Carbon Offset Credit Calculation Concerns Arise : Gainfront

29Dec, 2022

2022 shed new light on some of the darker aspects of carbon offsets. Carbon offset credit calculation concerns arise as governments, stakeholders, and consumers determine their value is inflated. A carbon offset is a project funded specifically to either lower CO2 emissions or extract and store CO2. These projects are frequently some form of reforestation, new renewable energy infrastructure, or re-engineered agriculture or waste management practices. Many companies purchase carbon offsets to achieve their carbon footprint and greenhouse gas (GHG) emissions goals. This is a widely accepted practice in energy, utilities, and airline industries.

To achieve a “net zero” goal, some volume of carbon offsets mush be purchased, in what is called the Voluntary Carbon Market (VCM). From 2018 to 2021, the VCM’s value grew from $300 million to $1 billion. McKinsey estimates the VCM value will grow rapidly in the coming decades, possibly reaching $180 billion by 2030.

It is better to purchase carbon offsets than do nothing to counterbalance the consumption inherent in doing business. It is also important to understand the recent developments related to how governments, stakeholders, and consumers view their value and how to avoid inflating that calculated value.

Change is Required

It is important that organizations develop a program to innovate and update practices to reduce GHG emissions, not just plan to purchase offsets. If used as a substitute for re-engineering business practices with a lower footprint, carbon offsets will make climate change worse as they offer no sustainable CO2 benefit. Part of the appeal of carbon offsets is the notion that it’s possible to meaningfully combat climate change while making no significant changes to our life and business practices. But people and organizations need to rethink all practices and reduce emissions at the source.

First Rule – Do No Harm

It is critical to assess how carbon offset projects impact local communities to ensure each project does not make other localized environment or social issues worse. Recent critiques have highlighted instances of carbon offset projects that harmed local communities or resulted in broader environmental damage.

One such project is the Alto Maipo hydropower dam near Santiago, Chile. Funded by several multilateral banks and registered to sell carbon credits via the CDM, it is touted by the Chilean government as a source of clean energy. This project has already led to numerous human rights violations, impacting the local water, land used for grazing and local environment. It is also disturbing the surrounding glaciers and accelerating desertification, exacerbating the regional impacts of climate change.

Overly Optimistic Estimations

According to a NY Times article from earlier this year “Many offset projects do not even come close to 100 percent of the benefits they promise.” The most obvious factor affecting an offset’s benefits and the potential for misstatements is the reliability of the methodology used to calculate the GHG reduction. Scientific errors can lead to massive overestimates of GHG reductions. For instance, a recent analysis by the non-profit Carbon Plan found that the methodology used by California’s forestry-based offset program overlooked significant biological differences between tree species. This resulted in overestimating the program’s GHG reductions by 30%, which translated to an additional volume of CO2 in the atmosphere and $410 million in offsets that were worthless to the climate.

Stuff Happens

It’s also important to note that carbon offset projects are not immune to the natural disasters and socio-political unrest that has disrupted all other pursuits. In 2021 wildfires in California burned more than 150,000 acres of forests that had been set aside under the state’s carbon offset program. Continue to track and stay informed of progress with offset purchase projects so there is an opportunity to get ahead of any surprises related to the offsets included in carbon calculations.

Offset Terms to Know

When incorporating carbon offset purchases into a larger ESG program, it’s important to be familiar with some of the terminology associated with issues in how much offset benefit is counted.

Additionality

Make sure that the funded offset projects are not carbon-reducing projects that would have happened regardless of the offset project investment. To properly credit a company with a GHG reducing offset it’s important that that initiative would not have happened without that offset investment. One study found that almost 52% of the offsets generated by wind farms in India through the United Nations’ Clean Development Mechanism derived from wind farms that “would very likely have been built anyway,” meaning that those offsets had nothing to do with GHG reductions.

Additionality is a major problem with forestry offsets. It is a common issue with “reducing emission from deforestation and forest degradation” (REDD+) projects. REDD+ projects protect forests from being destroyed or degraded. It is unclear that funding this project prevented any real threat of destruction or degradation.

Leakage

Review the local and broader impacts of any offset projects. Determine if the suppression of a bad practice will result in an increase of that harmful practice elsewhere. Avoid kicking the can down the road instead of creating a total net benefit for the planet.

Permanence

It is important to understand the lifespan and projected timeline for any purchased offset. Planted trees must be maintained for a long time to have meaningful climate impact. One hundred years is the accepted standard. When a forest is destroyed, all carbon stored in the forest is released back into the atmosphere. This will negate the offsets completely.

Double Counting

When multiple companies take full credit for the same GHG reduction, this is double counting. This happens when the same offset is sold multiple times or through supply chain and corporate duplicate reporting errors. Be clear about who is entitled to “get credit” for the offset to avoid overestimating the offset benefit.

Awareness is Key

Continue to monitor recent trends related to offsets. Make sure all practices and communications consider the increased ramifications of a misstep.

Government Fines

Increased regulation and government scrutiny will continue as international guidelines expand. There are multiple statutes that can result in liability and fines for misrepresentations about offsets, including truth-in-advertising and consumer protection laws prohibiting false and deceptive practices.

Litigation

Watch the growing trend of offset related litigation. Environmental groups sued KLM Royal Dutch Airlines for exaggerating their carbon offsets benefits. This lawsuit is a warning to all businesses making public benefit statements related to purchased offsets and any program making carbon neutral claims based on offsets.

Consumer Protections

Any business misleading consumers with false GHG reductions through carbon offsets may face enforcement actions and civil lawsuits claiming “greenwashing”. Be aware of how offset statements fall under different consumer protections.

Summary

The carbon offsets market is projected to reach $180 billion by 2030. Yes, it is unregulated and lacks a common, standardized methodology for consistent and reliable value calculation. Assess how the carbon offset benefit is calculated, assessed, and communicated. Take the time necessary to understand how suppliers are incorporating offsets into their reported ESG numbers. The planet and business will benefit with less investment in offsets and more focus on innovation to emit less carbon.

The Carbon Offset Upset