I’m a senior at U-M majoring in Organizational Studies. This past summer, I worked at a financial services company in Detroit, Michigan. The experience provided me an opportunity to explore how organizations, particularly those in finance, incorporate carbon offsets into their decarbonization goals. While I had known about carbon offsets before, I really enjoyed learning more about them from a business perspective because I had the chance to compare this perspective with the social justice and sustainability frameworks I have focused on throughout previous courses and positions.
What Is a Carbon Offset?
Carbon offsets, defined broadly, are the reduction or removal of carbon dioxide (CO₂) or CO₂ equivalent emissions to compensate for emissions elsewhere. There are two main markets for carbon offsets. The first are compliance markets, or carbon markets that are enforced with financial or legal penalties. Compliance markets are primarily government-administered and are the most widespread type of carbon market globally, with thirty markets covering about thirty-four percent of the global population. California, New York, and Virginia all have compliance markets for carbon pricing. Organizations, such as utility, industrial, and financial services companies, operating in these markets either receive a certain number of carbon allowances each year, or participate in government-led auctions. Organizations can then trade these carbon allowances on the market. If organizations are above their carbon allocation for the year, they will have to buy more carbon allowances or pay fines. The number of carbon allowances in regions with compliance markets typically decreases each year, which increases the price of carbon allowances each year.
The other kind of market for carbon offsets is a voluntary market. Voluntary markets experience much less regulation than compliance markets and use carbon offsets (a narrower definition for the purposes of financial transactions), rather than carbon allowances. Carbon offsets are created when organizations working on projects that sequester carbon or reduce carbon emissions in some way provide the opportunity for other organizations to support their efforts with financing and investment. An independent certifier, often referred to as a carbon registry, then researches the project, ensures it meets the standards the carbon registry has set internally, and issues a carbon offset available for purchase by organizations not regulated by compliance markets. Voluntary markets are currently about five percent the size of compliance markets around the world, with four-hundred companies voluntarily purchasing carbon offsets in 2021. This number is projected to sharply rise in the coming years as more organizations set carbon emission reduction targets and accelerate those already established. Organizations will voluntarily purchase carbon offsets for a variety of reasons, including to meet their carbon neutrality goals, for marketing purposes, to maintain or increase their legitimacy in the eyes of stakeholders, and to make a positive social impact.
That’s a quick run-down of the “what” for carbon offsets. Now, let’s dive into the arguments for and against the use of carbon offsets, including their economic and social justice implications.
Arguments for Carbon Offsets
Proponents of carbon offsets claim that offsets are crucial components of decarbonization strategies. A central argument is that carbon offsets incentivize investment towards climate mitigation projects, such as reforestation initiatives and renewable energy infrastructure. However, there are growing concerns that carbon offsets are abused by organizations and many go towards empty or misleading projects. Another claim made by offset proponents is that carbon offsets support efforts to standardize carbon emissions across different organizations, industries, and nations. While carbon offsets may support efforts to standardize how we measure and take action as a part of carbon reduction strategies, the third party auditing and verification processes vary according to the carbon registries that issue them. Carbon registries differ in how rigorously they audit and verify carbon offset projects. A significant method for addressing this and other carbon offset concerns is the concept of additionality.
Additionality asks whether reductions would not have occurred in the absence of a market for offset credits. For example, many carbon offsets go towards protecting a forest from, let’s say, logging companies or development firms. If forests would have been protected anyway, perhaps due to them already existing on state or federally-preserved land (and yes, this is drawn from a real-life example), then carbon offsets funding these forests’ preservation would not meet the principle of Additionality. Additionality also considers whether an organization can change its business practices with cost-effective technology. If the answer is yes, then carbon offsets may be a sign that an organization is not pursuing long-term decarbonization strategies. If the answer is no, then carbon offsets may be an important component to how this organization pursues its carbon reduction goals, until there are ways for it to decarbonize its operations and business practices.
Alright, we’ve talked about some of the arguments for carbon offsets – so what are the concerns? Spoiler alert, there are many, and they typically fall into two categories: logistical market-related concerns, and social justice concerns.
