What are some of the stakeholder benefits and risks in carbon offsetting?
Carbon offsetting ecosystem — who’s involved?
Exploring who can benefit from carbon offsetting, along with what some of the risks are, helps us see how the carbon market ecosystem functions and how it can be improved. First, let’s look at who’s involved in carbon offsetting.
The supply side of carbon credits consists of project developers and landowners of all kinds, and the people who are employed by the project. For certain types of carbon reduction projects (see our last blog on what makes carbon offsetting credible) such as energy efficiency and carbon sequestration through nature-based solutions (NbS), local communities are involved as the recipients of the new technologies, or the stewards of the NbS projects, helping to deliver the carbon reduction impacts on the ground.
Carbon crediting is also supported by companies that develop and maintain the monitoring, reporting and verification standards (such as Gold Standard, VCS and CDM), and independent verification or auditing providers that verify or audit the carbon reduction or removal of each project. These stakeholders play a critical role in the carbon offsetting ecosystem for two reasons: 1) they set the standards for the industry and market, and 2) all projects must utilise them in order to issue and monitor carbon credits. In future blogs we will examine these two service areas to analyse if current practices are sufficient to support the rapid 100-fold increase in demand to scale up carbon projects.
The demand side of carbon credits consists of buyers of all kinds, including industries, businesses, individuals and governments. Finally, supply and demand of carbon credits wouldn’t exist without project financing from private investors, governments, large NGOs, and civil society organisations.
Benefits for communities involved in carbon projects
Certain types of carbon projects involve and benefit communities directly, providing co-benefits across four areas: environmental (including climate adaptation), educational, economic, and social capital — all of which increase resilience in communities. For example, an energy efficiency project such as introducing fuel efficient stoves to women involved in shea nut processing across Africa that Earthbanc worked on with a multilateral development bank, provides:
- environmental co-benefits by reducing wood and water consumption, thereby reducing emissions, deforestation, and providing adaptation to climatic conditions of drought;
- educational co-benefits through training and skills development in how to construct and use the new technology;
- economic co-benefits by increasing and stabilising shea volume production abilities, which in turn supports the livelihoods of women shea producers;
- social co-benefits through gender equality and empowerment, helping women to overcome socio-economic disadvantages by strengthening their income earning potential and making it more resilient to climate change.
Similarly, in the case of forest conservation and restoration, intact and healthy forests provide food, fibre, fuel, medicines and income to the nearly 1 person in 8 globally whose livelihoods are dependent on forests. Carbon removal projects such as afforestation, agroforestry, ecological forestry, regenerative agriculture and grazing, and soil carbon sequestration in grasslands, all help to protect biodiversity, and improve air and water quality. They also provide critical green jobs and vital adaptation benefits to the most vulnerable communities in the form of increased land productivity, reduced soil erosion and disaster risk reduction resilience.
Many types of carbon removal projects provide a multi-pronged solutions approach to climate change while also addressing climate inequality. They help to meet the UN’s Sustainable Development Goals (SDGs) whilst simultaneously taking existing emissions out of the atmosphere. But these types of projects are categorised as ‘higher-risk’ and therefore can present more challenges to project developers.
Benefits and risks for project developers
Carbon projects are a business like any other, and developing projects delivers revenue and profit to developers. But this can vary in size and speed depending on the type of project. Just as offset buyers must consider lower-risk vs higher-risk categories of offsets when purchasing, so too do project developers need to consider this.
A lower-risk project, such as avoiding nitrous oxide (N20) emissions at an industrial site, can quite easily meet carbon verification standards of additionality, permanence and leakage, while delivering very clear environmental benefits — nitrous oxide has a global warming potential (GWP) that is 265–298 times more potent than carbon dioxide. But the myriad of other co-benefits beyond climate action that higher-risk offsets such as reducing deforestation, transitioning to regenerative agriculture and grazing with new management systems, cannot be delivered by solo industrial projects. This makes lower-risk projects less impactful in terms of systemic and localised co-benefits, particularly climate resilience and adaptation.
Project developers can benefit more from developing lower-risk offset projects, in that they:
- are easier and cheaper to finance, with lower interest rates offered due to the lower risk,
- are easier to quantify and verify reduction benefits (and therefore cheaper),
- can demonstrate impact and deliver revenue faster than most land use projects,
- and finally — they can be easier to sell in voluntary carbon markets due to their lower-risk profile.
