Do we need a paradigm shift on offsetting? Compensation to contributions

The problem of compensatory net zero

At the moment, “net zero” is about as popular a fad as we have ever seen in the climate space.[1] Before that there was “carbon neutral,” but it did not rise in popularity to the same degree. Underlying either claim, though, is an assumption that a country, company, or other entity is responsible for an established amount of greenhouse gas (GHG) emissions. And then if a company is not able to cease harmful emissions—that it has assigned itself or been assigned—the net zero concept dictates that the company provide compensation for its ongoing harm, while also taking steps to reduce this harm in the future. But there is much debate over what form this compensation should take (e.g., legitimacy and quality of offsetting by purchasing credits, the superiority of enhanced removals over avoided emissions, the role of “beyond value chain mitigation” in corporate responsibility, or the appropriate reduction pathways to achieve a 1.5 °C target).

There is a key underlying assumption involved in this compensatory framing of corporate responsibility for GHG emissions that raises doubts about its appropriateness. This assumption is that the current rules for assigning responsibility for emissions to companies are well-designed and unambiguous. Unfortunately, the current reality of corporate GHG reporting presents a case where this assumption is violated for many of the intended purposes of corporate GHG accounting. As I elaborate here, the current approach to setting GHG accounting boundaries for corporate GHG reporting is based on ambiguous accounting rules for setting boundaries and a bespoke application of the rules that do exist.[2]

The upshot is that we do not have an objective or comparable approach to assigning responsibility for GHG emissions to companies. Yet, the application of the corporate net zero or carbon neutral concept to companies presumes we do have such an approach. In other words, that we all agree that each company is responsible for a certain amount of emissions and no more. Then the implicit expectation is that once a company has addressed that amount, in some manner, it is morally absolved with respect to “its” climate change impacts and taking further GHG mitigation actions.

From this compensatory framing derives the conclusion that the harms from the emissions assigned to a company can be separately compensated for through actions or payments, such as those intended to effect emissions or removals from sources outside the company’s accounting boundaries (i.e., “offsetting them”). In other words, that a company may claim to be net zero or carbon neutral while the emission sources it has accepted responsibility for continue to emit.[3]

The moral basis for net zero

Hopefully, it is obvious that embedded in this conclusion are moral questions of what is fair and what is just in addressing climate change. We can see this underlying morality in the existing approach to corporate value chain GHG accounting (i.e., Scope 3), which implicitly believes that a company’s responsibility for indirect emissions should extend as far as possible, which then sustains critics arguing that no matter how expansive a company draws its GHG accounting boundaries, they should go further and take responsibility for more emission sources in their value chain.[4] The other side of this morality argument can be seen in the desire by companies to claim to be net zero or carbon neutral. Who wouldn’t want to be absolved of responsibility, and therefore blame, for something that is harming humanity and the planet?[5] The result is the current discourse on voluntary corporate climate action—how far does each company’s blame extend and can companies pay other companies to buy their way out of that blame? As anyone with expertise in global climate finance will tell you, the answers to these questions are not obvious on moral, environmental, or economic grounds.

For example, what is the basis of our commonly held belief, repeated in numerous guidelines and standards, that companies should concentrate first on reducing “their own emissions” before they consider “offsetting” through the purchasing of avoided emission or enhanced removal credits? Is this belief grounded in environmental efficacy or economic efficiency? It is not obvious which is more efficacious and efficient between implementing “internal reductions” or financing “carbon crediting projects”. One could bring strong evidence showing efficacy and efficiency that would support both arguments. Instead, I expect that the true, yet rarely spoken, basis for this belief is a moral judgment that companies should not be able to buy their way out of “their responsibility.”

The end result is a structural tension within the corporate net zero and compensatory framework for addressing climate change. Companies want to publicly absolve themselves of responsibility and the only way to achieve that end, under current GHG accounting rules, is through offsetting via the purchase of carbon credits, yet this approach feels morally objectionable to others in society. Does this moral objection actually reveal a conceptual problem with the corporate net zero framing?

What is net zero really?

