The promise and challenges of carbon offsetting
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The promise and challenges of carbon offsetting

Published Tue May 24 2022

Over the past 50 years, there has been a steadily developing consensus around climate change: the release of CO2 is causing – and will continue to cause – warming of the planet. Such a consensus was slow to develop but solutions have been even slower—and efforts slower still. Today, there are a number of different approaches to climate change that have been proposed and discussed by experts. Each approach has its strengths and weaknesses, and therefore each will be necessary in the fight against climate change. In this article, we will discuss each approach, then see how they compare with the carbon offsetting and carbon markets that are being jump-started by KlimaDAO.


National-level emissions reductions

The largest and most important class of mitigation measures is the policies taken by national governments around the world to force their industries and corporations to reduce carbon emissions. These measures are of paramount importance; ultimately, the planet will not achieve net-zero emissions without the cooperation of its governments. The Paris Agreement is built on this basis—a multilateral commitment from each national government to reduce their national emissions.

However, this strategy carries with it a number of pitfalls. The first problem is that there are many industries in which decarbonization would be prohibitively costly or impossible using existing technologies. Heavy industry contributes about 40% of global carbon dioxide emissions, but is integral to economic growth. The manufacturing of steel, cement, and chemicals will be particularly difficult to decarbonize in the near future, yet they are basic components of modern life and even of green technology itself. Therefore, achieving net-zero emissions must account for these industries.

The second problem with simple emissions reductions is that there is insufficient political will in countries around the world to adopt such measures. Concerns about carbon emissions have to compete with many other political considerations such as those of corporate lobbying, fiscal conditions, and labor concerns, and they have often taken a back seat to those questions. Indeed, even the commitments that countries have made are not sufficient to achieve global targets. Waiting for national governments to solve climate change is not feasible.

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The third problem is the question of global justice: accounting for the increased emissions of rapidly industrializing countries, especially in Africa and South Asia. Their industrialization represents an important development – involving clean water, electricity, and education – but it also represents a challenge in terms of climate change. Such countries have rightly pointed out the hypocrisy of slamming the brakes on their own development when the western world emitted vast quantities of CO2 during its own industrialization periods. Indeed, this is a global concern that has often been a key topic in global discussions; the phrase ‘developing countries’ or ‘developing states’ occurs 43 times in the Paris Agreement, a 27-page document. The truth is that these countries do not have the resources or the technology to industrialize cleanly on their own; they will either need external resources, or their emissions will continue to grow.

It is clear that limits on emissions are an essential part of the solution, but they leave major gaps and unaddressed problems.


Carbon removal technology

More technically referred to as direct air carbon capture and storage (DACCS), this is an exciting and futuristic approach to solving climate change. Capturing and removing CO2 – and other greenhouse gasses – from the atmosphere would allow us to avoid many of the tradeoffs associated with other approaches. A great deal of research has gone in this direction, and a number of companies have already made advanced market commitments to purchase an initial $925 million of CO2 removal. In May 2022, the US government announced a $2.3 billion investment in this technology.

In the likely event that the planet overshoots emissions targets by 2050, carbon removal will be crucial in helping to scale back CO2 levels. However, at the moment DACCS technology is very much in its infancy and it cannot be relied upon in the immediate crisis. Other approaches will be needed to get as close to the 2050 targets as possible, reducing the scale and scope of emissions to more manageable levels.


Carbon offsetting (voluntary carbon markets)

Carbon markets allow individuals or organizations to sell carbon offsets, or to buy the right to emit CO2. Sometimes, carbon markets function as a tool to help corporations comply with government restrictions—these are called compliance markets.

Here, we will focus on voluntary carbon markets, or VCMs. Such markets allow corporations or organizations to publicly declare themselves ‘carbon-neutral’ through a combination of their own mitigation efforts and the purchase of offsets. Offsets are sold by organizations that help to reduce atmospheric carbon elsewhere.

VCMs are an incredibly powerful tool. They take advantage of a simple principle: because climate change is a global problem, reducing one tonne of CO2 has the same effect no matter where it is done. Therefore, it is important to direct resources wherever they can be most efficiently used—the low-hanging fruit. Carbon markets harness the power of free markets in order to perform this function.

