What are carbon offsets?
Carbon markets are exchanges set up to sell carbon credits to governments, businesses and individuals. A carbon credit represents a tonne of carbon reduced or removed through an activity somewhere in the world, such as planting a tree or building a wind turbine.
There are a few main ways that businesses and governments can interact with carbon offsets:
- A voluntary carbon market where companies buy credits
- A compliance market, which mandates companies to reduce emissions by a certain percentage each year. If they over-achieve, they can sell extra emissions reductions to another company.
- Bilateral deals, through which two governments agree to transfer ownership over carbon saved or removed to meet their Paris Aligned targets.
Why is carbon offsetting facing criticism?
Carbon offsetting is a complex topic, and whilst it can provide financial benefits to some communities and governments, there are criticisms that apply.
The majority of credits are nature-based, such as forest protection and restoration. However scientists have explained that nature’s complexity disqualifies it from serving as a tool to cancel out continued fossil pollution. That same complexity causes incredible difficulty in proving that carbon removals or savings wouldn’t have happened anyway, for example due to government policy.
There are limited regulations in place that legally determine what a good quality carbon credit should look like. This makes deals and claims highly subjective and open to manipulation. Investigations have shown that the standards that do exist are open to interpretation by project developers, which in turn leads to over-claiming of carbon savings by companies or governments.
The money generated from the sale of the carbon credits has been reported to be soaked up by brokers and middlemen, leaving communities and the projects themselves facing an unfair share of the proceeds.
The increase in reliance on carbon offsetting by companies and governments has led to higher demand for land. Research has shown that we would need a land mass bigger than the United States to service all of the government offsetting pledges, and that’s before considering corporate demand.
UNFCCC carbon market rules negotiations at COP28
Within the Paris Agreement, there is a set of carbon market rules and standards still under negotiation that will impact both companies and governments. These rules are called Article 6 and are split into three main sections:
- Article 6.2: the framework of standards that governments should follow when making deals with one another.
- Article 6.4: the rules and standards that will underpin a new UN-governed market that governments, businesses and individuals can purchase credits on. This should set out what a good carbon removal is according to the UN.
- Article 6.8: other ways to bring in finance to help countries reach their climate targets that do not include market-based mechanisms such as carbon markets.
Each of these sections are in different stages of their negotiations. Under Article 6.2, countries are starting to sign deals that transfer ownership of carbon removals from one country’s balance sheet to another. But critical details around transparency, how to prevent double counting of carbon removal efforts, and who will check the integrity and hold countries accountable is still yet to be determined through this year’s negotiations. A recent set of deals signed between a UAE-based company, Blue Carbon, and several African countries have faced strong push back, highlighting loopholes in the Article 6 rules. We could see more of these deals announced at COP28.
For Article 6.4, a Supervisory Body was set up to create a first draft of recommendations for what a good carbon removal must look like in order to be sold on a UN-governed market. These definitions will be agreed at COP28, and over the next few years experts will begin to create granular standards specific removals must meet to become a carbon credit.
Article 6.8 has been relatively overlooked until now. This year could see countries like Brazil try to steer the conversation away from market based financing approaches and push for negotiations on non-market mechanisms that could be included under 6.8.
Forest credit politics at COP28
Recent investigations into the integrity problems facing corporate offsetting claims have led to a significant decrease in the price and demand for forest-based carbon offsets. Forest based credits have increasingly been deemed to fall under the minimum integrity bar, often because it is hard to measure how long they will live, how much carbon they store, and whether they would have been deforested if they weren’t carbon credits (lacking additionality).
At COP27 concerns were raised by rainforest nations that long developed forest credit methodologies under another part of the Paris Agreement, called Article 5, were being disregarded before multi-year conservation efforts were financially rewarded. These countries rightly felt that increasing integrity rules around carbon markets were moving the bar and leaving them without the financing they deserve for forests.
This tension is set to increase this year, with key decisions still on the table about how forestry credits will be handled through Article 6, and whether Article 5 will be reopened. Whilst these decisions are being made, limited finance is flowing to the regions that need it the most. A focus on Article 6.8 (non market mechanisms) could help to alleviate this, giving new ways to pay for forests.
Where do voluntary markets come into this?
The role of voluntary markets once the Article 6 rules have been ironed out seems unclear, and discussion around how to regulate supply and demand rage on. Initiatives such as the Integrity Council for Voluntary Carbon Markets have been working to develop a set of uniform credit standards called the Core Carbon Principals, but in theory, Article 6.4 of the Paris Agreement should replace these as the benchmark for high integrity.
On the agenda for COP28 is the launch of the UAE’s ‘end-to-end integrity framework for voluntary carbon markets’, although it’s not entirely clear what this is or how it will interact with Article 6. Jurisdiction-specific initiatives such as the African Carbon Market Initiative were launched last year to some criticism, looking to set African specific standards for credits. This year’s COP could see more initiatives announced from different regions, but their future depends upon regulatory developments.