Part 3: Anticipating the Future of Carbon Offsets

In Part 1 of this series I reviewed the history of carbon offsets and the “small world model” that underlies much of the thinking about carbon offsets. In Part 2, I explored the challenges of extrapolating from that small world model to what happens in the real world. Here in the third and final part of this series, I suggest there is both bad news and good news with respect to carbon offsets, and then explore alternative scenarios for their future.

The Bad News: Carbon Offsets Can’t Deliver on Today’s Market Expectations

At some level, the “small world” model of carbon offsets is a reasonable representation of the real world. In other words, there are opportunities to take advantage of GHG avoidance or removal options outside of individuals’ or companies’ Scope 1 emissions boundaries that leave the atmosphere ambivalent as to whether you reduce your own emissions or cause these alternative reductions or removals to happen.

But “some level” is not the real world. The problem comes in assuming that offsets can scale far beyond where the small world model is applicable, and far beyond what was anticipated when the World Resources Institute launched the first carbon offset in 1988. Yet that is exactly what is represented by the idea – commonly accepted -- that carbon offsets can play a major role in achieving global climate targets. 

The challenge is that the intangibility of the offset commodity, as explored in Part 2, becomes a bigger and bigger problem as offsets scale up. We’ve seen that even in the relatively modest scaling of carbon offsets to date, which has failed to deliver a quality offset market. Contrast that experience with the scaling of offset markets proposed by offset optimists; their goals would dwarf anything attempted so far.

Part 2 of this blog laid out the case for why offset optimists should not assume that carbon offsets can scale at will given the limitations of their small world model. When the Task Force on Scaling the Voluntary Carbon Market suggested in 2021 that offset markets need to scale by 10x to 100x in order to help meet global climate targets, no assessment of the plausibility of such an expansion while maintaining offset quality was provided. That assessment isn’t present in the more recent work of the Integrity Council for the Voluntary Carbon Market, either. And we don’t see it in the advocacy for carbon offsets on social media, where offset proponents tend to focus on the “need” for carbon offsets, as opposed to whether offsets are fit-for-purpose for meeting those “needs.” 

In the absence of a convincing demonstration that carbon offsets can be massively scaled while still accomplishing climate change mitigation goals, it is prudent to assume that carbon offsets are not fit-for-purpose when it comes to meeting today’s market expectations.

The Good News: Carbon Offset Markets Can Be Designed to Work

The fact that offsets aren’t working doesn’t mean they can’t work. To the contrary, the good news is that carbon offset markets can be designed to work, even if not at the scale that offset optimists advocate. It’s not really that hard to identify some of the key steps that would help “fix” offsets:

I argued in Part 2 of this series that absent explicit recognition during market design of the implications of offset intangibility, we should expect a gamed and low-quality market. As one carbon offset expert summarizes today’s situation: “at the project level, everyone kind of has an incentive to see how much they can get away with without raising alarm bells among buyers - but the systemic outcome is a crash.” That doesn’t mean this situation can’t be corrected -- but how likely is such a correction?

Alternative Offset Scenarios

There are many different potential scenarios when it comes to the future of carbon offsets. I’ll explore a few of them.

Scenario 1: We Fix Offset Markets

Could the steps laid out above, among others, be implemented to create a quality offset commodity? Sure. In fact, the relatively recent launch of multiple ratings agencies is a useful step in that direction. That said, an offset market designed for high quality would look very different from today’s market. Such a market would likely have certain characteristics:

Many of today’s offset market participants would object to a market with these characteristics. And because offset market stakeholders dominate efforts to “fix” offset markets, those efforts tend to nibble around the edges of the problem. The ICVCM’s proposed Assessment Framework, for example, might adopt substantially tightened offset rules; by some estimates, a majority of today’s standards organizations and offset projects would fail to meet the envisioned rules.

But much of what the ICVCM is proposing does not relate to the challenges we explored in Part 2. The ICVCM makes no mention of the problems created by scaling offsets beyond their “small world model,” for example, nor does it discuss the reality that we can’t be certain of an intangible commodity’s quality (just more or less confident). Finally, the ICVCM doesn’t address the need to explicitly balance the objectives of cost-effectiveness and environmental integrity. Because the ICVCM is in effect trying to improve the existing carbon offset “mousetrap,” it seems likely to fall well short of what a complete re-think of the system based on delivering a consistently quality commodity would lead to.   

Scenario 2: Full Speed Ahead on Offsets

Many offset market participants and investors are banking on a “full speed ahead” future for voluntary offsets and offset markets. This scenario requires arguably heroic assumptions about the ability of market participants to continue to distract attention from the structural problems discussed in Part 2 of this blog -- but admittedly our proven potential for “willful blindness” is huge, making it impossible to dismiss this scenario.

That said, willful blindness cannot succeed forever as a market strategy. If offsets scale rapidly under Offsets Round 2, all other things being equal, the result is likely to be the same kind of crash that Offsets Round 1 experienced.

Scenario 3: From Projects to Programs

Some offset market observers suggest that the problem with today’s offset markets is the focus on a myriad of individual projects, each delivering a relatively small quantity of offsets. They suggest that a “programmatic approach” (based, for example, on public policies intended to generate qualifying reductions and removals) could be simpler to implement and ultimately more effective.

But there is nothing about a programmatic approach that inherently solves the intangibility problems discussed in Part 2 of this blog series. Indeed, the Kyoto Protocol’s Clean Development Mechanism experimented with programmatic offset creation; the problems encountered in the CDM didn’t really differ from the project-based approach.

Scenario 3: From Offsets to Contribution Claims

Recently, there has been discussion about moving away from a focus on carbon offsets to the alternative idea of carbon contributions. What's different about “contribution claims” as opposed to carbon offsets is that the funder doesn’t claim ownership of any emissions reductions or carbon removals resulting from the funding. As a result, those emissions reductions or removals can’t be applied to a funder’s carbon footprint to enable footprint-related claims, whether climate neutrality or net zero.

“Carbon contributions” could fund many of the same types of initiatives funded by carbon offsets, but could also apply to activities that wouldn’t be able to qualify as offsets, e.g. climate education and policy advocacy. In effect, carbon contribution claims would encourage companies to spend their money on what will most advance global climate objectives, as opposed to focusing on their individual carbon footprints.

An obvious motivation for carbon contribution claims is to avoid the controversies that have surrounded carbon offsets. And to the extent carbon contribution claims aren’t counted against your emissions footprint, do things like additionality, leakage, and permanence still matter? They certainly matter less, since you are not implicitly justifying an emission somewhere else with a contribution claim, as opposed to a carbon offset that you're subtracting from your emissions footprint.

That said, if you’re going to give contribution claim money to someone to mitigate climate change, you would still want to fund something that wouldn’t have otherwise happened – i.e., the importance of additionality still exists. Moreover, you would still want to promote activities that might have a permanent impact and which don't leak. So, in a very real sense, additionality, permanence, and leakage are just as conceptually important, but arguably pose much less of a greenwashing problem than today’s carbon offsets. 

A growing body of carbon offset market participants are promoting the substitution of contribution claims for carbon offsets. Whether individuals, companies, or countries will have any interest in funding contribution claims that can’t be applied against their footprints or net zero targets, however, remains an untested proposition.

Conclusion

The future of offset markets and the ability to profit from offset investments seems most appropriately characterized as radically uncertain. Offset markets could evolve in a number of different ways, of which the “explosive growth” scenario is probably the most risky. These markets have collapsed before, and if we simply continue with offsets business as usual they probably will again. If you’re banking on carbon offsets, tread carefully.