Directing resources efficiently means, first, decarbonizing the easiest industries first. Manufacturing and air travel – industries that would be prohibitively expensive to decarbonize – can pay for carbon-free electricity and transportation, and therefore help to offset their own activities.

VCMs also mean a transfer of technology and resources from wealthier western countries to those that cannot decarbonize on their own. Although the Paris Agreement calls for the transfer of technologies and tools, it does not create any specific mechanism by which this should be done—voluntary markets for carbon trading are undoubtedly considered an important part of that transfer.

Lastly, VCMs allow private industry and civil society to move more rapidly and more ambitiously than governments, in order to meet the demands of the public for decarbonization. This will ultimately be an important part of closing the emissions gap.

The challenges associated with offsets

Carbon offsets and their associated markets are not perfect, and they have come under scrutiny in recent years. All observers agree that VCMs should not be used alone; that corporations must not be allowed to ‘greenwash’ their activities. Rather, for companies that have already taken great pains to reduce their carbon footprints, offsets are a tool to help them go further.

There are also criticisms of the implementation of VCMs—these fall into two broad classes. First, there are critiques of usability: the voluntary carbon market has historically suffered from illiquidity, opacity around buyers and sellers, and a lack of demand. It is very difficult for a buyer to navigate: to find the projects they want, to understand their specific qualities, and to purchase their carbon credits.

The second class of critiques is about the quality of offsets themselves. A high-quality offset needs to be responsible for the reduction of CO2 in the amount that it claims; this is often far from the case. Some organizations plant trees in areas with little regard for ecology, in areas where they are non-native, or where forest fires are common. Another example is the case of HFC-23, a greenhouse gas 11000x as potent as CO2 that is the byproduct of coolant production. Factories in India and China received offset credits for destroying the gas, and as a result they were ramping up production simply in order to collect these carbon credits. Due to these problems most standards have long-since banned HFC-23 projects from receiving credits.

The responsibility for certifying carbon credits falls to organizations known as standards bodies, such as Gold Standard or Verified Carbon Standards (Verra). Their task is an enormously difficult one—they must create predictability for sellers while ensuring overall quality for buyers. More broadly, they have to answer one major question: does offsetting a tonne of carbon actually result in one less tonne of CO2 in the atmosphere? This touches on additionality: whether each carbon credit is actually responsible for additional offsetting, or is merely collected as a bonus by projects that were already happening. For carbon credits to truly represent offsets, they have to include additionality.

KlimaDAO – working in tandem with other blockchain actors – represents a powerful solution to the problems of fragmentation, illiquidity, and lack of transparency in the carbon market. Already, KlimaDAO has created liquidity of over 20 million carbon tonnes, and there is great potential for growth. KlimaDAO is creating a revolution in the way carbon markets work, and helping to expand their size.


Concerns about quality are legitimate, and there remains a lot of work to be done. Standards bodies have worked tirelessly over many years to improve the quality of the carbon credits they certify, and KlimaDAO will continue working with all parties involved in the VCM to improve these issues. For example, we are supportive of the recent changes proposed by Toucan Protocol that set stricter limits on what projects can be accepted into their pools of tokenized carbon. Fundamentally, though, we are optimistic about the power of VCMs to make a difference in the climate crisis.

Conclusion

The challenges with carbon offsets are daunting, but experts widely agree that carbon markets are necessary. While some have called the carbon market “the worst possible idea—except for everything else”, the TSVCM estimates that to deliver the 1.5-degree pathway needed to avert the worst effects of climate change, carbon market trading volumes will need to grow by up to 15 times by 2030. Others have likened the VCM to a bucket brigade; though some buckets might leak or spill, with enough scale, it can put out any fire.

It is difficult to overstate the scope of the challenge the globe will face in the next several decades. It will require a complete overhaul of global electricity, manufacturing, and transportation, and will represent a shift in human technology rivaling the bronze age or the industrial revolution. There are no perfect solutions; every approach carries its own flaws and tradeoffs. But we simply cannot afford to leave any tools on the table, and the carbon market is undeniably one of the most powerful tools we have. We cannot allow the consideration of its flaws to consume its real potential: our planet cannot afford that pessimism.

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