By Sehoon Kim*
Carbon offsets have become big business as more companies make promises to protect the climate but can’t meet the goals on their own.
When a company buys carbon offsets, it pays a project elsewhere to reduce greenhouse gas emissions on its behalf – by planting trees, for example, or generating renewable energy. The idea is that reducing greenhouse gas emissions anywhere pays off for the global climate.
But not all offsets have the same value. There is growing skepticism about many of the offsets sold on voluntary carbon markets. In contrast to compliance markets, where companies buy and sell a limited number of allowances that are issued by regulators, these voluntary carbon markets have few rules that can be enforced consistently. Investigations have found that many voluntary offset projects, forest management projects in particular, have done little to benefit the climate despite their claims.
I specialise in sustainable finance and corporate governance. My colleagues and I recently conducted the first systematic, evidence-based look at the global landscape of voluntary carbon offsets used by hundreds of large, publicly listed firms around the world.
The results raise questions about how some companies use these offsets and cast doubt on how effective voluntary carbon markets – at least in their current state – are in assisting a global transition to net-zero-emissions.
Which companies use low-quality offsets might surprise you
Our analysis shows that the global carbon-offset market has grown to comprise a rich variety of offset projects. Some generate renewable energy, contribute to energy-efficient housing and appliances, or capture and store carbon. Others preserve forests and grassland. The majority are based in Asia, Africa and the Americas, but they exist in other regions too.
Companies use these projects to boost their environmental claims in order to help attract investors, customers and support from various groups. That practice has skyrocketed, from virtually nothing in 2005 to roughly 30 million metric tons of carbon offset per year in 2022. Investment banking firm Morgan Stanley in 2023 forecast that the voluntary offset market would grow to about US$100 billion by 2030 and to around $250 billion by 2050.
For our analysis, we examined 866 publicly traded companies that used offsets between 2005 and 2021.
We found that large firms with a high percentage of big institutional investors and commitments to reach net-zero emissions are particularly active in voluntary carbon markets.
Our results also reveal a peculiar pattern: Industries with relatively low emissions, such as services and financial industries, are much more intensive in their use of offsets. Some used offsets for almost all of the emissions cuts they claimed.
In contrast, high-emissions industries, such as oil and gas, utilities or transportation, used negligible amounts of offsets compared to their heavy carbon footprints.
These facts cast a cloud of doubt on how effective voluntary carbon markets could really be at cutting global greenhouse gas emissions. They also raise questions about companies’ motives for using offsets.
Why companies rely on offsets: 2 explanations
One explanation for these patterns is that offsetting is a means to “outsource” efforts to transition away from greenhouse gas emissions. Companies with smaller carbon footprints find it cheaper to buy offsets than to make expensive investments in reducing their own emissions.
At the same time, we found that emissions-heavy companies were more likely to reduce their own emissions in-house, because offsetting massive amounts of emissions every year for an indefinite future would be more costly.
A more pernicious explanation for the growth in voluntary offsets is that offsets enable “greenwashing.” In this view, companies use offsets to cheaply refurbish their image to naive stakeholders who are not well informed about the quality of offsets. Agencies rate offset projects on how likely they are to meet their climate claims, among other indicators of the trustworthiness of offsets. Our reviews of pricing data and ratings found that projects rated as low quality have substantially lower prices.
We found that relatively few of the 1,413 offset projects used by companies in our sample had been verified as high quality by an external carbon rating agency. Most offset credits used by companies were strikingly cheap. More than 70% of retired offsets were priced below $4 per ton.
These explanations are not mutually exclusive. We found that low-emissions companies could easily alter their peer rankings for ESG performance – how well they do on environmental, social and governance issues – by offsetting a small quantity of emissions.
Fixing the voluntary market for the future
Our findings have important implications as policymakers and regulators debate rules for the voluntary carbon markets.
The data suggests that voluntary carbon markets are currently flooded with cheap, low-quality offsets, likely due to a lack of integrity guidelines and regulations for voluntary carbon markets to ensure the transparency and authenticity of offset projects. This lack of guidelines may also encourage the use of low-quality offsets.
Ever since Article 6 of the Paris climate agreement created principles for carbon markets and ways countries could cooperate to reach climate targets, agreeing on how to implement those principles has been a challenge. For the principles to be successful, negotiators must agree on project eligibility and information disclosure standards, among other issues.
In April 2024, SBTi, the world’s leading science-based arbiter of corporate climate targets, added urgency to that process when it announced that it would allow companies to meet their carbon goals with carbon offsets to cover emissions in their supply chains.
The following month, the U.S. Treasury, Energy and Agriculture departments jointly released a policy statement laying out their own template for rules to govern voluntary carbon markets. “Voluntary carbon markets can help unlock the power of private markets to reduce emissions, but that can only happen if we address significant existing challenges,” U.S. Treasury Secretary Janet Yellen said at the time.
