Carbon Offsets
The Voluntary Carbon Market is important in fighting Global Warming
In the CEQA Net Zero program at Advocates for the Environment, my non-profit California law firm, we sue developers, mostly developers of warehouses in the “Inland Empire” east of Los Angeles, to compel them to mitigate their greenhouse-gas (GHG) emissions. Most of the cases settle before trial. We try to obtain a net-zero settlement. In most cases we require the developer to purchase offsets. In this article, I’ll use the terms “carbon offsets” and “carbon credits” interchangeably. Note that, in this context, “carbon” is a shorthand for types of gases that contribute to global warming via the greenhouse effect. Not all greenhouse gases (GHGs) contain carbon, and not all gases containing carbon are greenhouse gases, but referring to carbon credits or carbon sequestration is a useful shorthand.
Wikipedia defines an offset as follows: “A carbon offset is a way of compensating for the emissions of carbon dioxide or other greenhouse gases. It is a reduction, avoidance, or removal of emissions to compensate for emissions released elsewhere. It represents an emission reduction or removal of one metric tonne of carbon dioxide equivalent.”
Mitigating a Warehouse’s GHG Emissions
The two largest sources of added emissions from a typical warehouse project are mobile sources and energy. Energy emissions are not difficult to mitigate on-site: just add enough solar panels and batteries to power the project. Mobile-source emissions result from the additional driving of cars and trucks caused by the new project. There is no practical way to directly mitigate a warehouse project’s mobile-source emissions. The energy emissions will eventually decline to zero as the share of the electricity supply produced by burning fossil fuels declines to zero over the next couple decades. And the mobile emissions will similarly decline as we switch to 100% electric vehicles, supposedly by 2045 in California. But until these things happen the project will result in the emissions of a high volume of greenhouse gases, and we want to mitigate these emissions.
The developer could, in theory, directly mitigate mobile emissions with a project that would provide rebates on the purchase of electric vehicles, for example. The emissions avoided by removing the fossil cars from the road would compensate for the extra emissions caused by additional driving induced by the project. There are two problems with this. First, warehouse developers aren’t in the business of administering such rebates. They’d need to set up special departments to publicize the program, process applications, and distribute the rebates after verifying the sale of the fossil cars. Second, it would be very expensive. If a typical warehouse’s annual mobile emissions are 8,000 metric tonnes of CO2 equivalent (MTCO2e), and a typical passenger vehicle emits 4.6 MTCO2e/year, the project would need to remove 1,739 fossil cars to compensate. Assuming that a $1,000 rebate would be sufficient to induce the change, and the fossil cars would be scrapped, not sold, this would cost $1.739 million. The mitigation would cost $1.739 million / 8,000 MTCO2e = $217 per metric tonne. This is a relatively high cost per ton, suggesting that there are more cost-effective alternatives.
Carbon Markets
Since we have a limited amount of money to spend on climate mitigation, economists suggest that we focus on the lowest cost-per-ton measures so that we can reduce emissions more. We should do all the mitigation we can at $3 per ton before moving on to measures that cost $5/ton, and so on.
Reductions are fungible. From a climate-science point of view, a metric ton of CO2 released into the atmosphere anywhere in the world, by any process, is equivalent to any other metric ton. It affects everyone in the world the same way that a different ton of released CO2 does. Similarly, the avoidance of the release of a metric ton is equivalent to the removal from the atmosphere of a metric ton. This fungibility comes from looking at the problem from a strictly climate-science perspective. There are related issues of social justice, economic distribution, local co-benefits and so on. But we should focus on fixing climate change. It is important that we do not unjustly harm anyone while doing this, but we can’t afford to try to solve all of the world’s problems on the back of climate change, especially when climate change itself is by far the most pressing of those problems.
Economists tell us that markets provide the best way to allocate scarce funds most efficiently. The simplest market-based carbon-avoidance mechanism is a carbon tax. Anyone emitting greenhouse gases would be taxed a fixed amount per ton of MTCO2e emitted. The amount of the tax should be set so that the emitter pays for the harm to the world caused by their carbon pollution. This might be around $50/ton now. The taxes would be collected centrally when possible. In other words, instead of you paying for the emissions caused by driving your fossil-fueled car, the refinery producing the gasoline would pay the tax and pass it on to you in the price of gasoline.
Markets do not currently take into account the harm done by GHG emissions. Polluters harm everyone, but currently don’t have to pay for this. Making polluters pay would change the market dynamics and incentivize emissions reductions. Driving an electric car would make economic sense for a lot more people, for example, if gasoline cost several dollars more per gallon.
A carbon tax would allow markets to allocate emission-reduction funds to the most effective uses. Should we spend our mitigation money on building solar-energy farms or on retrofitting buildings to make them more energy-efficient? With a carbon tax, market participants, acting in their own self-interest would make choices that would implement the economically optimal emissions-reduction policies.
Cap-and-trade is another market-based mechanism to make GHG polluters pay for the cost of their pollution. The California cap-and-trade program, for example, which applies only to certain sectors, has been successful in reducing emissions. To be allowed to emit a ton of GHG, an industry falling within the purview of cap-and-trade must purchase an allowance. The allowances are initially given away free of charge to covered entities, which may trade or sell them. The number of allowances is reduced each year, to force carbon emissions to decline. Allowing allowances to be traded means that they’ll tend to be used by industries where it is the most expensive to reduce emissions, so cheaper-to-mitigate emissions will be reduced first. The economic effect of cap-and-trade is very similar to that of a carbon tax.
