If you’ve been following the latest news about climate change, one topic that garners significant attention is carbon offsets, and it is often layered in confusion and contradiction. Unlike proven renewable technologies like wind, solar, and geothermal which directly reduce emissions, a carbon offset is a financial mechanism that supports an action which, in theory, negates carbon dioxide equivalent emissions. This action could be planting trees, conserving an old growth forest, supporting a kelp farm or funding a direct air capture facility. The idea is not new, as it came out of the Kyoto Protocol back in 1997 through the UN Clean Development Mechanism.

Carbon Offsets vs Carbon Credits

You can think of a “carbon offset” and a “carbon credit” as two sides of the same coin, and while the terms are often used interchangeably they are not the same thing. A carbon offset generates a carbon credit that can be traded or sold, representing ownership of one metric ton of carbon dioxide removed or avoided. While all carbon offsets are connected to carbon credits, not all carbon credits need to be connected to offsets, further adding to the confusion. 

Individuals have long been able to purchase carbon credits through services like Terrapass to “neutralize” their personal carbon impact. In fact, the EPA offers a GHG equivalent calculator to inform consumers for this purpose. However, by far the larger market for carbon credits are companies which buy them to “offset” their own carbon footprint and decarbonize their supply chain.  

The Carbon Credit Market 

Estimates put the annual global carbon market at between $1 to $5 billion, and a leading authority estimates the global carbon market could grow to $100 billion by 2030. The markets for carbon offsets are divided between compliance and voluntary, with the compliance carbon markets making up the lion’s share. At present, the global carbon market is dominated by the EU as the first and largest regulated compliance market for carbon credits administered under its Emission Trading Scheme.  

Today, a uniformed global price on carbon does not exist with varying prices across multiple markets. To add to the complexity, third-party verifiers like Verra, Climate Action Reserve, Gold Standard, and American Carbon Registry validate the authenticity of carbon offsets using varied methodologies and protocols. Historically, the registries didn’t distinguish between "removals" and "avoidance" and as such only a small portion of voluntary carbon credits issued counted as removal, however this is changing. 

The US market remains primarily a voluntary market, but regional cap and trade regimes like California (the fifth largest economy in the world) have greatly influenced the policies and practices of companies, especially vehicle manufacturers. The main force driving the current market for voluntary carbon offsets is coming from large companies like Microsoft, Amazon, and Google which have pledged to get to net zero as soon as 2030 and are increasingly purchasing credits to reach this ambitious goal.  

The record for carbon offsets is mixed and it’s difficult to find examples of carbon offsetting programs that are working well.

A second factor is that many investors see the price of carbon naturally rising in the future and are increasing their positions of carbon credits on this premise. Indeed, the International Monetary Fund (IMF) has calculated that a carbon price floor of $75 per ton is needed to meet current climate commitments (at the time of this writing the price per credit was around $28 on the California Carbon Market).

Another force is also at play — well-endowed Web3 investors are getting into the fray. For instance, Silicon Valley technology VC Andreessen Horowitz has dropped $70mn in the controversial start-up Flowcarbon to use blockchain technology to bring “better transparency and efficiency” to carbon offsets (something one expert at the Cambridge Center for Carbon Credits doesn’t see as a problem). Other start-ups like JustCarbon and Likvidi have recently raised seed rounds to launch their own carbon-token marketplaces. It’s worth pointing out that Verra, the world’s largest carbon-offset registry, has recently announced that it will no longer accept crypto tokens as it creates too much confusion over who should get final credit for carbon reductions. This is because when a company like Google purchases a carbon credit it immediately “retires” that credit to avoid future trading so nobody else can claim their climate benefit and produce “double counting.”  

The Controversy Over Carbon Offsets  

The topic of carbon offsets spurs fierce debate, and for good reason. Many climate experts believe offsets can be a worthwhile interim solution to move us toward net zero. A large cadre of climate activists, however, disagree with the principle of carbon offsets, arguing that they prolong a business-as-usual mindset with regard to climate change and provide companies the right to pollute. Greenpeace, for one, labels them a scam, while British environmentalist George Monbiot likened them to Catholic indulgences, a way for the guilty to pay for absolution rather than changing their behavior. By contrast, proponents of offsets claim that legitimate third-party certified carbon offsets are leading to increased investment in natural carbon sinks which wouldn’t have otherwise happened. Both positions have merit.  

