Friday Climate Focus: The Crazy World of Voluntary Carbon Offsets, Schitt's Creek GIFs, & more
Edition #10
Welcome to the 10th edition of Living In A Greenhouse! Bit of a personal milestone there =)
Before getting into today’s edition, I wanted to talk to you about something important.
It is the last month of the year and if you are anything like me, this is when you introspect and reflect about your progress in the months that have gone by. And again, if you are anything like me, you will struggle to cut yourself some slack.
In all likelihood, you are better than me and this is not a problem. But in case it is, the next few lines are for you.
This year and the last merged into one big ball of blur for a lot of us. Everything that we did before March of 2020 seems like a distant reality that is slightly familiar, but not so much. We have had to adapt without our human superpower - our social support systems and communities. Some of us have had a few stumbles along the way, hard falls for the more unfortunate among us, but we picked ourselves up and carried on. We did and are doing the best we can and that’s fantastic.
Take a moment, think about the last 18 months that have gone by, and about how far you have come through all this uncertainty. You are awesome. You are resilient. While what is to come is still uncertain, you are the most prepared you have ever been and you will do just great.
I wanted you to hear that.
On that note, onto this week’s edition. It is a hard left, but hey, that’s what you signed up for with this newsletter.
Oh and because it is a happy Friday, I am going to use GIFs from Schitt’s Creek to talk about Carbon Offsets.
The Crazy World of Carbon Offsets
A post on this has been coming for some time. If you are one of the regular readers, you’d have seen me refer to it in my previous newsletters. You’d also know that I am a strong proponent of well-planned carbon markets. I think it is one of the most efficient policy levers we have at our disposal to cut carbon emissions.
And carbon offsets are a key (and a very controversial) component to carbon markets.
Why should I care about Carbon Markets and Offsets?
Great question. Short answer - it’s pegged to be a $100 billion market in 2030.
Slightly expanded answer - I would argue that climate change is as much a market failure as it is a humanitarian crisis. We are here because industrialisation, enabled by financial markets, put indiscriminate amounts of carbon and other greenhouse gases into the atmosphere.
The fastest way to pull it out is by using the same financial markets and pricing these emissions. And that is exactly what a carbon market does.
Carbon markets put a price on carbon.
(A Very Short) Carbon Markets 101
A cap-and-trade system allows regulators to cap emission levels of specific sectors such as power generation, cement, building materials etc.
— In other words, each sector is permitted an upper limit for emissions. Emissions are measured in tonnes.
— This limit is divided as ‘emissions credits’ among the companies operating within this sector
— If a company emits lower than its emission credits, it can trade the surplus to its peers for a price
— The price is set by the regulator to begin with. The demand and supply of credits determines it subsequently
A higher price will incentivise -
a. high emitters to lower its emissions
b. low emitters to continue to keep their emissions below the threshold
Now, imagine a scenario where a regulator tells a high emitter to finance a carbon reduction project instead. The project will compensate for the emissions that the company generates over its permissible limits. And they don’t need to buy credits.
That is a carbon offset.
A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made to compensate for emissions made elsewhere
Here are a few common categories of carbon offset projects -
Renewable energy projects, such as building wind farms that replace coal-fired power plants.
Energy-efficiency improvements, such as increasing insulation in buildings to reduce heat loss or using more-efficient vehicles for transportation.
Carbon sequestration in soils or forests, such as tree-planting activities.
When a regulator tells you to buy carbon offsets and you comply, it is called a mandatory offset. The rules around this are relatively clear, although there are issues.
The other category is voluntary offsets where companies choose to do this. And at that point, everyone loses their minds.
Wait, companies voluntarily buy carbon offsets?
Yes! Why the heck would they, right?
I am going to cut through the noise here. The exhaustive list of reasons to buy carbon offsets contains a grand total of two.
Climate leadership
A pollution free pass
I assure you this is not a controversial take. While it is hard to say which is which, there is an easy rule of thumb.
