Carbon Offsets: Risks and Mitigations

The clarion call was made during the 2015 Paris Agreement that decarbonisation is no longer a matter of choice but a global imperative!

More than 196 countries agreed to make concerted efforts to keep the global temperature well below two degrees Celsius, further limiting it to 1.5 degrees Celsius above pre-industrial levels. However, these efforts have fallen short. 2023 has been the warmest year on record and is already “1.35 degrees above the pre-industrial average (1850-1900).” In the recent global stocktake at COP28 in Dubai, it was highlighted that global greenhouse gas (GHG) emissions must be cut by 43% by 2030 and 60% by 2035 from the 2019 levels to achieve the Paris Agreement targets and reach “net zero” CO₂ emissions by 2050. Failing to do so would be catastrophic and could render the planet uninhabitable, with irreversible damage to ecosystems, resulting in severe rainfall, heatwaves, and droughts.

Source- Climate.gov, National Oceanic and Atmospheric Administration

In this blog, we will delve into understanding “net zero” and how carbon offset projects help companies achieve their net zero targets. We will also look at the voluntary carbon markets and the risks they pose in terms of credibility and effectiveness.

Net zero means that all the greenhouse gases we emit are cancelled out by removing the equivalent amount of greenhouse gases (GHG) from the atmosphere. The primary way of doing so is to significantly cut down emissions. However, some emissions might be unavoidable, and that’s precisely where carbon offsets come in.

Carbon offsets help neutralise an entity’s GHG emissions. These can be traded through carbon credits in carbon markets. One carbon credit “equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered, or avoided.” Essentially, for each tonne of emissions added by an organization, they can buy an equivalent amount of carbon credits from the market to offset their emissions and remain “net zero.” One of the ways Microsoft has committed to becoming carbon-negative by 2030 is by procuring credits through carbon removal projects. They have set carbon dioxide removal prerequisites for selecting low-durability, medium-durability, and high-durability projects that “deliver high quality and high-volume improvements.” They select projects related to forestry, carbon sequestration, direct air capture, biomass carbon removal and storage, and mineralisation.

With global temperatures going higher every year, private actors will need to significantly step up their decarbonisation efforts to reach “net zero.” The “Race to Zero” is one example of a global pledge of non-state actors to reduce emissions by half by 2030, and eventually, reach “net zero” latest by 2050.The pledge aligns with Sustainable Development Goal 13, which ushers us to “take urgent action to combat climate change and its impact.” Achieving “net zero” target is essential to avoid the severe fall-outs of climate change.

The “Race to Zero” is global coalition of over 14000 partners, with over 100 members from the UAE, who have pledged to reduce their emissions through various mechanisms, including carbon offsets and credits. Unilever is one of the partners in the Race to Zero initiative. Through their Climate Transition Action Plan (CTAP), they aim to reduce operational emissions by 100% by 2030 against a 2015 baseline. They have already surpassed their target of reducing operational emissions by 70% by 2025, achieving this two years early in 2023. However, for Unilever, 98% of value chain emissions occur upstream or downstream of their operations. Therefore, they have implemented a comprehensive greenhouse gas (GHG) reduction plan throughout their value chain. This includes programs such as the Supplier Climate Program to help suppliers set GHG reduction targets and report on their progress vis-à-vis set targets.

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The Carbon Market is one of the primary avenues that companies use to meet their “net zero” targets. It can broadly be classified into two categories: the Compliance Carbon Market and the Voluntary Carbon Market.

The Compliance Carbon Market is regulated. The most prominent example of a Compliance Carbon Market is the European Union’s Emissions Trading Systems (ETS). The EU ETS operates on the “cap and trade” model. This means each organisation is issued a cap or allowance on the emissions they can produce. This allowance is reduced every year in line with the EU’s climate target so that emission reductions can be achieved over time. Organisations that exceed their cap must buy permits from others who have surplus permits to sell. The EU launched its ETS in 2005 and its goal is to “reduce emissions covered by the EU ETS by 62% by 2030, compared to 2005 levels.” In 2021, China launched its own ETS, the largest ETS covering one-seventh of global carbon dioxide emissions from fossil fuel combustion, while Turkey will implement a national ETS in line with the EU ETS in the near future.

On the other hand, the Voluntary Carbon Market is unregulated. Although the current size of the voluntary market is considerably smaller than the compliance market, it is estimated to grow at an incredible rate. The voluntary markets include nations and private entities that develop projects to remove carbon from the atmosphere. Those who buy credits from the voluntary markets aren’t required to do so by law; they do it voluntarily to reduce their carbon footprint. Although not regulated, these carbon credits can be certified by certification programmes such as Verified Carbon Standard by Verra, Gold Standard, Climate Action Reserve, and American Carbon Registry.

Source- Ecosystem Marketplace: State of Voluntary Carbon Markets 2023

According to the Net Zero Tracker, over 148 of 198 countries and 1,136 of the largest 1,978 publicly traded companies have set net-zero targets. It’s important to note that there is no way that countries and organisations can reach their net-zero targets if they do not significantly reduce emissions. In fact, a report by Accenture highlighted that only 18% of the companies are on track to achieve net zero by 2050. However, as some unavoidable emissions will continue to exist, the growing pledge of companies across the world will significantly enhance the demand for Carbon Credits from the Voluntary Market.

