failings in Verra’s crediting methodology that the research cites include:

• Too much flexibility results in over-crediting
  • Verra allows project developers significant leeway, leading to exaggerated claims and more credits with their freedom to cherry pick methodologies that maximize eligible credits and exaggerate baselines.
• Ignoring international leakage
  • Leakage refers to deforestation shifting from one protected area to another. Verra, while aligning with many market standards, often underestimated or ignored leakage, a potentially significant oversight.
• No transparency on how estimates are calculated
  • Project developers weren’t required to explain how they calculated the carbon content of forests, and the lack of clarity on how carbon content in forests is calculated opens doors for potential misuse and overestimation.

What to watch out for with offsets: 

• Misleading “Net Zero” Claims: Some companies use carbon offsets as a way to claim “net zero” emissions. Yet, these companies continue to emit greenhouse gases, merely purchasing the offset as a form of moral licensing. It is important for companies to note that the crackdown on greenwashing is on the rise in the form of new rules and regulations that will force corporations to take their sustainability claims seriously with strong data and accurate reporting on emissions. In fact, lawmakers at the European Parliament and EU Council recently announced that they have reached a provisional agreement on new rules aimed at protecting consumers from misleading sustainability claims and greenwashing practices, including bans on unverified generic environmental claims and those based on emissions offsetting schemes.
• Impact on Local Communities: Dr. Arun Agrawal, a political scientist, points out that many projects often sideline Indigenous communities, neglecting their rights and ownership over forested lands. This not only undermines the rights of these communities but also poses potential sustainability issues for the projects themselves.
• Economic Disparities: Notably, the origin of many offsets in the Global South, purchased predominantly by affluent countries, adds another layer of concern. Such dynamics can perpetuate global inequalities and could potentially lead to exploitation.
• Complexity and Lack of Transparency: The voluntary carbon market (VCM) is decentralized, and the calculations behind the projects are often more intricate than anticipated. This complexity can make it challenging for consumers to understand what they are purchasing.
• Questionable Methodologies: A study from UC Berkeley highlighted issues like too much flexibility in crediting, ignoring international leakage, and lack of transparency in calculations.
• The “License to Pollute” Dilemma: Many critics argue that the basic premise of carbon offsets gives entities a “license to pollute.” Even though funding climate solutions is indispensable, purchasing offsets doesn’t negate the emissions created by an entity. The principle of “additionality” in carbon credits suggests projects wouldn’t proceed without the sale of such credits. But this concept can be hard to prove, demanding a high level of trust from buyers.
• Double Counting: Offsets raise the question of double counting of emissions in the global carbon ledger. The carbon sinks marked by offsetting projects for purchase may already be factored into well-established climate modeling systems that create carbon budgets in the first place.
• Forecasting Uncertainty: Offsets are typically about reliably forecasting the future, aka what would have happened in the absence of the current conservation activity. Peering into the future is a messy business and involves many complexities in societies, politics, and economics. Additionally, it is to the benefit of offsetting agencies and corporations selling their unused land to be overly pessimistic in terms of baseline deforestation rates, and indeed that is often the case in their methodology. Ultimately the uncertainty of these carbon sinks is enormous. The forest could burn down or in 50 years’ time that carbon may be in the atmosphere again. They are not persistent and often misused. 

Towards a More Effective Approach:

Understandably, it may be quite difficult for companies in certain industries to reduce their emissions in line with a net zero pathway by 2050 that aligns with the Paris Climate Agreement as some decarbonizing technologies can be prohibitively expensive for companies to implement. Carbon offsets are seen as the quick solution to this problem, and though they are controversial in terms of CO2 emissions accounting, they do direct funds toward beneficial projects, from low-carbon technologies to forest conservation and restoring nature, which are crucial to solving both the climate crisis and biodiversity loss. These carbon sinks need to remain intact for us to have a viable shot at keeping emissions from skyrocketing and upsetting planetary boundary systems and tipping points. However, the importance lies in ensuring genuine impact. As McKinsey Consulting points out, while carbon credits can fund projects that wouldn’t otherwise take off, they should complement, not replace, sincere efforts to reduce emissions.

• Reevaluate Carbon Offsetting: Carbon offsetting should be reserved for final unavoidable emissions or to demonstrate biodiversity protection on sustainability reports rather than used as a catch-all solution on decarbonization.
• Prioritize Direct Emission Reduction: Instead of relying heavily on offsets, there should be an emphasis on directly reducing emissions through sustainable practices and technologies.
• Involve Local Communities: Any project related to deforestation or forest preservation should actively involve and benefit local and Indigenous communities.
• Transparent and Strict Evaluation: Third-party evaluations should be rigorous, transparent, and based on real-world impacts rather than hypothetical scenarios.
• Rethink Our Relationship with Nature: Investing in nature should be prioritized, not for the sake of carbon credits but for the overall health of the planet. Carbon sequestration benefits of ecosystem sinks should be seen as a bonus rather than the primary reason for conservation.

Sources:

https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe

https://www.vox.com/23817575/carbon-offsets-credits-financialization-ecologi-solutions-scam

https://insideclimatenews.org/news/24082023/carbon-offsets-overestimatiing-impacts-cambridge-study/

https://www.greenbiz.com/article/carbon-credits-forest-preservation-projects-are-mostly-illusory-uc-berkeley-study-says

https://carbonmarketwatch.org/publications/error-log-exposing-the-methodological-failures-of-redd-forestry-projects/

https://www.mckinsey.com/capabilities/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge

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