26 Oct 2021, 12:43
Kerstine Appunn

Staying true to the Paris Agreement could hobble booming carbon offset market

Efficient cookstoves and other energy saving or renewable appliances reduce emissions in developing countries - and are often financed via carbon offset credits. Photo: Wikimedia Commons .

The booming voluntary market for CO2 emission offsets is facing a hairy double counting issue that could stop further growth in its tracks. While high-aiming businesspeople are preparing a new standard to scale the market and make it more transparent at the same time, there is growing concern that double claiming of the same emission reductions by countries where they take place and companies that finance them could harm overall climate ambition. Researchers and NGOs propose new ways of letting companies invest in energy and climate projects in the global south – without letting them use carbon credits towards their emission budgets. But others insist that only the selling and buying of actual offset credits will keep the market alive. The UN climate conference COP26 starting in Glasgow next week could bring some clarity on this – if governments can reach a decision on the infamous Article 6 of the Paris Agreement. But even with new guidance from the climate negotiators, the market will take several years to find its feet and adjust to the new rules, experts say.

Buying CO2 reductions from a project in the global south in addition to avoiding emissions from their own operations (or instead of avoiding them) is the new normal for many companies who are pursuing net-zero targets or want to sell “carbon neutral” products. The recent boom and projected growth of the carbon offset market is so considerable that some predict an undersupply of carbon credits in the near future. The potential of a “100 billion dollar” market has caught the attention of famous business people and bankers such as former governor of the Bank of England Mark Carney, who with his Taskforce on Scaling Voluntary Carbon Markets (TSVCM) wants to shape the global rules of carbon offsetting.

But while “compensating” emissions on the voluntary market becomes more and more mainstream, there is also recurrent and strong criticism of the practice, and with the emission accounting rules of the Paris Agreement taking hold across the globe, the entire market could lose its footing.

Under the 2015 Paris Agreement regime a hairy double-counting issue has arisen that – if taken seriously – could put an end to voluntary carbon offsetting altogether. As of January 2021, all countries have to submit economy-wide Nationally Determined Contributions (NDCs) and undertake everything possible to meet ever-increasing emission reduction targets. At the end of every year, they must submit an emission budget, which will count all reductions towards achieving the country’s target: This includes reductions that have been achieved via the use of more efficient cookstoves, financed by an Austrian NGO; or those emissions that didn’t occur from the use of diesel generators, because of a village being fitted with a solar PV grid thanks to the money invested by a German car manufacturer.

Info-Box: How the voluntary carbon market (VCM) works

Companies who set themselves net-zero emission targets often find that reducing all of their own emissions is not possible in the short term. To neutralise emissions in their operations, value chain or outside their direct sphere of influence, they therefore make use of carbon offset credits.

The emission offsets are generated by project developers who mostly invest in climate action in developing countries: energy efficient cookers in Nepal and Madagascar, installing wind turbines in India, operating biomass plants in Nigeria or protecting rainforests in Indonesia.

To proof the offset’s quality to customers, many projects use an external quality standard provider which checks the emission reductions achieved and also issues the credits that the project developer can sell.

The voluntary carbon offset market thus describes the generation, selling and buying of the CO2 reductions achieved by project developers and certified by the standards.

To count the emission reduction towards its net-zero goal, a company has to delete the credits it buys to ensure that no further use of the same tonne of reduced CO2 can occur.

If these emission reductions, e.g. in the energy sector, are achieved through a project financed by a German carbon offsetting project, they will still be counted towards the country’s emission budget. But at the same time, they are counted as a compensated tonne of CO2 by the buyer of the carbon credit – leading to double counting, or rather double claiming of an emission reduction that only occurred once.

“The worst-case scenario is that double counting prevents more climate action,” Denis Machnik from consultancy adelphi told Clean Energy Wire (CLEW). This would be the case if neither the country nor the company that are claiming the CO2 reduction make further efforts to achieve (non-double counted) emission abatement.

Carbon credits could only be generated under the radar – or by actively adjusting the budget

Under the Paris Agreement’s predecessor, the Kyoto Protocol, this problem didn’t arise because only industrialised countries had to have emission reduction targets, while emerging and developing economies were ideal locations to implement voluntary emission reduction projects – and sell their credits.

“Since the beginning of the year, every project in the world is theoretically an act of double counting,” Machnik said. The only reason why this isn’t quite the case is that not all countries have economy-wide emission reduction targets – yet. But realising all carbon offset projects in those remaining “loopholes” is not a future-proof solution and could prevent developing countries from pursuing economy-wide climate targets for longer.