With respect to GHG emissions, we can treat the Earth as a closed system. And so, net zero has an unambiguous technical meaning with respect to GHG emissions on a global scale. To cease accumulating further detrimental climate change impacts, global anthropogenic emissions minus removals need to reach zero—and ideally negative to address past cumulative GHG emissions. However, for an individual company the definition of net zero depends upon which emissions we choose to allocate to that company. The accounting rules for allocation, though, are inherently subjective. We fool ourselves if we believe that this allocation is a purely technical decision based on some universal scientific rules.[6] Rather it is a moral judgment hidden in technical clothing. The issue is further complicated when we allocate the same unit of emissions to multiple companies, as is the case with the current approach to Scope 3. We obscure the meaning of responsibility when responsibility for a given unit of emissions is dispersed to the point that no company actually knows the identity of all the other companies they jointly share responsibility with.

So, the proper way to understand a claim of corporate net zero, whenever it is achieved, is that it is based upon a specific set of GHG accounting boundaries in which the emissions from sources and removals from sinks allocated to the company are in balance. Since at present corporate GHG inventory boundaries are poorly specified and not comparable across companies, then claims of net zero and carbon neutrality are as well.

Again, unclear net zero claims complicates the debate over offsetting. Should companies be recognized as achieving net zero or carbon neutrality if they have done so by purchasing credits to compensate for their GHG emissions? Are carbon credits a credible form of compensation and if so, can we ethically extend the meaning of net zero to include paying others to avoid emissions or enhance removals in place of us ceasing our own emissions? Given that our instinctive reaction to offsetting is that companies are then shirking their responsibility to address their “own” emissions, is our discomfort with the idea of offsetting with purchased credits as much about their use to make a compensatory claim as anything else. I expect that carbon credit markets would face far less skepticism if companies did not make compensatory claims that instinctively trigger a morally distasteful reaction—that companies are not eliminating their emission sources and instead are “buying” their way out.

What would a shift toward contribution mean?

What if instead we accept that technically and morally the application of the net zero concept to individual companies is currently too problematic? And instead reframe the claims made by companies that purchase and retire carbon credits as contributions to global GHG mitigation. Clearly, companies should be recognized for making financial and other interventions that meaningfully avoid GHG emissions and enhance removals. And well-governed carbon credit markets can be a legitimate mechanism for more efficiently structuring the deployment of financial interventions to achieve GHG mitigation. Companies can also be held responsible for their allocated emissions, based on clearly specified boundary setting GHG accounting rules and reduction pathways. Ideally, these rules will strive to minimize duplicative allocation of emissions to multiple companies so that “ownership,” and therefore responsibility, is more meaningful and actionable. But the absence of a compensation option would mean that achieving net zero for an individual company is a longer-term goal rather than something achievable today.

We can see examples of our discomfort with the compensatory and net zero framing and its role in absolving companies of responsibility in the calls by some stakeholders for companies to be “climate positive,” “carbon negative,” or contribute to “beyond value chain mitigation” (e.g., companies set targets and get recognized for broader financial or GHG mitigation contributions). Implicitly, these cases recognize that the current net zero and carbon neutral framing is lacking and that companies can and should be recognized for doing more than net zero. In the end, it is recognition for being good environmental actors that companies are seeking. Recognition is the true fuel that powers corporate voluntary climate action and voluntary carbon credit markets. Yet, must this recognition be built upon a framing of compensation and absolution from responsibility? Although I recognize that paradigm shifts are difficult, I argue that recognition does not require absolution from responsibility.

An alternative framing is to replace the concept of net zero and compensation with the concept of contributions. A potential advantage of recognizing corporate contributions is that there is no limit to how much a company can be recognized for. Such a claim is akin to making a philanthropic donation, albeit one with a quantified impact in terms of avoided emissions or enhanced removals. However, it is feared by many that if companies cannot make compensatory claims, and so cannot then make claims that they have met their responsibility to address climate change (i.e., that they are net zero or carbon neutral) then demand for carbon credits will disappear and voluntary carbon market mechanisms will fail to achieve their potential. But is the true underlying driver of demand for carbon credit companies’ desires to be absolved of responsibility, or is it really a more fundamental desire to be recognized as being a good (or better) climate actor? This outcome could be achieved through recognized contributions to the implementation of meaningful climate action. I expect that abandoning the current compensatory and net zero framing will help lessen the level of criticism of both carbon credit markets and corporate green washing.

