What are Avoidance Offsets and the Carbon Markets?
Among all the head-spinning and dizzying terminology in the climate space are the nuanced (and confusing) carbon markets and the range of offsets* they contain. They were designed to support a move to enable the world to value the cost of emissions, and incentivise action to reduce them. It's long been argued that they've not been living up to that noble ambition, and it's clear why.
The theory is good, though everyone knows that clever accounting doesn't reduce emissions in reality. That's the crux of the challenge to overcome, both for offsets and carbon markets to make a meaningful difference in the fight to limit climate change.
Ok, so this is a fairly easy one to explain, even if it can seem a little silly when you break it down.
An avoidance offset is when an organization does something that doesn't release greenhouse gases* (GHGs) into the atmosphere.
For example, if you build and run a solar power plant, or capture methane from landfills to burn to create energy, or - in theory - prevent a forest from being chopped down for lumber or as land for livestock.
By not causing emissions to be released that organization can create a carbon credit.
This credit can then be sold on an open market.
On these markets, other organizations that do emit carbon are able to buy the credits to "offset" their own emissions.
In reality the organization that buys the credit hasn't reduced or removed any of their own emissions. For every tonne of avoidance offsets they buy, they're still releasing a tonne of carbon dixoide and equivalents* into the atmosphere. No emissions reduction or decarbonization* has taken place.
Let's look at a quick example:
1. Org A builds and runs a solar power plant (and sells the energy to their local power grid at market rates)
2. Org A issues credits for the amount of carbon emissions that have not been released because it's solar power, rather than a fossil fuel. Let's say 1000 tonnes to keep it easy
3. Org B has measured their emissions and wants to buy 1000 tonnes of offsets to become carbon neutral*
4. when Org B has bought 1 tonne of avoidance offsets they're technically carbon neutral, though have still released 1 tonne of emissions through their own activities
No additional emissions reduction has taken place.
The finances and economics of avoidance offset projects - like solar power or landfill gas recovery - can make sense even without issuing the credits for others to buy.
It feels, to us, like the ability to avoid emissions in this way disincentivises what really will make a dent in limiting climate change. That's the real decarbonization and reduction of global carbon emissions - 90% of which are related to fossil fuels in one way or another) - from their present level of about 50 billion tonnes per year.
It feels like a hand-wave-accounting-trick to say we've not emitted over here so that cancels out emissions over there, particularly when the nature of the project issuing the credits is something that, inherently, doesn't produce greenhouse gases.
Here's the kicker:
Avoidance offsets represent about 65% of the carbon credits that are currently available. Another 30% of offsets you can buy are for conservation and preservation of nature (this is important for us to support, though will not on it's own limit the impacts or severity of human-caused climate change).
It's only about 5% of offsets that actually remove carbon from the atmosphere, so it can't trap heat and warm the planet.
Right, let's move on to talk about how these credits are traded. There are two types of market, though many versions.
Voluntary Carbon Markets
Exactly as the name suggest, these are voluntary markets where organizations of all types - governments, companies as well as individuals - can buy carbon credits to - theoretically - offset their own emissions.
The offsets are verified in a range of ways and vary widely in terms of their emissions reduction effectiveness and permanence.
For example, a reforrestation project or a solar power plant can issue credits and sell them on a voluntary carbon market to others, in the way we talked about earlier.
These markets are a good sign as they show willingness and interest by all the parties to voluntarily invest in things that do help us mitigate climate change.
Some have argued that the huge variation in pricing for offsets in these markets - from a few US dollars per tonne - distorts the true cost of carbon and future cost of not reducing emissions. There's been talk of standardizing and centralize the disparate voluntary markets, and that may help (if/when it happens!).
The challenge comes in the ratio of avoidance offsets compared to removal, and how buying carbon credits without decarbonizing or reducing your own emissions can look like taking no action at all.
In truth, what's needed is a combination of both - funding projects that remove emissions as well as reducing emissions widely, as quickly as possible. It's the only credible path to net zero. This is some of what we talk about on our Climate Companies course.
Compliance Carbon Markets
These are created by governments to regulate emissions, sometimes referred to as cap and trade.
There's a bunch of them all around the world, all with difference values per tonne of emissions - ranging anywhere from a few USD to about $150 per tonne (a side question for another day is what is the true value/cost of a tonne of emissions at this point?, bearing in mind the clear science of climate change).
They are a market where organizations that emit GHGs in a place that has legislation limiting emissions can trade some of their unused quota, or buy some of another organization's quota if they've emitted more than their allowance.
Over time, the quota's get reduced and this forces organizations to reduce emissions in line with the reduction in their carbon allowance.
In theory this is a good idea and there's evidence that it has supported increased focus on emissions over the last two decades.
This said, similar to avoidance credits, in our view, organizations with low emissions can sell their extra quota to heavy emitters who can say they've reduced emissions without actually decarbonizing their operations.
It's still problematic if our collective goal is to reach true net zero and limit the impacts of The Climate Crisis*.
So what's next?
Curious about more terminology like Carbon Removal? Take a look at this article.
Want to dig deeper? Join our free 14-day Intro to Climate email course, all based on the science.
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Climate Buzzword Dictionary
Greenhouse Gases - Abbreviated to GHG. 98% made up of Carbon Dioxide, Methane or Nitrous Oxide. Gases that trap heat in the atmosphere. See Carbon and Equivalen
Emissions - the creation and release of Greenhouse gases into the atmosphere by human activities
The Climate Crisis / Climate Change - the accelerating heating of our planet caused by human activity
Decarbonize - disconnect all the things humanity does from creating carbon emissions. The process to stop emitting Carbon Dioxide into the atmosphere
Carbon Neutral - making or resulting in no net release of carbon dioxide into the atmosphere, likely using offsetting rather than fully decarbonized for Scope 1 and 2 emissions. Probably doesn't include emissions from Scope 3 sources
Offsets/Offsetting - buying parts of carbon avoiding, reducing or removing projects that avoid or remove emissions to reduce your own footprint
Learn more climate science and related terminology