It's also easy for carbon offsets to get a bad rap because many types are difficult to verify, some are overcredited, while others have been flat out fraudulent. Accounting systems differ on precisely what constitutes a valid offset, and to address this problem the University of Oxford developed a framework last year called the "Oxford Offsetting Principles" to promote greater uniformity in verification standards. For a carbon offset to be legitimate, it must possess a set of characteristics associated with actual greenhouse gas reductions, removals or avoidance, including: they must be quantifiable, they must at least be durable but preferably permanent, they can’t be claimed by another entity, and they must be socially beneficial. When it comes to nature-based carbon credits, a carbon offset can represent removals of carbon from the atmosphere (reforestation) or avoided emissions (conservation). Additionally, for every ton of carbon emissions released into the atmosphere, it is expected that a corresponding ton of carbon emissions is removed from the atmosphere and fully accounted for. 

Estimates put the annual global carbon market at between $1 to $5 billion.

There is one more key trait for a carbon offset to be considered legitimate — it is only valid if the offset funds an action which leads to a direct reduction in greenhouse gas emissions that would not have otherwise occurred. Among climate policy wonks, this concept is referred to as "additionality", which is a determination of whether an intervention has an additional effect compared against the baseline. For example, a company paying for an NGO in Tanzania to plant 10 acres of fig trees shouldn’t receive a carbon offset against its actual emissions if that NGO had already received funds to conduct that same project.  

Implementation With Mixed Results 

The most popular types of projects for carbon offsets involve reforestation and tree planting. Many environmentalist organizations have questioned the efficacy of some tree-planting projects for carbon offset purposes, a critique grounded in science. They point out that it is difficult to guarantee the permanence of carbon sequestration in forests which can be susceptible to clearing, burning, or mismanagement. For example, the British band Coldplay funded a well-publicized tree-planting project in India which resulted in 40% of the 10,000 mango trees dying.  

An investigation by ProPublica found that the carbon credits issued by the California Air Resources Board used an unrealistic formula for logging potential that led carbon credits to be issued to conservation organizations like the Massachusetts Audubon Society in return for not logging forests they presumably had no intention of cutting down. This allowed California polluters Philips 66, Shell, and SoCalGas to erroneously claim offsets against their emissions. In another analysis by the non-profit CarbonPlan of California's forest carbon offsets program — the largest such program in existence worth more than $2 billion — revealed net over-crediting of 29% of all credits issued. Rather than improve forest management to better store carbon, it was discovered California’s offset program creates incentives to generate credits that do not reflect real climate benefits. 

Moreover, a 2020 Bloomberg investigation found that carbon offsets sold by the Nature Conservancy, one of the largest environmental organizations in the world, were based on forested properties that likely would have been preserved without the extra funding. In other words, the emissions reductions from those trees would have happened anyway, making them invalid as carbon offsets.  

Rethinking Carbon Offsets 

The record for carbon offsets is mixed and it’s difficult to find examples of carbon offsetting programs that are working well. If carbon offsets are widely used by individuals, corporations, and governments, then they must reflect real climate benefits to the planet. This isn’t happening in many instances and this must change, otherwise their continued use amounts to false equivalence or even greenwashing. Encouragingly, several start-ups are bringing greater integrity to the use of carbon credits, including Pachama, NCX, Treevia, Cloverly, and Starling, to name a few, which have raised large rounds to scale their machine learning, SAAS, and satellite technologies.

As today’s carbon markets continue to evolve, so do the tools and standards governing their use. But significant challenges in their application remain, and this must be addressed if they are to help us achieve global net zero mandates.

Rob Kellogg is the founder of the Sathi Fund for Social Innovators, is on the faculty at the Watson Institute where he teaches in their accelerator, and is the director of innovation at CrowdSolve, a venture backed software platform and Web3 ecosystem supporting early-stage climate innovators. Since 2015, Rob has been active in the social entrepreneurship space, having served as a mentor or advisor to 150+ founders and their ventures, many working on addressing the climate crisis.