Article 6 and standards for carbon offsets are on the agenda for the 2024 United Nations climate conference, COP29, Nov. 11-22 in Baku, Azerbaijan.
With many segments of voluntary carbon markets faltering, the COP29 summit may be a make-or-break moment for voluntary carbon offsets to become a viable contributor to decarbonization going forward.
*Sehoon Kim, Assistant Professor of Finance, University of Florida.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
20 Comments
Great piece.
In simple terms, there was a pre-human, above-ground carbon cycle. We evolved to fit exactly that. Then we introduced below-ground carbon to our above-ground ecosystem, and the results of that are changing it.
Surprise, sur-effing-prise.
You cannot offset above-ground, that which you are adding. You could sequester underground, except it requires too much of the energy. And the planting a tree approach is necessary - but to redress the 3 trillion trees we've removed, first. Funny how so many false narratives choose to start their clocks at convenient points (except economics, which doesn't even have one).
So carbon trading was doomed to be exposed as a nonsense; an attempt to bootstrap, no more.
We WILL de-carbonize - the underground resource is finite, and fracking tells us we're well through the stock. That not only tells us the greenwashing will cease - it tells us that so too will the fossil-dependent companies.
And there aren't many which aren't.
Hi PDK,
I always enjoy reading your posts. I must admit that a lot of what you say goes completely over my head.
My very basic understanding is that we burnt a bunch of stuff from underground that is is finite. This has influenced our atmosphere and is generally accepted to contribute to climate change.
The bit that doesn't make sense to me is that up until the late 70's, all the climate scientists were predicting with models a new ice age with plummeting temperatures. This suddenly pivoted to a massive global warming threat on the back of a freak hot year in the US in the late 70's. All the models since then have forecast rising temps and the polar ice caps would disappear and vast swathes of land would be under water. The problem is that all of the climate models have been significantly wrong when forecasting cold and then hot.
I've no doubt that burning a finite resource from underground isn't a very smart or long term play. But, if the climate models are always wrong in terms of severity, does that mean we actually have a far longer runway to transition that we are being told?
Even Elon Musk reckons we've got 400yrs to sort ourselves out before it becomes a meaningful issue. That's an interesting point of view given how he personally benefits if the transition to a fossil fuel free future is rushed.
Oil has been running out since the 70's. I understand the EROEI concept and at some point it doesn't make sense to extract from underground. However, this point never seems to arrive after it has been forecast for decades.
Renewables make sense to me and I have a large solar and battery setup and it brings me great joy to know our house and one of our vehicles is powered by the sun. But, my system and the entire grid requires oil and its derivative products to manufacture and more importantly maintain.
Apart from society going back 200yrs, I don't see how we can maintain our current quality of life without fossil fuels.
I know you'll think I'm a prat, but I'm genuinely confused about what the real state of play is.
Maybe have a listen to this.https://www.rnz.co.nz/news/in-depth/533664/veteran-climate-scientist-mi…
I haven't yet, but the predictions since 1990 have been pretty well right.
"up until the late 70's, all the climate scientists were predicting with models a new ice age with plummeting temperatures."
That was basically because there were two conflicting forces acting on climate and it wasn't clear which one would dominate. As they say, hindsight is 20/20.
Forcing one was of course greenhouse gases from burning fossil fuels accumulating in the atmosphere, causing heating.
Forcing two was a negative forcing, or cooling forcing, caused by particulates, also known as aerosols, which reflect sunlight high in the atmosphere causing global dimming.
Up until the late '70s it wasn't clear which would dominate, but cleaning up our smoke stack particulate pollution, while pouring ever more heat trapping gases into the atmosphere, made the situation crystal clear.
All modeling is only as good as the parameters fed into them.
Cool theory but it doesn't explain the comparatively rapid early 20th century warming when there was relatively bugger all industry compared to post WW2 and CO2 crawled from 300 to 310 in 50 years. Nor the temperature flatlining post WW2 to mid 1970's. Whatever it was I am sure tax will fix it so we can all go back to enjoying Little Ice Age conditions per those who know what is best for us.
"The most pronounced warming in the historical global climate record prior to the
recent warming occurred over the first half of the 20th century and is known as
the Early Twentieth Century Warming (ETCW).
...The exact contribution of each factor to large-scale warming
remains uncertain, largely due to uncertainty in the role of aerosols in the cooling or stabilization of climate following the
middle of the 20th century"
The early 20th century warming: Anomalies, causes, and consequences
https://wires.onlinelibrary.wiley.com/doi/pdf/10.1002/wcc.522
Yes, and?
"Attribution studies estimate that about a half (40–54%; p > .8) of the global warming from 1901 to 1950 was forced by a combination of increasing greenhouse gases and natural forcing, offset to some extent by aerosols"
"The ETCW was followed by a period of slow or no warming until the 1970s, which may have been partly caused by aerosol cooling, and partly by internal variability"
Seems the study says exactly what I said. Thanks fo your confirmation.