According to a study by Morgan Stanley, the voluntary Carbon Offset Market is poised to grow from two billion USD in 2022 to 100 billion USD in 2030. By 2050, the size of the market is expected to reach 250 billion USD. This demand will primarily be driven by private sectors that are pledging to net zero emissions. With the estimated exponential growth of the Voluntary Market, the risks associated with them will also increase significantly. Let’s understand these risks and ways to mitigate them.

Source- Ecosystem Marketplace: State of Voluntary Carbon Markets 2023

A study on voluntary REDD+ projects, conducted by scientists and economists from the University of Cambridge and VU Amsterdam, found that only 6% of the total carbon credits produced at 18+ REDD+ projects in Peru, Colombia, Cambodia, Tanzania, and the Democratic Republic of Congo are valid. As per their findings, millions of credits generated were “significantly overestimating” the levels of deforestation they prevent. This is by no means a one-off incident. A nine-month investigation by the Guardian, the German Weekly Die Zeit, and Source Material, as reported in the Guardian, found that 90% of the carbon credits sold to large corporations are “phantom credits” that do not represent genuine reductions. Recently, three carbon credit projects were also suspended in Brazil due to alleged suspicious and illegal activities and are now prevented from selling any new credits.

Buying carbon credits when there isn’t any actual greenhouse gas reduction is tantamount to greenwashing and can seriously damage a company’s reputation if found during an investigation or audit. Organisations also need to be extremely vigilant while investing in carbon credits projects. Implementing a rigorous due diligence process that assesses the validity of carbon credits by verifying project data against independent environmental impact assessments through satellite imagery and site visits is essential to confirm that the projects deliver the stated benefits.

A closely linked concept to “phantom credits” is the idea of additionality. There might be projects that are beneficial for removing carbon from the atmosphere. However, what if they were going to be built anyway? Or suppose a carbon offset project is being sold to protect trees that would not have been cut. Then, the carbon credits sold do not produce any additional benefit that can be used to offset emissions. A study titled “Do Carbon Offsets Offset Carbon?” analysed data from 1,350 wind farms in India and found that 52% of approved carbon offsets were allocated to projects that would have likely been built even without the carbon offsets.

A company buying carbon credits might not even be aware that the credits they have purchased do not contribute to additionality. Therefore, it is essential to develop a comprehensive evaluation framework that assesses the additionality of carbon offset projects through detailed studies of ownership and project documentation. Additionality can also be determined to compare the cost involved in removing one tonne of carbon dioxide with similar projects elsewhere. Significantly lower costs of carbon offsets can be a definite red flag.

BBC has reported that hundreds of members of the Ogiek community have been evicted from the Mau Forest due to carbon offsetting projects. Similar incidents have been reported in Cambodia, where indigenous people faced forced evictions, including arrests and detentions that are also linked to carbon offset projects. The Oakland Institute reported that a Norwegian forestry and carbon credit company forcibly evicted villagers around their plantation in Kachung, Uganda, exacerbating a food security crisis. Again, if these findings are indeed true, then the reputation of companies involved in projects like these could be seriously tarnished. Moreover, if carbon offset projects displace communities and harm livelihoods, they undermine one of the fundamental ethical foundations of climate action.

Any due diligence framework to study carbon offset projects should include social impact assessments of these offsets. This assessment should review the treatment of indigenous and local communities, ensuring their rights and livelihoods are respected.

A significant risk with carbon offset projects is the problem of double counting. For example, say a carbon sequestration project funded by Germany is in Tanzania. In the absence of regulation, the same carbon offset may be counted by both Germany and Tanzania in their respective carbon reduction accounts. This double counting is detrimental to the overall target of global emissions reduction, as it can lead to misleading claims about actual reductions and hinder real progress toward climate goals.

Tracking and verification of carbon credits to ensure they are not double counted can best be done through a centralised and regulated database. In the absence of such a mechanism, a shared verification platform using blockchain technology might eventually be developed. However, that too will require a significant international collaboration.

Another major reason for concern regarding the viability of carbon offset projects is the rising incidents of forest fires due to climate change. For any carbon offsets that are bought under the assurance that trees will not be cut over a certain period, their effectiveness could be nullified by forest fires. The same goes for the long-term viability of projects. In the absence of regulation, what happens to offsets sold for the long term? Without proper oversight, these offsets might not deliver the promised environmental benefits, leading to a failure in achieving the intended climate action goals.

The importance of carbon offset projects in the goal of decarbonising our world cannot be overstated. There are some excellent examples of carbon offset projects that remove greenhouse gases from the atmosphere. However, a comprehensive due diligence mechanism has to be put in place to ensure that the investments made in carbon offsets indeed contribute to offsetting emissions. It is also essential that due diligence is conducted before a company invests in carbon offset projects because if issues are found during audits or investigations after the carbon offsets have been purchased, then the company’s brand could be severely damaged.

Find out how AKW Consultants can help you protect your company from the risks associated with buying carbon offsets and assist you in reaching your environmental goals.