Sam Jonker, Stanford University
When buying a plane ticket in 2024, most customers are presented with a puzzling option: to “offset” the carbon footprint of their flight for the low cost of around $20. As pressures to decarbonize continue to grow, airlines—and heavy industries alike—have been embracing novel solutions to reduce their carbon footprint. One solution—carbon offsetting—has grown to be a $5.5 billion industry, with shared support from both petroleum companies and environmental activists. Carbon offsets offer a unique solution to mitigating greenhouse gas emissions. Instead of reducing emissions at the source, carbon offsets decrease pollution by either eliminating potential emissions or directly removing carbon dioxide from the carbon cycle.
As it stands, many key industries are difficult to decarbonize because of financial, material, and innovation limitations. Heavy industries like cement, steel, and chemicals are particularly carbon intensive, with non-combustion processes making up a significant portion of emissions. Similarly, the aviation industry suffers from barriers independent of cost such as the energy density of jet fuel, which make complete decarbonization difficult, if not impossible. Furthermore, approximately 465 billion tons of CO2 legacy emissions have been emitted from fossil fuels alone. At the very least, these existing emissions are impossible to reduce directly from the source and require sequestration to abate.
Depending on their regulatory standing, carbon offsets are classified into two types. The first type, compliance offsets—often called allowances—are government-regulated and often based on emissions trading schemes. These programs, often known as “cap and trade” initiatives, are effective at reducing greenhouse gas emissions and have been adopted at scale over the past thirty years, with proven success across various emissions platforms. The EU Emissions Trading System (ETS), for example, reduced EU-wide emissions by 3.8% from 2008 to 2016 through compliance programs. On the other hand, voluntary carbon markets are without mandatory compliance. Under voluntary markets, entities in independent markets either profit from selling offsets they create or buy those credits to compensate for their carbon emissions.
Voluntary offsets can be further broken down into two categories: removal and avoidance offsets. As the name suggests, removal offsets reduce carbon directly from the carbon cycle using a range of methods, including direct carbon capture and natural sequestration pipelines such as carbon mineralization. On the other hand, avoidance offsets eschew emissions that would have otherwise been produced, such as not cutting down a forest that would have otherwise been deforested.
Avoidance offsets are a slippery slope, as they necessitate an often-impossible counterfactual to prove that emissions would have otherwise been produced without intervention. Often, what constitutes a viable emission prevention program under this paradigm is near-infinite; for instance, there are virtually unlimited forest regions potentially designated as carbon offset areas, provided some unregulated burden of proof is met. Voluntary carbon offsets are regulated independently, resulting in the burden of proof brightline for an effective project being entirely artificial and often ridiculous. For example, the Massachusetts Audubon Society, an ecological conservation group, proposed to the California Air Resources Board that it could heavily log 9,700 acres of its protected forest preserve. Accepting their carbon offset bid, the Air Resources Board granted them 600,000 credits in exchange for not logging the preserve, raking in $6 million after selling the credits to predominantly oil companies. This decision not only directly harms the environment by justifying continued pollution by fossil fuel companies, but also actively masks the possibility of substantive emissions reductions outside of voluntary carbon schemes. And yet, to this day, their website states that the Society is “proud of the precedent we set by participating in this pathbreaking program.”
Another issue lies in voluntary carbon offset markets themselves, which are privately regulated, verified, and transacted. Accounting for the lack of verifiability of carbon offsets, particularly in foreign countries, entities have established marketplaces and corresponding regulatory frameworks, but there is no definitive regulation or agreement on what constitutes a valid carbon offset. For example, one research paper found that within the offset industry, there exists “at least 30 standard developing organizations proposing at least 125 standard methodologies…and selling 27 different versions of certification instruments in voluntary and compliance markets.” This highly-complex industry with numerous sellers puts pressure on consumers to do independent validation and auditing on which regulatory framework is best. The lack of oversight on regulatory agencies and offset markets has produced a slew of issues with verifiability, including one example in which Verra, a leading offset standard company, sold rainforest offset credits that were more than 90% worthless.
While avoidance offsets have deeply rooted issues with counterfactual emissions claims, removal offsets offer a tangible impact: removing—and then offsetting—a quantifiable amount of carbon in the atmosphere. However, they are not without their respective problems. Most notably, accounting for open-system carbon sequestration technologies—ones designed around naturally occurring systems—is particularly difficult. While controlled carbon removal technologies like carbon capture and storage can be accurately measured and controlled per their “active” nature, open system pathways like ocean-based carbon dioxide removal and mineralization contain numerous exogenous factors with a high degree of variability. Furthermore, many natural carbon removal processes such as the carbon sequestered by planting a forest operate on long timeframes, which often do not align with their respective carbon offsets and emissions targets.
Compounding with issues endogenous to carbon offsets themselves, the role of carbon offsets in reducing emissions faces co-option from financial pressures. Addressing emissions at the source is an expensive and difficult process, and voluntary carbon offsets provide an easy—and cheap—solution to achieving net-zero emissions. For example, Delta Airlines advertises its carbon neutrality, powered by the acquisition of low-quality, renewable-energy-derived carbon offsets. These avoidance offsets are derived from the theoretical opportunity cost of using renewable energy over fossil-fuel-dependent energy solutions. However, the carbon offset value is nullified if renewable energy would have already been adopted—the counterfactual. The largest wind project in Delta’s offset portfolio “almost certainly didn’t need additional support,” effectively negating the emissions reductions from the credits. By buying cheap offsets to only theoretically minimize its carbon footprint, Delta creates a substantial opportunity cost of potentially funding better carbon dioxide removal programs. In reality, relying on fraudulent offsets only entrenches carbon-intensive processes. It detracts from meaningful emissions reductions elsewhere—low-carbon jet fuels, for instance, have the potential to reduce emissions at the source.
Looking ahead to the future of voluntary carbon offsets, there is ample room for improvement. Government regulation on third-party carbon offset rating companies offers the most appealing solution to the issues facing the voluntary carbon offset market today. Similar to how the U.S. Securities and Exchange Commission has regulated bond rating agencies following the passage of the 2010 Dodd-Frank Act, national regulation of carbon offset rating organizations could increase transparency and strengthen accountability. Increasing standards on voluntary carbon offsets would bolster trust with consumers, enhancing the reputability of offsets as a tool to reduce carbon emissions. Recent interest from regulators suggests shared concern for the voluntary offset market: Three months ago, the Commodity Futures Trading Commission announced new guidelines for commodity derivative exchanges to verify the quality of carbon offsets. Moreover, international frameworks such as the COP26 Glasgow Pact indicate international interest in carbon offset standards, and recent progress at COP28 in Dubai reaffirms this potential interest.
Moving forward, it is imperative to simultaneously address carbon dioxide emissions at the root and invest in removal offsets to minimize the harm of legacy emissions. While addressing emissions reductions directly is the most effective solution to combat global warming, removal offsets also serve an important role in the future of decarbonizing industries. However, avoidance offsets are counterproductive to addressing climate change and divert focus from substantive emissions reductions outside of voluntary carbon schemes.