The chorus of “net-zero” commitments continues to grow, fuelling the ambitions of businesses and governments around the world to reduce their greenhouse gas emissions. And one hot topic of debate is the role of offsets. 

While governments, companies, financial institutions, and many NGOs want to see them used more widely, critics have been vocal about their shortcomings, and the imperfections are real. The market must improve, and there’s a need to elevate this discussion, write authors Bill Morris and Pierre Alvarez in an opinion piece for iPolitics. Solving our climate and biodiversity crises requires vast sums of capital. Offsets are a way to attract private capital efficiently and direct it at cost-effective climate solutions.

Offsets are Necessary

No climate change solution is a silver bullet. We need most of them. Countries and companies are using a mix of solutions to get to net-zero.

But not all solutions fit neatly in the value chains of businesses and corporations. Alternatively, companies can buy renewable energy credits if they can’t access clean power directly from the grid—the same carbon markets that helped solar and wind scale up to become cost-competitive. Similarly, offsets can attract private capital to nature-based solutions.

Canada’s demand for offsets is poised to increase, thanks to the launch of Canada’s Greenhouse Gas Offset Credit System Regulations. Work is under way to define protocols for four types of projects: forest management, agricultural soil carbon storage, landfill gas management, and refrigerant management. These projects offer credible offsets at scale, and don’t otherwise benefit from regulations or direct corporate funding.  

Offsets are Imperfect

A valid criticism is that offsets are “get-out-of-jail-free” cards, enabling emitters to avoid the hard work of reducing their carbon footprints.

The Science-Based Targets initiative (SBTi) is addressing that [notwithstanding concerns about some of the methodological choices it’s made—Ed.]. More than 1,200 companies are working with SBTi to establish science-based targets. Companies that adopt them commit to eliminating emissions at a pace and scale consistent with mitigation pathways that limit warming to 1.5°C. The SBTi has approved the targets of more than 500 companies.

When the net-zero movement took off in 2019, it became clear to SBTi that it needed to update its protocols to reflect the growing use of offsets. In late 2020, it offered guidance, starting with: Offsets may supplement, but not substitute, a reduction of emissions. It then said companies could buy offsets for two reasons: First, to “neutralize” a company’s residual emissions; and second, to reach net-zero earlier by buying offsets to “compensate” for emissions while on the path to its approved science-based target.

The beauty of the framework is that a company would report progress against both its science-based target (value chain emissions) and net-zero (including offsets). New disclosure rules requiring companies and governments to report natural assets reinforce this transparency.

The other debate concerns the credibility of the offsets themselves. Nature-based solutions are particularly open to criticism because of additionality, permanence, and leakage.

Additionality

Was it the project itself that made the difference? That’s the essence of additionality. There are stories of carbon projects launched years after landowners had already decided to conserve a forest. We’ve also heard of projects to prevent forest clearcuts that were unlikely to happen in the first place. Others failed to adjust their offsets as operating conditions changed over time. The Gold Standard (GS) and the Verified Carbon Standard (VCS) have incorporated these lessons into their protocols. While they are still today’s news, older questionable projects are rapidly becoming yesterday’s market challenges.

Permanence

Forest offsets are vulnerable to permanence risks, such as forest fires. Fires cause accumulated carbon to be released all at once, undoing what was offset years before. VCS has a group insurance policy called a buffer pool to account for these losses. Another permanence concern is whether a project can guarantee not to cut trees in the future. Conservancies solve this by buying lands or putting long-term easements in place.

Leakage

Another challenge for offsets is “leakage.” Has offsetting reduced the emissions or moved them elsewhere? Leakage is complicated. If you develop a solar panel project, should you get a renewable credit without shutting someone else’s coal plant? If we limit oilsands production, don’t other global producers produce more? If you stop harvesting a particular forest, don’t others harvest more?

VCS requires proponents to apply a leakage discount, generally at 20%. It’s large enough to be meaningful, but not high enough to be controversial. Verra, the non-profit behind VCS, is reviewing its leakage provisions. The topic is also being reviewed by B.C.’s Forest Carbon Offset Protocol.

The Market is Evolving

Successes, failures, and innovations are raising the bar. Standard-setters are tightening their protocols, buyers are learning what to look for, and developers are shaping their projects accordingly. As a result, more of today’s projects deliver on their promises.

We’re also starting to see different classes of offsets. Least pricey are older offsets in developing countries that didn’t adhere to today’s more rigorous standards. Most pricey are those that permanently remove carbon. Offsets that avoid emissions are somewhere in the middle. While fragmentation may be inevitable, market forces will gravitate to where a tonne credibly avoided equals a tonne credibly removed.

The imperfections of offsets cause some to say that regulation and further government spending are better ways to scale up specific climate solutions. Critics fail to acknowledge that offsets are evolving at an impressive pace in response to their challenges.

But we also need to elevate the discussion. We need trillions of dollars to solve the twin crises of climate change and biodiversity loss. Unlike many countries, Canada still has the chance to protect nature, and has an abundance of it. Government funding and philanthropy aren’t enough. Offsets, when done right, efficiently put billions in private capital into the hands of those who can deliver carbon reductions while protecting and restoring nature.

Bill Morris is a retired CEO of Accenture Canada. Pierre Alvarez is vice-chair of Global Public Affairs. They are working with groups across Canada to advance policy and business frameworks for nature-based climate solutions. This post originally appeared on iPolitics, and we’re republishing it in full with the authors’ permission.