Understanding Carbon Offsets. The Benefits, Controversies, and Best Practices

Introduction

Regulatory measures and market-based mechanisms

First, we should ask ourselves if such cooperation between policymakers and market players can be feasible. I don’t know if this is the case for you, but I was born in the 1990s, and as a child, I remember many cartoons playing with the idea of acid rain and how dangerous they were. Growing up, I thought they would become a pressing issue in my daily life; however, I don't feel threatened when I see rain nowadays.

For starters, acid rain is a consequence of sulfur dioxide (SO2) emissions, which back in the day could be tracked vastly to the work of power plants. So early in the 1990’s policymakers in the United States decided to do something about it. The Acid Rain Program under the Clean Air Act Amendments of 1990 proposed a combination of regulatory measures and market-based mechanisms.

The Acid Rain Program established a cap-and-trade system for SO2 emissions, which placed a limit or ‘cap’ on the total amount of SO2 that power plants could emit. The program also created a market for SO2 allowances, which were permits that allowed power plants to emit a certain amount of SO2. Power plants that emitted less than their allotted amount of SO2 could sell their excess allowances to others who emitted more than their allotted amount, creating an economic incentive to reduce emissions.

Annual sulfur dioxide (SO₂) emissions in the United States from 1970 to 2021

Due to the Acid Rain Program, SO2 emissions from power plants in the United States fell dramatically. Between 1990 and 2021, SO2 emissions in the United States declined by more than 90%, from over 23 million tons to less than 1.9 million tons. This reduction in emissions has significantly impacted the environment, reducing the levels of acid rain and improving air quality.

History of carbon offsets

Nowadays, the world is dealing with another set of emissions. We are talking about carbon dioxide (CO2). Carbon has always been there. However, its rising levels are becoming problematic for our global goals to limit the increase in global average temperature to well below 1.5 degrees Celsius.

So if we look back to what happened in the 1990s to the efforts to combat rising levels of SO2 emissions and the program's success in reducing emissions and addressing environmental problems, then we could assume that a similar approach could work for reducing carbon emissions. After all, carbon offsets play a crucial role in both the Paris Agreement and the Kyoto Protocol, which are international agreements aimed at addressing the issue of climate change. The Paris Agreement, signed in 2015, calls for countries to take action to limit global temperature rise to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 degrees Celsius. The Kyoto Protocol, signed in 1997, was the first international agreement to set binding emissions reduction targets for developed countries.

Carbon offsets are a market-based mechanism supposed to be used to achieve these emissions reduction targets by creating economic incentives for companies and individuals to reduce their carbon footprint. They work somewhat similarly to the allowances for SO2.

What are Carbon Offsets

Carbon offsets are a type of permit or credit representing the right to emit a certain amount of carbon dioxide into the atmosphere. The basic idea is that a limit or ‘cap’ is set on the total amount of emissions that can be released, and companies are given permits or credits that allow them to emit a certain amount. If a company pollutes less than its allotted amount, it can then sell its excess credits to others who emit more than its allotted amount. This creates an economic incentive for companies to reduce their emissions, as it becomes more expensive to emit more greenhouse gases and less expensive to reduce emissions.

Having said that, what we just described only addresses mandatory carbon offset markets. However, this doesn’t contemplate every country in the world. The European Union Emissions Trading System (EU ETS) is one of the world's largest mandatory carbon offset markets, covering over 11,000 power plants and industrial facilities. Another example of this is the California Cap-and-Trade Program.

On the other hand, we have voluntary carbon offset markets created by individuals, companies, and organizations that want to offset their carbon emissions voluntarily. In these markets, participants can purchase carbon offsets to offset emissions that they have generated, such as from air travel, energy use, or other various activities. The primary motivation for participating in the voluntary carbon offset market is to take personal or corporate responsibility for reducing one's carbon footprint, even if no one is forcing us to do so.

If done right, these markets could bring different benefits to the environment and society by supporting low-carbon technologies, such as renewable energy and efficient energy management.

Sadly, yes, sadly, our global CO2 emissions keep on rising as over half of humanity's emissions have taken place in the last 30 years. So, what failed?

Controversies surrounding Carbon Offsets

Despite the benefits that carbon offsets can bring, there have been several controversies and criticisms surrounding their use. Clearly, there is some explaining to do as different consulting groups state that these markets can already be valued as an industry worth billions of dollars. Yet, we see no positive outcome for the planet. Some even suggest that by 2037 the voluntary carbon credits market could be worth 1 trillion 👀 .