Another option would be for the country where the emission reduction was achieved thanks to the offsetting project to adjust its emission reporting accordingly and not count the reduction towards its budget (corresponding adjustment). German compensator atmosfair is among the first to succeed in negotiating such a deal with Nepal, the NGO’s founder and CEO Dietrich Brockhagen told CLEW.

However, not all countries would be willing or able to make such an adjustment. Researchers, consultants and NGOs are therefore proposing a new way of labelling companies’ climate action efforts without selling a (double-counted) tonne of CO2. In the “contribution claim” model, companies and individuals would be able to say that they have financially contributed to emission reductions elsewhere, e.g. by supporting an efficient cookstoves project in Madagascar, without claiming that they have compensated their emissions via this project. While this would still be usable as an advertisement for the company or its products, it could not be counted towards a net zero or climate neutrality goal.

Info-Box: The three options to fix the double claiming problem

a) Non-NDC crediting model: Projects could continue to be pursued in countries that don’t have an economy-wide Nationally Determined Contribution (NDC) under the Paris Agreement yet. While this could help prevent a sudden crash of the voluntary market, it would only be possible for a limited time and pose the risk that countries delay more comprehensive emission reduction efforts. This model could not apply to projects in Germany, for Germany has an economy-wide target within the EU’s NDC.

b) NDC crediting Modell = corresponding adjustment: A country agrees to not use emission reductions that were enabled by a carbon offset project towards its own emission inventory. This avoids double counting (and double claiming). In Germany difficult because cutting out a piece of its emission reduction obligation while at the same time not doing enough to fulfil the reduction that it should show under the Paris Agreement. But in Germany also difficulty with additionality. Germany is already called upon to make a contribution with the highest possible ambition and has considerable possibilities of its own.

c) Contribution claim model: Instead of generating and selling credits for 1 tonne of compensated CO2, project developers would sell “contribution claims”. By purchasing these contributions to climate action projects abroad, companies and individuals would be able to say that they have financially enabled emission reductions elsewhere, without claiming that they have compensated their own emissions via this project. While the claim would still be usable as an advertisement for the company or its products, it could not be counted towards a net-zero or climate neutrality goal in a company’s CO2 inventory.

In a new (preliminary) survey by consultancies adelphi, NewClimate Institute and sustainable AG for the Federal Environment Agency (UBA), 57 percent of respondents said that they were aware of the double counting issue. While most private individuals would be happy to use the “contribution claim” model as an alternative, companies mostly said “only if we’re still allowed to call ourselves climate neutral.” Those who knew about the double counting issue said they would be more hesitant to use CO2 compensation credits more than they already do today.

Another aspect of this discussion is that no projects in Germany can be used to generate offsets for the voluntary carbon market, although offset customers would flock to buy them (some 49% of offset consumers in the adelphi et al. survey said their first preference would be to buy credits from German projects). But the EU’s and therefore Germany’s NDCs offer no unregulated areas where such projects could take place and even corresponding adjustments would be difficult to arrange because as a rich industrial country, Germany has to show the highest possible ambition and even its current climate targets are not definitely compatible with a 1.5°C warming limit.

Generating and selling EU carbon credits grey zone

Meanwhile, even high-tech European governments struggle to exactly measure and count in their greenhouse gas inventories the emissions from their forest and land-use sectors. So would the carbon that is sequestered in a German or Irish field with the help of an offsetting scheme really show up twice in the emission budgets? In Ireland, agriculture groups maintain that they have a right to sell the sequestered CO2 on the voluntary carbon market, while the agriculture minister insists that CO2 stored in forests planted on farmland belongs to the government.

Some argue that the whole counting and double-counting debate is much too pernickety and that all that matters is that money flows from wealthy companies to climate protection projects in the global south.

So far, the voluntary carbon market (VCM) has channelled over 5 billion USD into projects around the world, which also often contribute towards reaching the United Nations’ Sustainable Development Goals (SDGs), the world’s largest offset standardiser Verra writes. Verra is not ready to abandon the voluntary offset market with actual CO2 credits, arguing that corresponding adjustments are only necessary when carbon offsets are traded between countries. Following the theory of double counting to a tee would mean that all countries also couldn’t count emission reductions achieved by corporate actors via energy efficiency measures, renewable energy purchases or the use of electric vehicles, Verra argues.

One of the most trusted and established standards, the Swiss Gold Standard, on the other hand, says that all double counting has to be avoided and has put in place rules for corresponding adjustments.

In the spring 2021 meeting of G7 environment ministers, the governments’ communiqué affirmed the importance of “high integrity carbon market mechanisms, including those used for voluntary purposes, which should be based on robust rules and accounting that ensure avoidance of all forms of double counting.”

