Carbon offsets are going primetime and they’re not ready

Companies are scrambling to buy carbon offset credits based on forest conservation projects, but the accounting is often riddled with flaws.
Companies are scrambling to buy carbon offset credits based on forest conservation projects, but the accounting is often riddled with flaws.
Image: REUTERS/Elizabeth Frantz//File Photo
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As more companies commit to erasing their climate footprint, the global market for voluntary carbon offset credits is going gangbusters. But the market remains plagued by widespread, fundamental flaws in how offsets are tallied, turning a critical element of the corporate campaign against climate change into a house built on sand.

Carbon offsets are derived from activities that draw carbon out of the atmosphere—forest conservation is the most common—and ostensibly allow their purchasers to move toward decarbonization while continuing to produce an equivalent volume of emissions. Oil companies, airlines, and other high-emitting sectors have touted the purchase of offsets as a promising way to make immediate progress on climate while technology catches up and the fossil fuel market winds down. In early May, for example, the US gas company Cheniere Energy said it had sold a “carbon-neutral” shipment of liquified natural gas to Royal Dutch Shell—one matched with offsets.

All that attention is spurring efforts to better police the market—but for now, it’s still a Wild West.

“There’s a lot of expectation for growing the market,” said Niklas Kaskeala, head of sustainability at Compensate, a Finland-based nonprofit offset brokerage. “But we’re worried this growth will be worthless for the climate if we don’t raise the bar.”

The booming carbon offset market

Companies are clamoring for offsets, and more are becoming available. In the first quarter of 2021, 38.6 million metric tons of offsets were purchased globally, according to the analytics firm Ecosystem Marketplace, a record. That’s equal to the annual emissions of 10 coal-fired power plants and a jump of 81% compared to the same period last year. Meanwhile, the volume of new offsets “issued” (certified in some way and available for sale) globally jumped 76% in 2020 from 2019, and 2021 is well on track to break another record. Analysts predict offset purchases could reach the equivalent of 500 coal plants by 2030, growing the market 15-fold in value to more than $50 billion.

Carbon offsets have a major credibility problem

But just as they’re stepping into the spotlight, carbon offsets are facing more challenges to their credibility than ever. In the last few months, one investigation after another by journalists, environmental groups, ratings agencies, and even offset-brokering companies themselves has unearthed dubious assumptions, willful misrepresentations, and systematic accounting errors in the offset market that ultimately drive emissions up, not down—and permit offset purchasers, intentionally or not, to greenwash their image without actually addressing the climate crisis.

Much of the problem is rooted in the fact there is no official international standard for carbon offset accounting. Instead, private groups like Gold Standard, Verra, and the American Carbon Registry use a mishmash of methods to tally, certify, and broker offsets. On May 21, a high-profile international task force chaired by Bill Winters, CEO of Standard Chartered bank, will publish new voluntary guidelines for the carbon offset market that are meant to impose order on an untamed system before companies waste more cash on bogus offsets (big banks are also key customers for offsets, to offset emissions from their investments). The task force’s recommendations, while not legally binding, will be impossible for brokers to altogether avoid, and will likely influence rules in the Paris Agreement around public-sector offsets that are due to be revised later this year. But the group’s membership includes oil majors, airlines, and other corporate polluters that benefit from the scattershot status quo, as well as the major brokers themselves.

“The last few years have been very eye-opening and disappointing,” said Kaskeala. “In order to create something new, we have to acknowledge that the existing system is not good enough, and I’m worried that the task force is not really acknowledging all the issues.”

In an April research paper, Kaskeala and his colleagues analyzed 100 offsets certified by Gold Standard and other groups. They included offsets derived from projects supporting forest conservation, climate-friendly farming, direct air capture technology, clean cookstoves, and other means of drawing down emissions. They found that 90% of the offsets either failed to offset as much as they claim, are not permanent, come with damaging side effects for local communities or ecosystems, or some combination of the above.

Fixing the global carbon offset market

The biggest problem, according to Compensate, is so-called “additionality,” meaning that an offset draws down more carbon than would have happened without its sale. Those claims are often exaggerated. For example, a bird sanctuary in Pennsylvania markets offsets based on its stewardship of 2,300 acres of oak forest, even though the sanctuary’s director admitted to Bloomberg that the trees have been untouched for nearly a century and face no real danger of being cut down. In other words, paying for that offset—as JPMorgan, among others, did—does nothing to change net emissions.

Another key issue is baseline accounting, or estimating how much a given project actually reduces emissions. Again, these claims are often exaggerated; a ProPublica investigation in April found that the California Air Resources Board, which manages the state’s offset market, systematically over-allocates offsets because it glosses over critical distinctions about the relative carbon-sucking power of different tree species.

Sarah Leugers, a spokesperson for Gold Standard, said the group doesn’t certify any offsets from the UN’s REDD+ forest conservation program, even though it accounts for 80% of global forest-based offsets, because baseline accounting problems are so pervasive. The math becomes even more dubious on unusual projects, like an uncertified one marketed by the sustainability consulting startup Sweep that derives offsets from sustainability educational programs for children, on the theory that they go on to adopt more climate-conscious lifestyle habits.

Technology could offer some solutions. The artificial intelligence startup Pachama, for example, uses satellite imagery to verify that the forests behind forest-based offsets are indeed being conserved, and to better estimate biomass and carbon sequestration capacity. But ultimately, Leugers said, some problems with forest-based offsets may be unfixable. The market needs to shift more of its focus, she said, toward offsets that are more readily verifiable, for example those that support methane capture on farms, freestanding direct carbon capture technology, or clean cookstove programs that come with economic development co-benefits.

Leugers said she hopes the Bill Winters task force will reconsider its support for REDD+ offsets in its new recommendations. It should also do more to promote pricing transparency, Kaskeala said, and crack down on the pervasive practice of double-counting, in which a single offset is claimed by both a company and a government. And it should be more proactive in publicly withdrawing support from offsets that don’t meet a high standard.

Are offsets a scam?

Leugers stressed that offsets are certainly no replacement for actual emissions reductions; the Science-Based Targets Initiative, a program led by the World Resources Institute to evaluate corporate climate goals, doesn’t permit them to be counted toward a company’s progress on reaching net zero emissions. For companies without immediate alternatives for decarbonization, credible offsets are out there, Kaskeala said. But corporate sustainability officers and other offset shoppers should be prepared to ask detailed questions about “additionality” and other issues, and be willing to pay more for quality. And the clock is ticking: Demand is quickly closing the gap to supply, which will drive up the price of credible offsets and raise the likelihood that a buyer could end up with junk.

“There will be high-quality credits available for some buyers, but you might have cheap credits flooding the market at the same time and buyers who don’t know what they’re buying,” Kaskeala said.

Still, rising prices for offsets could be beneficial to the climate, if it makes the alternative—tangibly reducing fossil fuel consumption—more economically appealing in comparison. Ultimately, Leugers said, the carbon offset market should aim to put itself out of business.

“We don’t want to take our eye off the ball in terms of reducing the fossil fuels we’re burning today,” she said. “Our job is to raise the ceiling. Anything else is just a philanthropic exercise.”