Carbon neutrality objective: carbon offset projects, a further option towards environmental Ecommitment.

In recent years we are seeing how climate change and commitment to the environment has started to become an issue that is closer not only to citizen, but also to the business level. More and more companies are interested in aligning their brand and their business to the concept of sustainability, some for purely marketing reasons and others for effective environmental protection ideals. There are times when insetting implementations, i.e. internal company decarbonisation projects, are not enough to decree total carbon neutrality. In these cases, when the production process does not allow to go further, there are plausible and internationally certified alternatives that can be used to offset their CO2 emissions. We are talking about carbon offsets, or credits associated with carbon offset projects.

What is meant by carbon offset?

Carbon offsetting generally refers to a reduction in Greenhouse Gas (GHG) emissions that is used to compensate for emissions that occur elsewhere. Such offsets are measured in tonnes of carbon dioxide equivalent (CO2e), as CO2 is not the only GHG produced by human activity. It is true that it accounts for 76% of total emissions, however, with the term GHG we also refer to other compounds, such as methane, nitrous oxide, etc. that somehow have to be accounted for as well. For this reason, we talk about tonnes of CO2e, depending on the global warming potential of each GHG.

But how are these offsets registered? Today there are carbon offset credits, which certify the reduction of one metric tonne of CO2e globally. The key concept here is that offset credits are used to pass on a net climate benefit from one entity to another. Since GHGs are globally mixed in the atmosphere, it doesn’t really matter exactly where they are reduced. Carbon offsets are possible for just this reason, as the phenomenon of climate change is not a local problem.

Offsets from carbon emission reduction projects are one more component in the list of options that companies can consider on their way to neutrality, once they have reduced their emissions internally as much as possible, as they allow offsetting those residual emissions that they are not yet able to completely eliminate.

Carbon offset markets

There are two types of GHG offset markets: mandatory (compliance) and voluntary schemes. The former is created and regulated by mandatory national, regional or international carbon reduction schemes, while the latter operates outside compliance markets and allow companies and individuals to purchase carbon offsets on a voluntary basis without being earmarked for compliance purposes. The key differences that distinguish one market from the other are outlined below:

Figure 1: Difference between mandatory and voluntary offset markets. Source: Climatecare

We underline that, if for credits from the compliance offset market it is possible to be purchased by voluntary entities, for those from the voluntary market it is not possible to satisfy the demand of the compliance market. Therefore, the voluntary offset market cannot replace the EU ETS market scheme (for example), where companies are obliged to buy allowances on that market to compensate their annual emissions. This means that at no time can companies buy offset credits on the voluntary market rather than on the ETS market. In fact, there is a large price difference between them today, with the price of the former varying between 8 and 13 €/tCO2e, representing a quarter of the value of allowances currently traded on the ETS market, above 40 €/t.

Figure 2: Evolution of CO2 prices in the EU ETS market. Source: Magnus-Mtech

Certified standards and international projects

Whether the offset credit is compliance or voluntary, it is certified and recognised by the main international standards and/or climate agreements, thus guaranteeing the buyer’s registration and commitment to the environment. These include the Clean Development Mechanism (CDM) for the compliance market and the Verified Carbon Standard (VCS) for the voluntary market.

Both standards implement GHG offset projects in developing countries and cover the following categories:

  • Implementation of renewable installations
  • Methane reduction and biomass/biogas utilisation
  • Energy efficiency and fuel switching
  • Forestry and land use
  • Upgrading of household devices and appliances

Going into details concerning standards, the CDM is one of the flexible mechanisms included in the Kyoto Protocol (article 12) and the Paris Agreement (article 6) and allows companies in industrialised countries with emission limitations to carry out projects aimed to reduce GHG emissions in developing countries. The objective of this mechanism is twofold: on one hand, it allows developing countries to use cleaner technologies and move towards sustainable development; on the other hand, it allows emission reductions where it is economically more advantageous and thus reduces the overall cost of compliance with regulatory obligations. To quantify, we are talking about 8,100 projects that have reduced more than 2 billion GHG emissions.

The VCS, although not recognised in the climate agreements, represents the most widely used programme for offsetting GHG emissions in the voluntary market, certifying more than 1,600 projects. The voluntary market is increasingly taking shape, from its origin in the 1990s, and increasing the volume of CO2e reduced, thanks to the actions and interests of market players (multinational companies, banks, etc.) and the creation of new standards, to reach a reduction of more than 100 million tonnes of CO2e by 2019.

Figure 3: Voluntary carbon offset market evolution in 2019. Source: Ecoystem Marketplace.

Scepticism about the offset market

Despite the offset methodology is recognised as one of the solutions to mitigate global warming, there is still a lot of scepticism about the merits of offsets, especially those associated with the voluntary market, which is still a self-regulated market.

According to various environmental institutes, most of the offsets sold by intermediaries, companies and governments do not deliver the emission reductions they promise. Famously, the United Nations programme (UN-REDD) and one of its projects in Amazonia, where pressures to clear the rainforest exceeded the payments made to protect it, causing a major carbon sink to degrade while the associated emissions of the buyer of the offset credits continue unabated.

This is one of the biggest problems with the voluntary carbon offset market, which, despite increasing international certification standards, remains a difficult market to control,

While the carbon offset market can be an instrument for offsetting GHG emissions, it remains an additional option to existing CO2 reduction tools. It is not a unique solution, but rather an additional methodology available to those companies that are not yet able to reduce their emissions and have no other solution to reach carbon neutrality.

Cristina Vitale | Energy Consultant

By | 2021-04-20T09:07:37+00:00 April 20th, 2021|Categories: Coal, Energy Markets, Energy Policies, Featured, M·Blog, Oil|Tags: , , |0 Comments

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