Expanding Offset Markets? Great Idea or Willful Blindness?

December 10, 2020, by Mark Trexler

There is a lot of discussion of the psychological and cognitive challenges we face in tackling climate change. These challenges are the focus of quite a few books, including George Marshall’s 2014 book Don’t Even Think About It: Why Our Brains Are Wired to Ignore Climate Change. But perhaps the single best quote on the topic is from Margaret Heffernan’s 2011 Willful Blindness: Why We Ignore the Obvious at Our Peril, where she states:

“[I]n failing to address climate change, all the forces of willful blindness come together like synchronized swimmers in a spectacular water ballet.”

One climate change topic where willful blindness has been easily observable over the last 30 years has been the use of carbon offsets for climate change mitigation. Don’t get me wrong; I’m not part of any “never offset” camp. I worked on the first carbon offset project more than 30 years ago, and many more since then. But offsets have encountered genuine challenges in their design and implementation that we have to recognize. So when Mark Carney, UN Special Envoy for Climate Change and former Governor of the Bank of England, recently called for massively expanding voluntary offset markets, I wondered whether Margaret Heffernan’s willful blindness admonition had been adequately considered.

Perhaps I should start at the beginning. In 1988, Applied Energy Services (now AES) planned to build small coal-fired powerplants around the United States, selling the electricity to local utilities. But the CEO of AES, Roger Sant, was concerned about climate change. He approached the Washington, DC based World Resources Institute (WRI) to explore whether AES could do anything to mitigate the climate change impacts of its business model. The result of that consultation was AES’s decision to fund carbon offset projects.

To offset emissions from AES’s first coal-fired plant, the Thames plant in Connecticut, WRI recommended that AES fund an agroforestry project in Guatemala. The carbon benefit of the project would result from slowing local deforestation, and I was hired by WRI to develop the methodology for quantifying the amount of carbon being offset. AES later funded offset projects for each of its power plants with the goal of offsetting 100% of their emissions.

The Guatemala project was estimated to have offset AES Thames’ emissions at a cost of just pennies per tonne of carbon dioxide. Not surprisingly, a number of companies, particularly electric utilities early on, enthusiastically embraced the idea of offsets. They seemed to be an inexpensive way to respond to growing stakeholder concerns over climate change, and many companies were already seeing offsets as a way to make compliance with future climate change policies and regulations more cost-effective.

Compliance-based offset markets quickly became central to both domestic and international climate change policy conversations. At the U.S. domestic level, offsets would have been key to compliance with national climate legislation; unfortunately, such national legislation was never enacted. At the international level, offsets were key to the successful negotiation of the 1997 Kyoto Protocol under the United Nations Framework Convention on Climate Change (UNFCCC).

After 1997, however, compliance offset markets quickly hit a snag. It took a long time for enough countries to ratify the Kyoto Protocol for the treaty to come into force, and the United States never did ratify it. This meant that the emerging global offset credit market was missing billions of tonnes of anticipated annual demand, much of which would have come from regulated U.S. companies. In a real sense the Kyoto Protocol never recovered. When the Protocol expired at the end of 2012, it was replaced in 2015 by a far more voluntary compact, the Paris Agreement.

Voluntary offset markets fared better, at least initially. An industry sprang up to serve voluntary offset demand. Although individuals were slow to purchase offsets for their cars and airline flights, many companies were eager to purchase offsets as a low-cost way to expand their corporate sustainability messaging.

From the very beginning, however, offsets were the focus of both uninformed as well as legitimate ethical and environmental critiques. Offsets were compared to the purchase of “indulgences” in the Catholic church, for example. Other critics focused on climate justice, arguing that offsets would allow polluters to continue operating facilities that produced other air pollutants posing a direct harm to the health of local communities. Many critics also questioned the environmental integrity of voluntary markets.

As time went on, large companies heard more and more complaints about carbon offsets. Many began to pull back from the market. Electric utilities had originally seen forestry-based and other offsets as a way of demonstrating that they were not simply double-counting the energy efficiency investments and renewable energy projects they were already pursuing. But they started withdrawing from those offset projects in favor of “safer” energy efficiency investments and “green energy” purchases.

Despite rapidly growing public concern over the impacts of climate change, by about 2015 the role voluntary and compliance-based carbon offset markets would ultimately play in mitigating climate change was far from clear.

More recently, the global climate change conversation has taken a new turn. Suddenly, everything is about the “net zero” or “negative emissions” pathways needed to get to a 1.5°C or 2.0°C scenario. Companies are announcing voluntary “net zero” commitments that depend heavily on being able to count large quantities of carbon offsets towards their commitments. Suddenly, carbon offsets round 2 was underway.

The Task Force on Scaling Voluntary Carbon Markets (TSVCM) led by Mark Carney gave a boost to carbon offsets round 2 when it began promoting the idea that voluntary offset markets should increase in size by 100 to 200-fold to support climate change mitigation. The TSVCM recently issued a consultation document for public comment. A bit surprisingly, the document focuses almost entirely on the contractual and procedural “hows” of scaling voluntary markets. It omits almost entirely any discussion of the challenging history of offset markets and the reasons that offsets have been so contentious.

A key question associated with any radical expansion of voluntary offset markets is whether such an expansion is even possible in the context of the 2015 Paris Agreement, which limits average global temperature change to 2.0°C or even 1.5°C. If countries are serious about achieving that target, far more of the world’s greenhouse gas sources and sinks will need to be addressed by policies and measures of one kind or another. Can many gigatonnes of cost-effective emissions reductions and carbon sequestration really be “left over” to supply voluntary offset markets?

The TSVCM’s answer to this question is disturbing, particularly in light of the contentious history of carbon offsets. The TSVCM’s consultation document suggests that there is no conflict between commitments made as part of the Paris Agreement and expanding voluntary markets because the emissions reductions countries have committed to as part of the Paris Agreement will be able to be sold into the voluntary offset market. It’s a PR disaster waiting to happen.

The vast majority of TSVCM stakeholders are carbon offset buyers and sellers with understandable institutional incentives. All things being equal, offset buyers want to be able to buy at as low a price as practical. Offset sellers want to be able to sell a lot of offsets with an adequate profit margin. The interests of both groups are advanced by creating rules that allow low-risk and low-cost sources and sink tonnes into the offset market.

Promoting the environmental integrity of offset markets, on the other hand, requires just the opposite. No offset market can ever be perfect, but an offset market with robust environmental integrity will inevitably be supply-constrained since it will exclude most low-risk and low-cost tonnes. A high environmental integrity market will be much more costly than a market characterized by low environmental integrity.

One of the many lessons we have learned since the first carbon offset more than 30 years ago is that when designing the market rules for an environmental commodity like carbon offsets, which cannot be seen or weighed or empirically observed in any way, it is critical to ensure that climate change mitigation interests have a dominant seat at the table. Any proposal to dramatically expand voluntary offset markets should not pretend that we are starting from scratch. We should not treat the challenge of market expansion as primarily one of process and we should not assume that having primarily buyers and sellers at the market-design table will end well, regardless of participants’ stated intentions. We should fight back against willful blindness.

Photo credit: Lotus Carroll Copyright 2011

One response to “Expanding Offset Markets? Great Idea or Willful Blindness?”

  1. Claire Wigg says:

    Thanks for this excellent blog. I hope the members of the Taskforce read it.

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