Concerns with Carbon Offsets
Let’s start with market-related concerns. First, there are concerns that there is a lack of oversight and accountability for the ways carbon registries evaluate carbon offset projects and issue voluntary carbon offsets to organizations. Carbon registries vary in the factors that they take into consideration and, as a result, not all carbon offsets are created equal. However, less rigorous carbon offsets are often touted by organizations that purchase them as comparable to more rigorous carbon offsets, which can contribute to carbon offset “shopping” and confusion among consumers, investors, and other stakeholders. Additionally, carbon offsets are more volatile than other sources of investment. Therefore, projects that require continuous, stable financial sourcing may suffer from the uncertainty and fragility inherent to relying on investments from carbon offsets. These are a couple of the market-related concerns regarding carbon offsets.
In addition to carbon offsets’ logistical and market-related concerns, there are also questions about the impacts of carbon offsets on equity and social justice. First, carbon offsets ask markets to fix the very problems that they have caused. Opponents argue that market-based governance approaches not only reproduce inequality, but also depend on the existence of uneven power relationships in order to function, which places them at odds with social equity goals. Second, reliance on market principles as a key mechanism of governance excludes other important factors; for example, framing carbon offsets as an economical solution to carbon reduction strategies devalues and subverts other values of landscapes, such as their aesthetic beauty, their function as wildlife habitats, and their potential spiritual or religious significance. Additionally, carbon markets are constructed in particular ways that reflect the interests of the actors who are in charge. This means carbon markets are filled with asymmetries of information and power, which exacerbate inequality and injustice.
So, Should We Use Carbon Offsets?
So, what should we do? Should we stop using carbon offsets? Can we realistically stop using carbon offsets and still decarbonize as communities, organizations, and nations? These are tough questions. Right now, most policy makers, economists, and academics agree that carbon offsets are a crucial component to climate mitigation and adaptation strategies around the world. This sentiment is reflected in key initiatives stemming from the most recent COP27 talks in Sharm El-Sheikh, Egypt. However, if decarbonization efforts and energy transitions are to center equity and justice, people and planet, and carbon offsets are to play a role in supporting these transitions, then market, oversight, and social justice concerns must be addressed. Recommendations to address carbon offsets’ logistical and market-related concerns include establishing more rigorous state and federal oversight of carbon registries that require organizations to be transparent about what factors they consider when issuing and purchasing carbon offsets. Additionality is also recommended as a guide for navigating the use of carbon offsets across different industries.
Recommended actions for addressing equity and justice concerns include establishing free, prior, and informed consent to protect the interests and rights of stakeholders, especially community members and Indigenous tribes, who are often the groups who are silenced and negatively impacted by carbon offset projects. Consent should accompany social safeguards directly embedded in transparent carbon offset documentation. Other initiatives that are more long term include supporting social contracts and social safeguards with incentives for carbon producers. This could take the form of nudge legislation, structural changes, and shared metrics that are agreed upon by all stakeholders. Additionally, the entire life cycle of a carbon offset project should be assessed for impacts on environmental justice and social equity issues prior to validation. Elements of what form this could take can be found in initiatives like the Energy Equity Project. However, many researchers, policymakers, and other actors believe that win-win solutions involving carbon offsets are difficult, if not impossible, due to trade-offs that are inherent between the land that is often set aside for carbon trading and other purposes for that land. For example, reforestation carbon offset projects make it more tempting for nations to consolidate sovereign rights over forest areas, which dispossesses forest communities of their land and resources. Any initiatives that claim to address equity and justice issues should be thoughtfully crafted, carefully examined, and rigorously upheld.
What Can You Do?
So, where do we, as individuals, come in? How can we make sure how carbon offsets are bought, sold, managed, and used in ways that promote people and planet? First, we can engage with the political system. Carbon offsets are part of economic and societal systems, and voting for candidates that align with your views, advocating for policies you agree with, and reaching out to your current representatives to share your perspective are important ways you can make a difference. Second, if you work at a company that uses carbon offsets, or plan to work at one in the future, ask questions! Not only is it a great way to spark conversation about how the organization is working towards its decarbonization goals (or if it has any), but it is also a great way to show your coworkers that you are a critical thinker and curious about how the organization runs. Third, keep up to date on public and private developments regarding carbon offsets and share information with friends and family. A few resources that I’ve found helpful for learning more about carbon offsets and their implications are listed below:
We have an opportunity to make sure the energy transition doesn’t reinforce structural inequality and perpetuate social injustice, but we need to act now, together.