The basics on carbon offsets

This week I want to talk about carbon offsets. What are they? Are they good? Are they enough?

What are carbon offsets? 

Broadly speaking, carbon offsets are a way to take responsibility of your GHG emissions. Ideally, organizations should focus first on reducing emissions, but those emissions that cannot be reduced (given the nature of the business) can be “offset” by paying some other organization for a share of their carbon reduction efforts.

The market for carbon offsets has two categories:

• Compliance offsets are used to meet legal requirements, such as the maximum amount of carbon emissions permitted. An example is the European Union’s Emissions Trading System.
• Voluntary offsets are carbon offsets that individuals or companies choose to buy themselves.

What options are there out there for carbon offsets? 

There are many reliable options for carbon offsets. As an example, the Clean Development Mechanism (CDM), a United Nations-run carbon offset market, was set up under the Kyoto Protocol in 1997 to allow projects in developing countries to earn certified emission reduction credits which can be sold to companies looking to offset some of their carbon footprint. On its website it states that more than 7,800 projects have registered to provide carbon offsets, and over 2 billion certified emission reduction credits have been issued so far (equivalent to 2 billion CO2 tons). The price of these credits varies from deal to deal (these are always bilateral agreements) depending on the characteristics of the carbon reduction project, as well as how well-known the project is.

Most carbon offset companies, and non-profit organizations, acknowledge four main categories of types of projects: renewable energy projects (building wind farms, for example), energy-efficiency improvements, destruction of greenhouse gases (such as halocarbons), and carbon sequestration in soils or forests (tree planting, for example). To provide context, 1 ton of CO2 is equivalent to the carbon captured by 1 acre of a forest in a year.

What is the downside?

The main issue with carbon offsetting is that it creates the incentives for companies to keep polluting the environment without truly questioning if there is a better way to move forward, as long as they are compensating for it in some way (and saving face with their stakeholders this way). Thus, companies could continue to emit large amounts of GHGs into the atmosphere as long as they can say these emissions are reduced by carbon offsetting.

Furthermore, there is the issue that not all carbon offsetting projects are transparent enough, or there is even the possibility that some of these projects may fail to reach their goals in the future (when you are investing in things that are not already absorbing the CO2). There have also been instances where some of the projects actually have had negative externalities in neighboring communities (see an example here), and therefore organizations like Gold Standard are used by organizations to reach a given level of comfort that the projects they invest on actually deliver the benefits they say they will.

The carbon offsets market is unregulated, so there is still room for less-than-ideal situations in these marketplaces which in the end may lead to good intentions not having the desired impact (and that is why sticking to well-known markets when doing this (such as the UN’s CDM) is key.

What is going on in Mexico?

The Mexican government has been working for a few years now in a pilot program for a carbon offsets marketplace called the Emissions Trading System (SCE). The idea is that by 2023 the pilot program will be over, and the marketplace will be fully functional. There is also an independent carbon trading platform called MEXICO2 which has both a voluntary emissions trading system.

Additionally, there have been already many projects hosted in Mexico which have certified emission reduction credits (some of them still working today). A simple search on the CDM’s website throws 204 registered projects hosted in Mexico (some of them are probably already expired).

As for companies, Aeromexico has an agreement with MEXICO2 to purchase carbon credits (it actually offers its passengers the possibility to pay for the offsets themselves). Volaris does something similar with Carbon Neutral Planet. Cemex is another company with a strategy that includes buying offsets. It is likely that as more companies in Mexico commit to GHG targets (few of them have targets today), we will see much more demand for offsets in the country.

I hope you found this interesting. As usual, if there is anything we can help you with, please reach out.

Best,

Marimar

CEO, Miranda ESG