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October 16, 2019

It’s Time to Score Carbon Offset Quality

Mark Trexler

In 1988, as an associate at the World Resources Institute, I worked on the first carbon offset project. Thirty-one years later, carbon offsets are a well-known and common piece of climate mitigation efforts -- and they are at a critical juncture. As countries around the world act to reduce their GHG emissions, the number of potential carbon offsets will decline. At the same time, carbon offset demand will expand as more companies and products strive for carbon neutrality and as the aviation sector turns to offsets to legitimize growth in its Scope 1 emissions.

But there is an even bigger problem. Carbon offsets have always been known to be a challenging environmental commodity, primarily because of difficulty in differentiating between “additional” tons that can serve as offsets, and “non-additional” tons that need to be kept out of offset markets. Getting additionality right has been by far the biggest challenge facing carbon offset markets over the last 30 years.

Getting additionality right has been by far the biggest challenge facing carbon offset markets over the last 30 years.

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This isn’t the message you will hear from some new carbon offset providers who are trying to characterize the biggest problems facing carbon offsets as poor quantification, double-counting, and even fraud that results in offsets being sold multiple times. They argue that Blockchain-tracked carbon offsets are a big part of the solution, and that reliable quantification of offsets is more important than additionality. These arguments run counter to 30 years of experience with carbon offsets and a massive carbon offsets literature.

Unfortunately, 31 years into our collective experience with carbon offsets, the environmental integrity of offset markets today is probably much lower than generally assumed. It is time to explore options for reforming the ways in which carbon offsets get qualified, both for voluntary and compliance-based markets. In particular, we should look for changes that incentivize offset purchasers to seek out higher quality offsets, rather than simply cheaper offsets.

A scoring-based approach to offset quality would change many aspects of the offset qualification process that currently hinder the environmental performance of offset markets. Today, voluntary offset purchasers can’t tell whether they are buying an offset that represents a 200 or a 600 score on a 0-1,000 confidence continuum. 

If purchasers had that information, who would want to purchase a 200 score offset, even if they could? And project developers would see an opportunity to bring many more 800 score projects to market, knowing that the higher quality score would justify a higher price.

Implementing a scoring system for offsets eligible for compliance use is a bit more complicated. Many compliance purchasers won’t care what they buy as long as the tons count against their compliance targets. However, policy makers could declare that only offsets scoring above a certain score, e.g. 500 or 600, would qualify as compliance tons.

An Offset Qualification Scoring System already exists and could quickly be brought to market. My team was developed it more than a decade ago for one of the major carbon trading houses. Some parts of the company were convinced that a subset of offset buyers would be interested in higher confidence reductions and would pay a premium for them. Other parts of the company, however, feared (correctly) that a scoring-based system would undercut the marketability of the lower confidence portions of the company’s offset portfolio. They also feared that being the only company to adopt such a system could put the company at a significant competitive disadvantage. So the system was never implemented.

You can learn more about the system in our newly published paper, but I’ll describe one particular aspect of the methodology that solves a really tricky challenge. How can you weight “additionality” high enough so that a project cannot generate make a high Offset Qualification Score without a high “additionality” score, without the “additionality” score dominating the entire Offset Qualification Score?

The answer is the inverse weighting assigned to the additionality criterion in the overall Offset Qualification Score. As a project’s additionality score increases, the overall weighting of the additionality criterion as part of the Offset Qualification Score decreases. This makes it impossible for a project to generate a high Offset Qualification Score without a high additionality score. At the same time, a high additionality score cannot by itself generate a high overall Offset Qualification Score. This tells purchasers that an 800 or 900 score project is truly at the high end of the confidence continuum based on all of the criteria included in the weighting system.

This Offset Qualification System is not written in stone, and can probably be improved, but it represents an important step in trying to reverse the “race to the bottom” that so many carbon offset systems have been engaged in over the last 30 years. 

Read more in our newly published paper, and explore the carbon offsets literature for yourself, starting with the Carbon Offsets Index Entry in the Climate Web. Or take advantage of this roadmap to the carbon offset literature.

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Mark Trexler

Mark has more than 30 years of regulatory and energy policy experience. He has advised clients around the world on climate change risk and risk management. He is widely published on business risk management topics surrounding climate change, including in the design and deployment of carbon markets. Mark has served as a lead author for the IPCC and holds advanced degrees from the University of California at Berkeley.

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