Carbon offsets and credits
Based on Wikipedia: Carbon offsets and credits
Here is one of the strangest ideas in modern environmentalism: you can pollute as much as you want, as long as someone else cleans up after you. This is the basic premise behind carbon offsets, a multi-billion dollar market built on the seductive promise that we can buy our way out of climate change without actually changing how we live.
The concept sounds almost too good to be true. And for many projects, it has been.
The Basic Bargain
A carbon credit is essentially a certificate claiming that someone, somewhere, has either prevented one metric ton of carbon dioxide from entering the atmosphere or removed that amount from the air. When you buy that credit, you can claim credit for that reduction yourself, effectively canceling out your own emissions on paper.
Think of it like a moral ledger. You flew from New York to London, pumping roughly one ton of carbon dioxide into the atmosphere. But you also paid twenty dollars to a project in Guatemala that planted enough trees to absorb one ton of carbon dioxide. Net result? Zero emissions. At least, that's the theory.
The marketplace that facilitates these transactions has grown enormously complex. There are voluntary markets, where companies and individuals choose to offset their emissions. There are compliance markets, where governments require polluters to either reduce emissions or purchase credits. There are registries tracking who owns which credits, auditors verifying that projects actually work, and ratings agencies trying to separate legitimate carbon reduction from elaborate accounting fiction.
Carbon offsetting has become one of the primary tools in the corporate sustainability playbook. When a company announces it has achieved "carbon neutrality," it often means they've continued emitting roughly the same amount as before while purchasing enough credits to balance the books. Whether this represents genuine climate action or sophisticated greenwashing depends entirely on the quality of those credits.
The Quality Problem
Not all carbon credits are created equal. In fact, the variation in quality is so vast that some credits represent genuine, verifiable emissions reductions while others are worth approximately nothing.
The essential elements of a legitimate carbon credit come down to five criteria. First, the project must be additional, meaning it would not have happened without the carbon credit funding. If a forest was going to remain standing anyway, paying to "protect" it isn't actually reducing emissions. Second, the reductions must be robustly quantified. If a project claims to sequester ten thousand tons of carbon but the methodology for calculating that number is flawed, the credit is meaningless. Third, the reductions must be permanent. A tree that absorbs carbon dioxide for twenty years and then burns in a wildfire hasn't permanently removed anything from the atmosphere. Fourth, the credit cannot be claimed by multiple entities. Double-counting is a persistent problem in carbon markets. Finally, the project should not cause significant social or environmental harms, like displacing indigenous communities or destroying biodiversity to plant monoculture tree farms.
These criteria seem straightforward enough. In practice, they have proven extraordinarily difficult to verify.
A History of Disappointment
The track record of carbon offset programs does not inspire confidence. Investigation after investigation has found projects that failed to deliver on their promises.
The Australia Institute has documented twenty-three separate instances where major carbon crediting programs were found to have significant shortcomings. These include projects that wildly overestimated how much carbon they would sequester, credits that were counted multiple times, and projects that claimed to provide environmental benefits that would have happened regardless of whether anyone bought credits.
Some projects have been even worse than useless. Certain enhanced removal initiatives, which aim to actively pull carbon from the atmosphere rather than simply preventing new emissions, have been accused of greenwashing because they overstated their capabilities so dramatically that they may have actually increased overall emissions. How? By giving polluters permission to continue emitting under the false belief that those emissions were being offset.
This is the fundamental danger of low-quality carbon credits. They don't just fail to help. They actively harm climate efforts by creating the illusion of progress where none exists.
How Did We Get Here?
The intellectual foundations of carbon trading trace back to the 1970s, when the United States began experimenting with tradable permits for conventional pollutants. In 1977, amendments to the Clean Air Act created one of the first emission offset mechanisms, allowing facilities to increase their pollution if they paid another company to reduce its emissions by a greater amount. The idea was elegantly simple: let the market find the cheapest way to achieve any given level of pollution reduction.