The voluntary carbon market, which will be discussed below and is the main subject of this article, is another market-based mechanism for GHG reduction. Carbon offsets are bought and sold in this market. An offset represents a ton of CO2-equivalent emissions that is avoided or removed. Projects that mitigate GHG emissions can package their mitigations and sell them as offsets to companies that cannot inexpensively reduce their own GHG emissions. Airlines currently have no climate-friendly substitute for fossil jet fuel; cement manufacturers currently have no climate-friendly way to produce Portland cement at a reasonable price. They will have to eventually face these problems head-on, and develop zero-emissions fuel and processes, but for now it’s better if they offset their emissions rather than simply ignoring them.
Some environmentalists criticize market-based GHG reduction mechanisms. First, they claim that the market mechanisms are just “licenses to pollute.” Even if this is true, it is better for polluting industries to be forced to pay for the harm they cause. The alternative right now to polluting with a license is polluting with no license, which is what most industries are doing.
Some environmentalists would rather have ”command and control” laws and regulations prohibiting pollution than a market mechanism that allows the pollution to continue. But, in many cases, there is no viable alternative to the polluting activity. Airlines, for example, have no practical alternative to burning jet fuel to fly their planes. Prohibiting the burning of jet fuel is impractical. And government regulators can’t figure out as well as the market can which reductions will be most cost-effective; the costs can vary considerably. The IMF estimates, for example, that methane-flaring regulations will cost $20 for a ton of GHG reduction, whereas subsidies for home weatherization will cost $350/ton. Market-based mechanisms will choose to reduce methane flaring first, which will result in a much larger GHG reduction for the same cost.
The political climate in developed countries, especially the US, is not favorable for command-and-control laws restricting GHG emissions. The Inflation Reduction Act in the US, for example, is almost entirely “carrots,” such as subsidies for clean-energy projects, with no “sticks” requiring GHG reductions. I would favor sticks in the form of federal laws gradually prohibiting the burning of fossil fuels over the next 25 years, and gradually phasing out oil and gas production over the same period. This is what we need to be doing, but the chances of passing such laws now are nil. So we need to make the best possible use of the tools that are available.
The Voluntary Carbon Market
Our warehouse program, discussed above, provides a good example of where carbon offsets are appropriate. There is no practical way a warehouse developer can directly mitigate the increased driving of vehicles (VMT, or vehicle miles travelled) caused by the use of the warehouse. When our settlement with a developer requires them to purchase carbon offsets in the voluntary carbon market, the purchase provides funds that are used to reduce the concentration of GHGs in the atmosphere, either by removing them or by avoiding their emission. We require developers to purchase credits from projects listed on one of the major carbon-offset registries, such as the UN Clean Development Mechanism or the Climate Action Registry. Those registries vet projects before listing them, to make sure they are well managed, based on established science, will actually result in GHG removals or avoidance, which would not occur without the project.
The registries have been criticized for failing to provide adequate oversight of the projects they list. For example, a widely cited article in the Guardian in early 2023 found that many of the credits approved by Verra, a leading registry, did not represent genuine carbon reductions. I asked a panel of experts at a recent climate technology conference the average actual GHG reduction I could expect if I bought 100 MT worth of offsets from an average supplier on one of the large registries. The answer was “60 MT.” This answer doesn’t discourage me from requiring warehouses to purchase offsets through the registries. It just means that I should ask for 67% more offsets to make up for offsets that are less effective than advertised.
A lot of attention is being paid to offset quality now. Organizations such as the International Emissions Trading Association and the Integrity Council for the Voluntary Carbon Market are establishing principles to improve the integrity and efficacy of carbon-offset projects. Large companies that are attempting to offset all their GHG emissions, like Microsoft and Salesforce, not only purchase offsets through registries, they establish their own protocols for vetting new types of carbon-reduction projects. They are very concerned about offset quality and will push the market to increase quality. In addition, the UN is developing standards and processes under Article 6 of the Paris Agreement, the Paris Agreement Crediting Mechanism. The registries will want to comply with these standards when they come into force.
The voluntary carbon market provides substantial funding for projects that reduce GHG concentrations, either by avoiding emissions or removing GHGs from the atmosphere. According to one estimate, total funding up through 2021 was around USD $8 billion. This is a substantial contribution toward fighting global warming. Our warehouse project has resulted in about $8 million in offset purchases, and I’m proud of that contribution we’ve made towards fighting global warming. John Berger’s excellent book, Solving the Climate Crisis, tours the efforts being made in various industries to cope with the climate crisis. For many of them, an important part of the solution is the ability to sell carbon credits on the voluntary carbon market. Farmers and forresters changing their practices to sequester more carbon, and developers of low-carbon Portland cement and steel need these credits for their businesses to be viable.
The voluntary carbon market is not perfect, but it’s improving, and it has an important role to play in financing the measures we need to take to move to a net-zero world.