Some companies have been accused of double-counting emissions reductions, meaning multiple countries or companies count the same reductions (e.g., on the one hand, you have those who do the actual compensation work and, on the other hand, the one who buys the certificate). In other words, as my math teacher would say back in the day, 'If you have three apples and you give me all of them. How many apples do you have left?' Cero. Super easy. You can’t duplicate apples just as you can’t duplicate money or a carbon offset; even if you do so meticulously, you will be counterfeiting but not creating any real money or new carbon offsets. This undermined the effectiveness of carbon offsets in reducing emissions.

This is only possible because of the lack of transparency in carbon markets, which can be complex and difficult to navigate. Messy baselines are part of the problem and the criteria to determine what emissions levels would have been in the absence of the carbon offset project. Already feel overwhelmed? Let’s not forget the lack of additionality, which is one of the critical principles of carbon offsets. What does additionality mean? That carbon offsets should represent emissions reductions that would not have occurred without the financial incentive provided by the offset itself.

There are vast examples of sketchy projects that state that without the help of the offsets the protected area would be deforested rapidly, therefore, providing unrealistic deforestation projections. There are even verified projects located at commercial timber plantations. How on Earth is this even legal, you may ask yourself? What is the purpose of plating or ‘protecting’ a tree that will eventually be chopped down? Outrageous.

By the way, if you have ever asked yourself what the relation between trees and carbon is, this is indeed an excellent question!

On average, a tree is about 50% carbon by weight. This is because carbon is the main component of cellulose, which is the primary structural component of a tree's trunk, branches, and leaves. Cellulose makes up about 40-50% of a tree's dry weight, and it consists of long chains of glucose molecules linked together by chemical bonds. In addition to cellulose, a tree also contains other organic compounds that are rich in carbon, such as lignin, hemicellulose, and various sugars and starches. These compounds contribute to the tree's overall carbon content.

Unsurprisingly, investigative journalists from The Guardian, Die Zeit, and SourceMaterial concluded that 94% of the carbon offsets from 29 Verra-approved projects were worthless. Keep in mind that this organization approves three of every four projects from the voluntary market. According to the study, credits from 21 of this set of projects had no climate benefit, and the rest had somewhere between 98% to 52% less impact than was claimed by Verra’s standard.

Another part of the analysis raises another critical concern due to the vast of credits from these projects that were bought by several internationally renowned companies that use this for greenwashing purposes, telling their clients they can fly or buy some new merch without making the climate crisis worse, in fact promising to do the opposite.

On top fo that, generally speaking, less than 10 % of the price of an offset actually goes to the community on the grounds, meaning the stewards that protect our planet. Most of the cut is taken by brokers and other sorts of middlemen in the process.

What can you do about it?

So we already have a market-based mechanism to control and reduce emissions by creating economic incentives. However, it hasn’t worked so far. Consumers' trust is getting lower by the minute, yet big companies keep buying these offsets to keep marketing how green they are, even if they are top fossil fuel producers.

We recommend that to stay true; we should focus on impact instead of just carbon. We must go beyond and include biodiversity in the equation, as nature is declining globally at rates unprecedented in human history, with the current rate of species going extinct accelerating.

We can no longer accept the simplistic idea that carbon offsets can be as static and steady as they claim. Trying to sell you the idea that somebody will plant a tree for you and keep it safe for 100 years is fake news or at least doubtful.

Impact is, and always has been, dynamic, and so should be the case for our measurements. Therefore we must use the power provided by new technologies such as Artificial Intelligence and blockchain to measure and reward nature stewards in real-time, issuing Impact Certificates that individuals and companies could monitor on a near–real-time basis to know their true impact. Dynamic measurement comes at a cost, though. Well, at least for those who wish to keep on cheating our planet and society. We already explained why trees are crucial to offsetting carbon; therefore, we know that a newly planted tree, if it continues to grow healthy, will keep on capturing carbon until a certain point. However, if such a tree dies, which can happen due to several causes, such as deforestation, fires, and so on, then the Impact Certificates related to such tree or its area must be upgraded and showcase its real value.

To create such a credible and verifiable mechanism, we are evolving digital Monitoring, Reporting, and Verification (dMRV) models to ensure that emissions reductions are accurately measured and reported cheaply and efficiently. The use of blockchain technology will bring transparency in the purchasing process of such credits and increase the power and engagement of different stakeholders, such as the local and indigenous communities on the ground that take care of many conservation and reforestation projects.

Those willing to do things transparent and efficiently should see the power of this idea. Now it’s up to all of us to create a snowball effect to alter the tendency of the current market toward a new way of doing things that will help protect habitats, biodiversity, and ecosystems as a whole.

Carbon offsets can be a powerful tool in the fight against climate change, but they must be implemented in a transparent, credible, and verifiable way. Let’s keep in mind that not everything is about carbon, though!