This approach gained momentum with the Acid Rain Trading Program established in 1990, which introduced the concept of cap and trade. Under this system, the government sets an overall limit on total emissions, then distributes or sells permits that can be traded among polluters. Companies that can reduce emissions cheaply sell their extra permits to companies for whom reductions would be more expensive. The cap ensures the environmental goal is met while the trading ensures it happens as efficiently as possible.
The Kyoto Protocol, adopted in 1997, extended this market-based approach to greenhouse gases on a global scale. It established the Clean Development Mechanism, which allowed wealthy countries to sponsor emission reduction projects in developing nations and claim credit for those reductions. The logic was that a ton of carbon dioxide has the same effect on the climate regardless of where it's emitted, so it makes sense to reduce emissions wherever it's cheapest to do so.
In theory, this would channel investment from rich countries into clean development in poor countries while achieving climate goals at minimal cost. In practice, the system developed serious integrity problems that have plagued carbon markets ever since.
The Paris Agreement and Its Promises
The Paris Agreement, adopted in 2015 to succeed the Kyoto Protocol, included provisions for carbon crediting as a tool to help countries meet their Nationally Determined Contributions, the emission reduction targets each country sets for itself. Article 6 of the agreement established three mechanisms for voluntary cooperation between countries on climate goals.
Article 6.2 allows countries to trade carbon credits directly through bilateral agreements. If Costa Rica reduces emissions beyond its target, it can sell those excess reductions to a country struggling to meet its own goals. Article 6.4 established a new international crediting program meant to replace the troubled Clean Development Mechanism with something more rigorous. The third option, Article 6.8, enables non-credit forms of cooperation and is therefore tangential to the offset market.
The Article 6.4 mechanism, sometimes called the Paris Agreement Crediting Mechanism, represents an attempt to learn from past failures. It aims to enhance credit quality and raise standards across the entire market. Projects operating under the old Clean Development Mechanism can transition to the new system if they meet stricter eligibility requirements, and a methodology panel is reviewing old approaches to determine which meet the more rigorous new standards.
After years of deadlock over the details, governments at the 2024 climate conference in Baku, Azerbaijan finally agreed on rules for creating, trading, and registering carbon credits under the Paris Agreement. This theoretically opens the door for a more robust international carbon market, though whether the new rules will prevent the quality problems that plagued earlier programs remains to be seen.
The Alphabet Soup of Carbon Credits
Navigating the carbon credit landscape requires learning an entirely new vocabulary. Each crediting program issues its own type of credit with its own designation.
The Clean Development Mechanism issues Certified Emission Reductions, abbreviated CERs. The new Article 6.4 mechanism issues A6.4ERs. Verra's Verified Carbon Standard issues Verified Emission Reductions, or VERs. The American Carbon Registry issues Emission Reduction Tonnes. Climate Action Reserve issues Climate Reserve Tonnes, or CRTs.
These are not interchangeable. A methodology approved by one crediting program cannot necessarily be used through another. The American Carbon Registry has its own list of approved project types and calculation methods. Verra has a different list. The Clean Development Mechanism has yet another. A project developer hoping to generate carbon credits must navigate this bureaucratic maze, selecting the right program for their project type and location, then following that program's specific rules, requirements, and methodologies.
The vintage of a carbon credit, the year in which it was issued, also matters. Some buyers prefer recent vintages, reasoning that older credits may represent reductions that have already been reversed or that were counted under less rigorous standards. Compliance markets and reporting programs often limit which vintages they accept.
What Kinds of Projects Generate Credits?
Hundreds of different project types have approved methodologies across various crediting programs. The diversity is remarkable.
Forestry projects form a major category. Some protect existing forests from logging, arguing that without carbon credit funding, those trees would have been cut down and their stored carbon released. Others plant new trees, generating credits as the saplings grow and absorb carbon dioxide from the air. Mangrove restoration projects combine carbon sequestration with coastal protection and biodiversity benefits.
Renewable energy projects generate credits by displacing fossil fuel electricity generation. Wind farms, solar installations, hydroelectric dams, and biomass energy facilities all have approved methodologies. The argument is that without carbon credit revenue, these projects might not have been financially viable, and electricity would have been generated by burning coal or natural gas instead.
