A Ton is Not a Ton: Aligning Voluntary Carbon Markets with Net-Zero
By: 2022 Bay Area Fellow Nicholas Adeyi
In the voluntary carbon markets, not all offsets are created equal. Offsets branded as equivalent in terms of tCO2e (metric tons of CO2 equivalent) can deliver significantly different emissions reductions over timescales commensurate with achieving our long-term temperature targets. High-quality offsets (additional, verifiable, and durable, in short) command significant price premiums — this makes economic sense, but since many lower-quality offsets are branded as equivalent in terms of nameplate tCO2e, buyers are incentivized to purchase offsets at the least-cost tCO2e even if they deliver significantly less real climate impact. In practice, buyers do consider factors such as reputational risk, project co-benefits, and technology adoption, and construct portfolios that co-optimize across these considerations. High-quality offsets are also legitimately supply-constrained, so even deep-pocketed or altruistic buyers struggle to purchase exclusively top-tier removals. Still, the combination of skewed incentives and false equivalence turns offsetting into an accounting exercise that overstates the physical emissions reduction driven by the voluntary markets and limits their potential as a source of decarbonization finance.
Who Cares About Accounting?
Offset emissions accounting is both art and science — the timescale over which emissions are considered relevant is one particular normative decision with a significant impact on calculated emissions impact. Ton-year accounting has drawn particular scrutiny from climate data and research nonprofit CarbonPlan because the practice enables claims of algebraic equivalence between short-term removals and more permanent storage. As noted in CarbonPlan’s dissection of the practice, temporary removals provide “some value for meeting our climate goals,” but we lack a “clear intellectual framework for thinking about the climate benefits of temporary storage.” What might such a framework take it account? It would, for one, evaluate offset accounting claims based on their physical climate impact. Temporary removals reduce cumulative radiative forcing — the heating effect that results from accumulated solar radiation — offering interim but potentially meaningful reprieves from global heating and buying time towards achieving longer-term targets through more permanent emissions reductions and drawdown measures. They are not, however, definitive mitigation solutions in the long run and should be evaluated as providing distinct benefits from permanent removals.
Time is Everything
As such, voluntary carbon markets should value temporary removals and permanent storage as providing individually valuable but distinct and non-fungible climate benefits; the two are not physically equivalent, and markets should be designed to make this explicit distinction. Crucially, corporations should not be able to balance temporary removals against their net-zero targets. Allowing so runs the risk of companies ‘achieving’ net zero with significant backlogs when those temporary removals expire, and significantly underestimates both the cost and physical requirements of reaching long-term temperature stabilization. Incorporating these considerations into the market design and offset pricing would more accurately reflect the ‘true cost’ of emissions and could make voluntary markets more effective drivers of decarbonization in at least two ways. First, corporates may take renewed looks at Scope 1 and 2 reductions — even ‘insetting’ Scope 3 — if offsets become less financially attractive relative to operational emissions reductions. Second, incorporating longer timescales better aligned with the physical behavior of CO2 in the atmosphere could funnel investment into higher-quality removals by leveling the playing field of offset pricing.
It Ain’t Much, But It’s Honest Work
There is no economic magic wand we can wave to align voluntary markets with long-term temperature targets. As Danny Cullenward and David G. Victor assert in Making Climate Policy Work, the diverse political interests and economic structures of different industries and regions make cross-border and cross-sector linkages in regulated carbon markets both politically infeasible and economically inefficient. With few exceptions, highly interconnected carbon pricing and market regimes are likely to remain the fantasies of economists unmoored from political reality. Those regulated markets that do exist trade the residual emissions leftover from emissions regulations and industrial policy; regulated or unregulated, carbon markets should not be confused as primary drivers of decarbonization in and of themselves. Still, voluntary carbon markets should be designed to drive financing towards projects that will help us meet our long-term temperature targets, particularly in hard-to-decarbonize sectors. We can better align buyer incentives with climate outcomes in the voluntary markets by implementing accounting methodologies and agreeing on offset definitions that explicitly incorporate the physical climate impact of individual offsets in the context of long-term temperature reduction targets.
About the Author
Nicholas Adeyi is a 2022 fellow in the Bay Area cohort of the Clean Energy Leadership Institute and an investor at Congruent Ventures, a venture firm that invests in early-stage climate tech startups. He holds a B.S. in Chemical Engineering and Energy Studies from Yale University.
