What Are Carbon Offsets? Are They a Credible Climate Solution?
Youll hear lots of pledges from companies and governments to cut the greenhouse gases they release to net-zero. Thats because they need to completely halt their release of carbon emissions to avoid some of the worst consequences of climate change. But how to get there? In many cases, it may prove too costly to go all the way to zero. Thats where the concept of carbon offsets comes in, though their use is controversial. 1. Whats a carbon offset? The idea is that when a company, government or individual releases greenhouse gases, they can pay someone else to remove an equivalent amount of climate pollution from the atmosphere. If, say, a company operates a fleet of diesel-powered trucks that generates 100 tons of carbon dioxide annually, it might pay a landowner to plant trees that absorb an equal amount of CO2. In theory, the trees have canceled out or offset the impact of the trucks. The term has been used since the early days of environmental initiatives, such as the 1970 US Clean Air Act, though its now applied more widely. 2. Whats the appeal? For many industries, the cost of addressing their climate pollution can be daunting. For instance, it costs well over $100 per ton to capture CO2 from industrial plants such as aluminum smelters and then bury it permanently underground. Offset projects that plant trees or destroy landfill methane might reduce heat-trapping gases for a fraction of the cost. By allowing companies or governments to pay and take credit for cheaper emission reductions beyond their own field of activity, the cost of addressing climate change becomes less formidable. That is if those promised reductions are real, which is often not the case. 3. How big is the market for carbon offsets? Most of the discussion of offsets revolves around voluntary offsets purchased to meet self-imposed goals (as opposed to the mandatory pollution credits purchased by companies in jurisdictions such as the European Union). Annual transactions surged to nearly $2 billion in 2021, according to Ecosystem Marketplace. The deals involve developers who propose projects, registries that validate whether the carbon savings are real, and brokers who match offsets with buyers. But as criticism mounted over the effectiveness of offset projects, the market has lost steam. In 2022, companies bought slightly fewer offsets due to fears of reputational risk from purchasing low-quality credits, according to BloombergNEF. 4. Whats the problem with carbon offsets? No single entity oversees the market for carbon offsets. Voluntary carbon offsets are managed by a patchwork of nonprofits that run various registries that oversee offset projects. Most fail in the crucial measure known as additionality. To be credible, offsets must deliver additional reductions meaning the climate-friendly activity wouldnt have occurred in the absence of the carbon payments. In fact, the market is flooded with blatantly non-additional projects like conservation groups or local governments selling offsets for preserving trees that werent going to be chopped down anyway. In one case, Bloomberg Green found that the largest carbon reforestation project in North America sold millions of offsets, even though most of its participating landowners had already planted their trees sometimes more than a decade earlier through a government program. 5. Are all offset projects flawed? No. Projects that flare methane leaking from coal mines or destroy climate-warming gases produced by industry can more easily show that theyre adding real benefits. Companies including Airbus, JPMorgan Chase and All Nippon Airways, for instance, have signed deals to purchase offsets from direct air capture, or DAC projects, which use machines to pull carbon dioxide out of the air and store it underground. This expensive process wouldnt occur without carbon payments, with costs topping $1,000 per ton in 2023. Meanwhile, Calyx Global, a company that rates the quality of carbon projects, has found less-popular project types, like the destruction of methane from landfills, to be more effective than most. 6. Can offsets be fixed? Theres a notion that offsets have turned into a get-out-of-jail-free card for big polluters. A growing number of scientists are raising doubts about the effectiveness of the market, and some sellers of offsets have joined the call for more guidelines. The industry would prefer not to see offsets as a way for a company to avoid costlier but more effective action to cut its own carbon emissions. The most publicized effort to fix things is from a group called the Integrity Council for the Voluntary Carbon Market, which is seeking to develop stronger rules and guidance for carbon projects. 7. Whats the main challenge? Many of the biggest buyers are airlines and oil companies such as Shell Plc and BP Plc that are doing little to corral their fast-expanding carbon footprints. A debate has emerged about how much companies should be trying to shrink their carbon footprints before they offset what they deem to be unavoidable emissions. The industry could face a reckoning on this question in the coming months and years. More stories like this are available on bloomberg.com 2023 Bloomberg L.P.