Energy efficiency projects reduce the amount of energy needed to accomplish a given task, thereby avoiding the emissions that would have resulted from generating that energy. Biogas digesters capture methane from agricultural waste or landfills and burn it for energy, preventing a potent greenhouse gas from escaping into the atmosphere. Carbon capture and storage projects attempt to intercept carbon dioxide before it reaches the atmosphere and sequester it underground.
Some of the most controversial credits come from the early retirement of coal power plants. The idea is that paying a plant to shut down earlier than planned avoids years of emissions that would otherwise have occurred. Critics argue these projects often fail the additionality test because economic forces were already pushing coal plants toward closure.
The Problem with Looking Forward
Forward crediting is one of the riskiest practices in carbon markets. This approach issues credits for projected future reductions before those reductions have actually occurred.
Imagine a reforestation project that plans to plant one million trees over the next decade. Under forward crediting, the project might issue credits now for the carbon those trees will eventually absorb, allowing buyers to claim immediate offsets for emissions happening today based on sequestration that might occur years from now.
The problems with this approach should be obvious. The trees might not survive. The project might fail. Political instability might disrupt the region. Climate change itself might create conditions, like drought or wildfire, that prevent the projected sequestration from materializing. Forward crediting essentially allows people to offset present emissions with future promises, and promises are notoriously easier to make than to keep.
Watching the Watchers
In response to growing concerns about credit quality, a cottage industry of ratings and verification services has emerged.
Some initiatives provide open access resources to help buyers distinguish high-quality from low-quality credits. The Integrity Council for the Voluntary Carbon Market developed an assessment framework and labels methodologies that meet their quality threshold with a Core Carbon Principle designation. The Carbon Credit Quality Initiative conducts deep analysis and assigns scores from one to five representing the holistic quality of different methodologies.
For-profit ratings companies have also appeared, reviewing individual project documents and providing quality assessments that buyers can use to inform their purchasing decisions. These services represent market demand for information that crediting programs themselves have struggled to provide.
Registries form the backbone of credit tracking. Through publicly accessible databases, carbon credits are monitored for ownership and retirement. When someone uses a credit to offset their emissions, it must be formally retired in the registry to prevent it from being sold again. These registries typically contain project documentation, credit generation records, and ownership history, providing at least some transparency into the market.
The Economics of Offsetting
The economic argument for carbon offsetting rests on a simple observation: the cost of reducing emissions varies enormously depending on where and how you do it. Installing energy efficiency improvements in an aging factory in Poland might cost a fraction of what equivalent reductions would cost in Germany. Protecting a forest in Brazil might be cheaper still.
If the goal is to reduce global emissions by a certain amount at the lowest possible cost, it makes sense to pursue reductions wherever they're cheapest. Carbon markets facilitate this by allowing those who can reduce emissions cheaply to sell credits to those for whom reductions would be expensive. In theory, this achieves any given emissions target more efficiently than requiring each emitter to reduce their own emissions by a fixed percentage.
Studies supporting the Kyoto Protocol suggested that its flexibility mechanisms, including carbon trading, could substantially reduce the overall cost of meeting climate targets. The same logic applies to the Paris Agreement. Offset and credit programs have been identified as a way for countries to meet their Nationally Determined Contributions at lower cost than they could achieve through domestic reductions alone.
Beyond cost efficiency, offset projects often generate co-benefits. A forest protection project might improve local air quality, increase biodiversity, and protect watersheds. A clean cookstove project in a developing country might reduce indoor air pollution while also creating local employment. Some certification programs have developed tools to quantify these additional benefits.
But the economic case for offsets only holds if the credits represent real emissions reductions. Low-quality credits don't just fail to provide climate benefits. They distort the market by competing with legitimate projects while delivering nothing. When buyers can't distinguish real reductions from phantom ones, they have little incentive to pay premium prices for quality.
Compliance Versus Voluntary Markets
Carbon markets divide into two broad categories with very different characteristics.
