Currently, most mandatory carbon pricing schemes, like the EU Emissions Trading System, apply to the power sector and manufacturing.
But many companies are not part of mandatory carbon pricing schemes, like retailers, wholesalers, contractors, carriers, farmers.
That’s precisely where offsetting schemes could play a role in achieving a company’s voluntary climate objective: neutralising residual emissions that are still deemed unavoidable today until a technological alternative becomes available on the market.
So, voluntary carbon markets allow corporate leaders to offset carbon emissions that can only be reduced at a high cost or to offset unavoidable emissions.
Voluntary carbon credits, which are also referred to as offsets, are financial tools issued by project developers that avert or remove GHG emissions from the atmosphere.
For a carbon reduction project to generate credits, it needs to respect a set of criteria certified by independent standard-setters like Gold Standard or Verified Carbon Standards .
Critics often argue that offsets do not deliver the environmental benefits they promise and that the unregulated and fragmented markets offer companies a licence to pollute.
But they also have the potential to bring capital flows into the global south where it is crucially needed.
Financial additionality is key for the credibility of offsets, meaning that an offsetting project could not have gone ahead without the extra revenues resulting from the sale of carbon credits.
Permanence is another key criterion to ensure that offsetting activities, such as tree planting, will last in perpetuity.
Despite criticism for failing to deliver the climate benefits promised, some reports suggest that global demand could rise by 15 times by 2030 and 100 times by 2050.
The Science-Based Targets initiative , the global green gold standard for businesses, now allows companies to factor in carbon offsets as part of their transition journey to net-zero – but only after science-based goals covering the next five to ten years have been adopted and once groups have slashed 90% of their emissions.
The Taskforce on Scaling Voluntary Carbon Markets , headed by former Bank of England Governor Mark Carney, thrashed out a set of core underlying features that carbon credits should adhere to, called the core carbon principles, in an attempt to harmonise carbon certifications.
The next steps should be about developing standardised contracts and trading infrastructure to help overcome known shortcomings like low liquidity, scarce financing and limited data availability.
Article 6 of the Paris Agreement has made it possible for countries to purchase emissions reduction abroad and use this towards their own targets, as long as a set of rules are respected.
This solution was one of the stickiest points of the negotiation, but it avoids one emissions reduction unit being counted by two countries.
For example, an investor in country X could fund solar panels in country Z to replace electricity generated by a coal plant.
Importantly for corporate decision-makers, it means that voluntary offsets without corresponding adjustments can still be used by companies claiming carbon neutrality, keeping the door open for greenwashing .
The reputational risk that comes with it is already an incentive to focus more on offsets involving a corresponding adjustment.
With a large number of voluntary market standard-setters of various quality and little institutional oversight, offsetting schemes could continue to be perceived as the wild west – leaving some room for additional guidelines and more stringent standards.
Right now, credits can be bought with or without a corresponding adjustment.
Note that qualities and options also vary within each project category.
This is much lower than the global price of carbon needed to be consistent with the temperature goals of the Paris Agreement, which should be between €100-€150 per ton CO2 by 2030.
Even if offset credits become more credible with corresponding adjustments, prices are likely to remain much lower compared to mandatory carbon markets that are focused on reducing companies’ emission levels.
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