“It is understandable that big standards like Verra are worried about the double counting problem. Their business model has just started to really fly, so now they fear that it won’t last,” Carsten Warnecke, analyst at the NewClimate Institute, said at a compensation workshop in Berlin. His advice is to quickly develop something new – like the contribution claim model – to prevent the collapse of the market and also of the money flows that have supported projects in the global south for years.

Clarification for voluntary market at COP26?

As tempers are running high in the carbon offset market about double counting, the upcoming negotiations on Article 6 of the Paris Agreement at COP26 in Glasgow could provide some clarification, also for the voluntary market. Article 6 – the last part of the Paris Agreement for which the (very contentious) implementation rules still have to be agreed – provides for carbon credit trading between countries, enabling nations that overachieve their Paris goals to sell emission cuts to governments that have not reached their targets. But Article 6 also provides for a second mechanism, governed by a UN body, under which the public and private sector can trade emission reductions created anywhere in the world. Negotiations in Glasgow will focus on the inter-state trade of carbon credits, but since “corresponding adjustments” are a big issue here too, whatever will be decided will influence the voluntary market, Lambert Schneider from the Öko-Institut said. “Germany and the EU have made it very clear that they will not stand for double counting under Article 6,” Machnik said.

Most German carbon offset providers in the adelphi et al. survey said that the COP decision on double counting will only have limited influence on the further development of the market. Markus Götz from sustainable AG said: “Decisions at climate conferences set a course, but they take time to reach the markets,” adding that it would be interesting to ask the suppliers’ opinion again after the COP. Several suppliers who participated in the survey said they were not expecting a quick solution from corresponding adjustments.

Task force wants to establish meta-standard for voluntary carbon market

To ensure a “scalable, liquid, transparent and reliable voluntary carbon market” that can help deliver the Paris climate goals, another player has entered the scene. With his Taskforce on Scaling Voluntary Carbon Markets (TSVCM), Mark Carney, UN special envoy for climate action and finance and former governor of the Bank of England, recommended the creation of a “high-integrity” market for carbon trading and in September 2021 established a new governance body for the voluntary carbon markets. The body will publish new Core Carbon Principles (CCPs), a threshold standard that will set a global benchmark for carbon credit quality, in 2022. This creates a new meta-standard that ideally improves the quality of the existing standards, Lambert Schneider, a co-chair on the expert panel to the governance body, said. So far, the TSVCM includes the option that carbon credits are attached with different attributes – including one indicating whether the carbon credit is double counting risk free or not, Schneider explained. Pending the outcome of November’s COP26, a “corresponding adjustment tag” could become one of the attributes that can be registered under the Core Carbon Principles (CCPs).

Brockhagen of German market leader atmosfair told CLEW: “It's simply too much quantity before quality. If the meta-standard goes for the lowest common denominator, then the market will not contribute significantly to the greening of energy systems worldwide.”

Carsten Warnecke from the NewClimate Institute is also sceptical of Carney’s idea. In a market with so many different products and so many different quality requirements it is hard to include everything within one single mechanism, he said.

A booming market with an expiry date

Despite these uncertainties and pitfalls, Carney, in his role as UN special envoy for climate action and finance, writes in his COP26 objectives that the voluntary carbon market “could generate tens of billions of dollars every year” for emission reduction projects in developing and emerging economies.

Others insist that the market, although growing now, will with time only play a niche role and probably come to an end before mid-century. “Offset markets need to die and will die at the net zero emissions point. At net zero, there’s nothing more to offset. There’s only to emit or to remove. So that business model is already finite,“ Christoph Beuttler, policy advisor at direct air capture pioneer Climeworks, told CLEW. While current offsets mostly give credits for avoiding emissions, e.g. by reducing emissions from cooking or power generation in the global south, in a climate neutral future only actual CO2 removal can be used to compensate (unavoidable) emissions, Beuttler argues. Market places like the German startup Carbonfuture, which has launched a market place for CO2 removal credits and sells certificates from biochar usage that stores CO2 for at least 100 years, can be the only future of the compensation market, he said.

“It’s politicians and society who eventually have to decide which industries are still allowed to have residual emissions and compensate them,” Warnecke said. “Companies must not be permitted to decide this for themselves.”

All texts created by the Clean Energy Wire are available under a “Creative Commons Attribution 4.0 International Licence (CC BY 4.0)” . They can be copied, shared and made publicly accessible by users so long as they give appropriate credit, provide a link to the license, and indicate if changes were made.
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