Compliance markets exist where governments require certain entities to limit their emissions. The European Union Emissions Trading System covers power plants and heavy industry across Europe, requiring covered facilities to surrender allowances equal to their annual emissions. California's Cap and Trade Program takes a similar approach. In these systems, carbon credits may be eligible for compliance use, though often with restrictions on quantity, type, or origin.
Voluntary markets operate outside regulatory requirements. Companies and individuals purchase credits because they want to offset their emissions, not because any law requires them to do so. These markets tend to have less oversight and more variable credit quality. When a company announces carbon neutrality based on voluntary offset purchases, the credibility of that claim depends entirely on the quality of the credits they bought.
The interaction between these markets creates interesting dynamics. Non-regulated entities might participate in compliance markets as buyers if they prefer the more standardized credits available there. Compliance market prices tend to be higher and more stable than voluntary market prices, reflecting both regulatory demand and typically more stringent quality requirements.
Prices in both markets vary widely. This volatility reflects fundamental uncertainty about whether any given credit actually represents real emissions reductions. That uncertainty has made some companies increasingly skeptical about purchasing offsets at all, preferring to invest in direct emissions reductions even when offsets might theoretically be cheaper.
The Fundamental Question
The originating idea behind carbon credits is that they can substitute for reductions a buyer could have made to their own emissions. For this substitution to be valid, the world must be at least as well off when someone buys a credit as it would have been if they had reduced their own carbon footprint instead.
This is a deceptively simple standard that has proven enormously difficult to meet in practice.
The quality of a carbon credit refers to the level of confidence that using it actually fulfills this basic principle. A perfect carbon credit would represent an emission reduction that was genuinely additional, accurately quantified, permanent, unique, and free of significant harms. Such credits may exist. But the market is awash in credits that fail one or more of these tests, and distinguishing the real from the fraudulent requires expertise that most buyers lack.
As of 2022, sixty-eight carbon pricing programs were operating or scheduled worldwide. These range from international mechanisms under the Paris Agreement to national and sub-national cap and trade systems. The scale of these markets continues to grow even as questions about their integrity persist.
Carbon credits represent one approach to putting a price on pollution, alongside carbon taxes and Carbon Border Adjustment Mechanisms. Each approach has its advocates and critics. Carbon taxes are simpler and more transparent but don't guarantee specific emissions reductions. Carbon credits can channel investment to developing countries but create opportunities for gaming and fraud. Border adjustment mechanisms prevent carbon leakage when production moves to jurisdictions with weaker climate policies but raise concerns about trade protectionism.
The debate over which approach works best continues. What's clear is that carbon credits, despite their troubled history, remain a central element of international climate policy. Whether the new frameworks established under the Paris Agreement will deliver on their promise of higher quality and greater integrity remains the defining question for this peculiar market in atmospheric accounting.
The Moral Dimension
Beyond the technical questions of additionality and permanence lies a deeper philosophical puzzle. Even if carbon credits worked perfectly, delivering exactly the emissions reductions they promise, would offsetting be the right approach to climate change?
Some critics argue that offsetting provides psychological permission to continue polluting. A business traveler who buys credits to offset their flights might feel absolved of responsibility in a way that reduces pressure to fly less. A company that achieves carbon neutrality through offsets might lose motivation to actually reduce its emissions. In this view, offsets function as modern indulgences, allowing the wealthy to purchase absolution for environmental sins rather than changing their behavior.
Others counter that perfect shouldn't be the enemy of good. Climate change is happening now, and any tool that reduces emissions is worth using. If offsets channel investment into renewable energy and forest protection while we work on longer-term solutions, they serve a valuable purpose even if they're not ideal.
The truth probably lies somewhere in between. Well-designed offset programs with rigorous quality controls could play a useful role in addressing climate change, particularly for emissions that are genuinely difficult to eliminate through other means. Poorly designed programs that issue worthless credits provide cover for continued pollution while delivering nothing of value. The challenge is building institutions capable of consistently telling the difference.