You probably need to read the last sentence of the paper again? - your "made the situation crystal clear" statement doesn't seem to gel with "The exact contribution of each factor to large-scale warming remains uncertain, largely due to uncertainty in the role of aerosols in the cooling or stabilization of climate following the middle of the 20th century." But hey, you be you. No one is more certain of the future than a doomster.
Yes, but you see I'm not a scientist. I'm allowed to take the findings of studies and make statements like" crystal clear", whereas scientists must always stick to convention and emphasise "uncertainty". Global dimming is certainly a thing, and there was deep concern about its effects through the seventies, until the signal of human caused global heating appeared in the data through the '80s.
"Global dimming was observed soon after the first systematic measurements of solar irradiance began in the 1950s. This weakening of visible sunlight proceeded at the rate of 4–5% per decade until the 1980s.[1] During these years, air pollution increased due to post-war industrialization. Solar activity did not vary more than the usual during this period.[2][5]
As aerosols have a cooling effect, and global dimming has masked the extent of global warming experienced to date, with the most polluted regions even experiencing cooling in the 1970s.[1][6]"
https://en.m.wikipedia.org/wiki/Global_dimming
I suspect that level off in global heat from '40s, through '70s was entirely due to human aerosol pollution and without those particulates the heating trend would have been degrees warmer now.
I may be a doomer, but at least I can sleep at night knowing I'm not strip mining the planets life support systems for a digit on a server somewhere. Better a doomer than a yeast I say. ;-)
Climate scientistsTM admit they don't even know what caused a a full half of the warming and speculate on the other half. It is a wild stretch to base a tax system on that, let alone label it "crystal clear"!
"Attribution studies estimate that about a half (40–54%; p > .8) of the global warming from 1901 to 1950"
Thought it was a pretty comprehensive study actually. If you bother reading it you'll see the complexity of the natural climate forcings existing during the studies relevant timeframe. Not surprised the warming attributed to human pollution has a wide margin of error.
So you know state the complexity of the natural climate forcings existing during the studies relevant timeframe. Not surprised the warming attributed to human pollution has a wide margin of error AKA not "crystal clear" so why state such or base a tax system on it? Predicting the future is far harder - especially if you don't know hat caused half the early 20th Century warming and can only speculate on the other half. Cheers.
Ah prof, but we do know what caused the warming, and it wasn't denials favourite source of heating, fairy dust. The causes are meticulously listed in the reference you kindly provided. Your reference attributes around 50% of the pre '50s warming to human pollution, and the post '50s plateau wasn't caused by changes in solar activity, or volcanism/fairy dust.
I'm afraid if you are expecting attribution for each climate variable confirmed down to two decimal places, that's not going to happen, especially with historical data lacking the sophistication and coverage of the modern era. As you say when cheering the oil extractivists on, technology changes.
"Apart from society going back 200yrs, I don't see how we can maintain our current quality of life without fossil fuels."
Yep, About right. I'm guessing by quality of life, you aren't refering the 1000000000 humans now living on a dollar a day? To be honest, for that bottom 1/8 of global population, quality of life was probably better 200 years ago. At least they weren't living in filth and depletion.
We won't maintain anything like this level of activity, beyond fossil fuels.
And this level of activity is transitory - economic growth and energy-use are still in lockstep (there has been no de-coupling).
Running out is a spin-doctors term; depleting from peak is the issue (we collapse long before we 'run out').
Musk is on the spectrum, to the point where he probably has zero empathy. 'Even' is not a word I'd associate with him; in many ways, he's a clown.
Climate is accepted science now - denier sites will try and confuse by cherry-picking (Profile here is a classic cherry-picker) and the way to check that stuff, is to ask: Who? and Why? Always traceable to a vested interest (as for instance, Federated Farmers dodging emission responsibilities, leading to them putting out a pile of horsepoo).
Musk's comment fails that test too, BTW: his 400 years is a linear comment, growth (that he needs) is exponential. The question is: at which rate? (There's millions of years left at a litre a year...)
Population growth was exponential for most of my longish life but now it isn't. If the number of births is declining isn't it possible energy use will do the same. Trouble is by then it may be too late - but solar is already cheaper than fossil fuel electricity (it wasn't a couple of years ago).
It is possible that population and energy use will decline, however remember most of that energy use is by 10% of the population. There's another 90% wanting to step into those vacated consumption shoes. Our yeasty overlords will be working overtime to ensure neither population, nor energy/resource consumption reduces. Physics means they won't be able to deconstruct the planets atoms and turn it into a Dyson sphere, but they'll give it their best shot, because that's all yeast knows.
It was always about the big end of town. Resources diverted away from actual problems like clean water, education and healthcare.
"The World Bank claims to have invested more than $100 billion in the effort to combat climate change. But a new report found that up to $41 billion of the bank’s spending on climate finance is impossible to track."
https://www.oxfam.org/en/press-releases/41-billion-world-bank-climate-f…
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