Rule of Thumb to judge a good Carbon Offset Strategy
If a company’s climate action plan does not include emission cuts, offsets bought by this company is probably a pollution free pass.
Think about it. Carbon offsets are darn convenient.
You own an oil and gas company and the clamour around fossil fuels is reaching fever pitch. You cannot stop doing what you do. What you can do though is to plant trees in Bolivia or Belize or Brazil. And continue to emit per usual.
A Story Of the Crazy World in Three Charts
These charts do a brilliant job in explaining the situation just by itself. Seriously, they do.
A quick summary of the charts because you seem very interested.
In a GIF -
In bullets -
The supply of voluntary carbon offsets has been increasing
But nearly 95% aren’t removing emissions
And the price is ridiculously low. That’s $3 for a tonne of carbon emissions. (The European Union cap-and-trade system is trading at ~$90 a tonne today)
You realise how ridiculous voluntary carbon markets are when an oil and gas major announces that they had just delivered its first shipment of ‘carbon-neutral’ natural gas.
But to make it work Total’s pioneers of carbon neutrality first needed to find green projects capable of meeting two requirements: generate carbon credits backed by an international organization, without costing too much.
After struggling to come up with an answer, the team set up a meeting with South Pole, a project developer based in Zurich that came recommended by rival traders. That’s how $600,000 from a $17 million LNG transaction ended up, in part, paying for forest protection in Zimbabwe.
The Fictitious World of Carbon-Neutral Fossil Fuel, Bloomberg
Forest protection cannot offset emissions caused by production of natural gas. Seriously, they called it 'carbon-neutral' gas.
Okay, what’s gotta give?
I have one major problem with the current system.
Major Problem #1: Lack of a rigorous accounting standard
There are a few private accounting standards like the Gold Standard, Verra, and the American Carbon Registry that did a wonderful job for a relatively new concept in the 1990s and the early 2000s. They aren’t agile or flexible enough to include safeguards for integrity when volumes skyrocketed. Refer Chart #2 above.
And I have a few not-so-minor problems.
Not-so-minor Problem #1: If it is something that would anyway happen, it shouldn’t count
There is no point buying credits today from a wind farm that has been generating clean energy for nearly a decade. Whether you buy credits or not, it’d continue to operate. You may ask what if they shut down. But I am sure the paltry $3 a tonne you are playing for offsets isn’t keeping the lights on in a wind farm.
Not-so-minor Problem #2: One-size does not fit all
One single acre of mangrove has ~5x-10x the carbon storage capacity compared to a regular tree. Carbon credits should account for this variation and not use a single capacity in its estimation.
Not-so-minor Problem #3: High quality is relative
Below is an excerpt from a foundation that is leading the fight against climate change -
[…] provides high quality carbon offsets from renewable energy, energy efficiency, and forestry projects. High quality carbon offsets are essentially reductions in greenhouse gas (GHG) emissions from a project that has been independently audited against leading, third-party certification standards. Such standards include the American Carbon Standard (ACR), the Climate Action Reserve (CAR), the Gold Standard, and the Verified Carbon Standard (VCS)
These are the same standards that have fallen short.
It is extremely important to acknowledge that high quality carbon credits aren’t the highest quality there can be.
So, what is a good quality offset then?
Here is a great definition of a quality carbon offset -
Quality has two main components.
First and foremost, a quality offset credit must represent at least one metric tonne of additional, permanent, and otherwise unclaimed CO2 emission reductions or removals.
Second, a quality offset credit should come from activities that do not significantly contribute to social or environmental harms
Make sure it is additional, estimated accurately, permanent, not used by anybody else, and does no harm. You are then good to go.
And that’s a wrap on this edition.
I am taking a week’s break from the newsletter to attend to a few other priorities that are time-sensitive, and to end the year without having to fret about a to-do list =) I will be back again the week after next.
Here’s a parting GIF-t from my absolute favourite character in the show. (Yup, really milking this, but Happy Friday, y’all!)