How does the Paris Agreement impact net zero and contribution frameworks?

The compensatory and net zero framing faces another problem created by the new universal participation design of the Paris Agreement and requirement for corresponding adjustments in national GHG reporting. Under the Agreement, almost all countries have made commitments to reduce emissions occurring in their territories over time through the implementation of ambitious national GHG mitigation actions and policies. This new international framework of national actions raises the question of whether there are any emission sources from which to produce carbon credits that will not be reduced anyway through forthcoming national policies. The corresponding adjustment provision of the Paris Agreement recognizes this issue by requiring a country’s GHG inventory to be adjusted upwards in accordance with any amount of credits it is allowing to be claimed by another country to help satisfy their commitment.[7] If a company is then claiming a carbon credit to make a compensatory claim for its emissions then one can argue that there is an additionality and baseline scenario problem because the country, from which the avoided emission or enhanced removal underlying the credit originated, has likely already committed to take actions that will reduce those emissions.[8] To justify a compensatory claim, programs that issues carbon credits for corporate claims are then put in the awkward position of either trying to demonstrate how their crediting projects go beyond what current and pending national commitments, actions, and policies will achieve or arguing that countries will fail to implement the ambitious actions and policies called for in the Paris Agreement (e.g., countries will fail to achieve their Nationally Determined Contributions or NDCs). In other words, is corporate demand for carbon credits going beyond national actions and associated international climate finance or is it just a substitution for it?

A contribution framing to carbon crediting does not completely solve the additionality and baseline scenario question created by the Paris Agreement. However, because a contribution framing can be justifiably viewed as a credit buyer making a contribution in support of a country achieving its NDC, it has a dramatically different moral salience. A contribution framing replaces the substitution problem (i.e., the credit buying company shifts responsibility for lowering emissions to others so it can avoid blame) with a more environmental justice-aligned solution (e.g., contributions to carbon crediting projects in lower income countries are made by companies from wealthier countries).

Conclusion

So, is all the attention on achieving corporate net zero the wrong path to more meaningful climate action? And is this path instead a cause for some of the bigger challenges with voluntary carbon credit markets and corporate greenwashing? In light of the moral basis for the underlying assumptions with the compensation and net zero framing, I would hope that we can at least consider a new paradigm that more transparently addresses the inherently moral nature of assigning responsibility for emissions and giving recognition. This new ‘contributions’ paradigm could combine a more meaningful and more exclusive assignment of corporate responsibility with a framework that recognizes further corporate contributions to global mitigation efforts.

 

Acknowledgements

Few of the points made in this blog are original. For background on the contribution debate I recommend past posts from Derik Broekhoff here and here. I am thankful for the insightful comments from and discussions with my colleagues Derik Broekhoff (SEI), Tani Colbert-Sangree (GHGMI), Mark Trexler (Climatographers), and Owen Hewlett (Gold Standard).

[1] Anyone remember the NAMA fad (Nationally Appropriate Mitigation Actions?

[2] This point is itself based on the assumption that the intention of the GHG Protocol is to produce an allocational physical GHG accounting metric.

[3] To simplify the discussion, I have left out of the explanation the accounting for removals from sinks that a company is responsible.

[4] See this essay on the logical error in using the concept of “influence” or “causation” for the setting of GHG inventory accounting boundaries.

[5] The proposals regarding “beyond value chain mitigation,” such as the one from the Science-based Targets Initiative, are an example of a shift in how the expectations of companies can be framed. Instead of simply eliminating their “carbon footprint” companies can be recognized for a range of actions and targets that contribute to global GHG mitigation. This framework introduces other ways to think about defining obligations to address climate change or fair and just contributions (e.g., based on profits or revenues instead of a company’s emission levels).

[6] Similarly, the setting of emission reduction pathways for individual companies or sectors to achieve global net zero cannot be done in the absence of moral implications.

[7] To be technically precise, it is not the national GHG emissions inventory that is adjusted, but instead the national accounting of emission obligations and commitments for the purpose of tracking NDC compliance.

[8] Although frequently presented as a double counting problem, as explained here, the issue with Paris Agreement corresponding adjustments and corporate offsetting claims is properly understood as an issue of additionality.

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