Lower-risk vs higher-risk offset projects — what is the tradeoff?
Like any market, carbon markets face challenges in expanding higher-risk projects, such as more costly finance and less market demand. But carbon markets shouldn’t exist just to make a quick profit. They need to exist to accelerate rapid, systemic climate solutions. That means we need to consider how to de-risk, finance and scale higher-risk projects such as [1]:
- Regenerative agriculture and agroforestry
- Reduced deforestation and ecological forestry and land use
- Carbon farming and grasslands
- Biomass energy that is ecologically sustainable
- Energy efficiency at the scale of industrial demand and supply
- Renewable energy at scale
As the above list demonstrates, what equates to higher-risk in carbon offset projects is either the level of scale, or if nature-based solutions are involved. Higher-risk projects in this context simply means it can be more difficult to meet the essential carbon offset verification criteria of additionality, permanence and leakage, as nature-based solutions are a convergence of human management, culture and environmental changes. Higher-risk carbon sequestration projects that deliver co-benefits are considered to be higher quality offsets. But this leaves project developers to manage the higher risk in order to bring them to market.
Part of our mission at Earthbanc is to de-risk these types of land use projects so that project developers do not have to accept a trade-off between ease of bringing to market and developing higher quality offsets. Through machine learning and satellite technology we provide continuous proof of the underlying carbon asset’s existence and report on other co-benefits such as: biodiversity; women’s participation and leadership opportunities; and diversity and inclusion in project design to ensure distributed opportunities across communities.
Nature-based solutions are a multi-functional solutions approach
Nature-based solutions (NbS) are defined by the International Union for the Conservation of Nature (IUCN) as, “actions to protect, sustainably manage and restore natural and modified ecosystems in ways that address societal challenges effectively and adaptively, to provide both human well-being and biodiversity benefits. They are underpinned by benefits that flow from healthy ecosystems and target major challenges like climate change, disaster risk reduction, food and water security, health and are critical to economic development”.
While there is growing evidence of the cost effectiveness of NbS and its essential role alongside other solutions in addressing climate change, less than 1% of climate finance is currently directed to NbS. The categorisation of NbS as higher-risk within carbon offsetting poses a systemic challenge to scalability that needs to be addressed. That’s why Earthbanc is delivering AI-enabled carbon Monitoring, Reporting and Verification (MRV) technology that can more accurately and consistently measure and quantify the benefits of diverse nature-based solutions. We’ll explore NbS more fully in future blogs, particularly how to de-risk and unlock their multiple benefits at scale.
Financing higher-risk projects
There is growing awareness of the role that natural systems play in addressing climate change and infrastructure needs. Integrating ‘green and grey’ — natural and human-built systems — is a solution for next generation infrastructure needs that takes into account the requirements of the Paris Agreement. But financing higher-risk projects requires project developers to access higher-cost capital as a result of the perceived risk.
In an era of low and no-cost loans, and during a climate emergency, we simply can’t afford to play by ‘business as usual’ rules when it comes to risk and finance. As a climate fintech, Earthbanc’s vision is to de-risk land use carbon removal projects using our MRV technology, and to provide the infrastructure for climate finance to flow more easily through green bonds to fund projects. Follow us to learn more in our green investment blog series coming in early 2022, and about how we are working with UN agencies to scale up NbS exponentially.
Summary and what’s next
In this second blog we’ve outlined who’s involved in carbon offsetting, and the benefits for communities from certain kinds of carbon reduction projects, particularly from energy efficiency and nature-based solutions. We’ve also explored the dilemmas project developers face in regard to lower-risk and higher-risk categories of offsetting projects and how this is a critical area that needs to be addressed with breakthrough technology in order to scale carbon offsetting markets to be a credible climate solution.
In our next blog we’ll explore the role carbon offsetting plays in reaching net zero, looking at more of the specifics in regard to transition and decarbonisation strategies, as well as regenerating ecosystems at scale to ensure continuity of earth’s life support systems. Follow us on Medium here and stay tuned!
Read more about Earthbanc here.
