Carbon Offsets are a Hot Mess, and That's a Huge Problem
joshgreen.substack.com
Carbon offsets are having a bad week, which is bad news for the many companies that are relying on offsets to hit their climate goals. Not sure what an offset is? You are not alone, and I’ll try to help with that. But, first, check out this week’s headlines about offsets:
I wonder if a good analogy for these different types of offsets is the way banks and insurance companies have to account for capital adequacy. E.g. if the company holds very safe assets (Treasuries) they are counted at face value towards meeting solvency requirements; if the company holds riskier assets (corporate bonds, equities) they are counted at some haircut to face value. Relating this to offsets, the goal should be to give a clear preference towards certain approaches (high additionality and permanence), but not to entirely discount the imperfect approaches. Otherwise you end up with the situation where a landowner cuts down all his trees (if there's no incentive not to) and then gets paid to replant them. For financial institutions, these haircuts are managed by a central authority... it's not a perfect process and parameters have to be tweaked periodically to reflect better understanding of risk in various asset classes. I bet this centralized scoring model ends up being the right solution for offsets as well.
Josh, thank you for writing this. You're giving me a lot to think about. This issue of offsets is very interesting because it has so many sides to it.
It's definitely true that offsets could be misrepresentend, miscalculated, or misused, but we also need them to have any chance of meeting those Paris Agreement climate goals.
Futhermore, while companies may be using offsets instead of making emissions reductions, offsets are also a way to funnel development capital to less developed countries.
Forestry has problems with baseline and measurement, but buyers love nature-based solutions (right now) because deep inside we do feel a need to do something about the "environment." We should move towards a biodiversity rather than just carbon credit, but will take that require a lot of new science and technology?
In the end, the market can definitely be better, but it's going to take not just critiques of the current mechanisms but better mechanisms.
I wonder if a good analogy for these different types of offsets is the way banks and insurance companies have to account for capital adequacy. E.g. if the company holds very safe assets (Treasuries) they are counted at face value towards meeting solvency requirements; if the company holds riskier assets (corporate bonds, equities) they are counted at some haircut to face value. Relating this to offsets, the goal should be to give a clear preference towards certain approaches (high additionality and permanence), but not to entirely discount the imperfect approaches. Otherwise you end up with the situation where a landowner cuts down all his trees (if there's no incentive not to) and then gets paid to replant them. For financial institutions, these haircuts are managed by a central authority... it's not a perfect process and parameters have to be tweaked periodically to reflect better understanding of risk in various asset classes. I bet this centralized scoring model ends up being the right solution for offsets as well.
Josh, thank you for writing this. You're giving me a lot to think about. This issue of offsets is very interesting because it has so many sides to it.
It's definitely true that offsets could be misrepresentend, miscalculated, or misused, but we also need them to have any chance of meeting those Paris Agreement climate goals.
Futhermore, while companies may be using offsets instead of making emissions reductions, offsets are also a way to funnel development capital to less developed countries.
Forestry has problems with baseline and measurement, but buyers love nature-based solutions (right now) because deep inside we do feel a need to do something about the "environment." We should move towards a biodiversity rather than just carbon credit, but will take that require a lot of new science and technology?
In the end, the market can definitely be better, but it's going to take not just critiques of the current mechanisms but better mechanisms.
7 question quiz was great, hadn't seen a clear articulation of the various types of "offsets" before.