Considering a Carbon Offset Purchase?
Here are Four Things to Think About
Carbon offsets can feel overwhelming, whether you’ve been around them for years or you are just starting out. There are numerous projects available with many nuances between them, and some corporate buyers don’t know where to start. This article is intended to provide a framework for thinking about 4 different criteria among offsets.
Corporate buyers purchasing offsets to fulfill greenhouse gas reduction targets may have standard, technology, price, and/or vintage specifications in mind, but more recently, buyers are increasingly looking to source offsets that impact particular sustainable development goals (SDGs) and support economies and locations that align with the geographies of their operations or supply chains.
1. CARBON STANDARD
The three most recognized carbon standards for projects in the U.S. are the Climate Action Reserve (CAR), the Verified Carbon Standard (VCS) and the American Carbon Registry (ACR). Outside of the U.S., the VCS, CSA CleanProjects and Gold Standard are the most used of the voluntary offset standards. Each carbon offset standard issues protocols (also called methodologies) that define how projects are designed and operated. Each has robust criteria that ensure that each carbon offset generated is additional to a business-as-usual situation, real, measurable, verifiable, enforceable and permanent.
2. PRICE AND TECHNOLOGY / PROJECT TYPE
The technology types used to mitigate greenhouse gases numbers in the hundreds and includes the more popular methods of forest carbon sequestration, methane avoidance from various sources, improved appliance manufacturing and hydrofluorocarbon leak detection to name a few. Pricing can vary tremendously between technologies, but why is this the case since each produces the same unit of measurement (1 metric ton of CO2-equivalent)? For example, forestry projects tend to command a much higher price (in the range of $8-$12 per metric ton wholesale) than landfill gas (which can be as low as $2-$5 per metric ton wholesale). In this instance, forest landowners must be compensated an amount in carbon revenues that is similar to what they would have earned from more aggressive timber harvesting, cropland development or conversion of their land for development. Without a sufficiently high carbon price, those other less environmentally friendly actions are going to be the default. Buyers also often prefer the wealth of co-benefits that can arise from forest carbon projects. Projects that reduce the emissions of highly potent greenhouse gases like methane, nitrous oxide or hydrofluorocarbons may involve advanced technological improvements with high capital costs, but the reductions earned can be in significant volumes, resulting in less expensive offsets. Because buyers are typically managing to a budget, many purchase a portfolio of credits from multiple projects that include some high-cost and low-cost options to achieve a feasible average cost per ton. Buyers may want to familiarize themselves with the basics of some of the more popular project types so that they have an idea of which they prefer as they enter the marketplace.
3. SUSTAINABLE DEVELOPMENT GOALS (SDGs)
Many offset projects not only reduce or sequester emissions but also contribute to the livelihood, economic growth, education and general well-being of ecosystems and local communities. As United Nations SDGs become more important for companies, voluntary buyers are increasingly considering which SDGs to support from within their offset purchases. The buyer can then communicate compelling and relatable stories about the types of offsets that they are buying and the types of co-benefits that these projects support. In the same way, offsets can impact a company’s Environmental, Social and Governance (ES&G) objectives beyond simple greenhouse gas reductions. Projects that support multiple SDGs and have many co-benefits tend to be popular among buyers and can command a price premium. As a buyer considers offsets, he or she may also want to decide if there are specific SDGs that his or her company hopes to support.
4. GEOGRAPHY AND FIT
When available, some buyers choose to support projects that are close to their operations or locations, while others choose to purchase offsets that were generated in the same industrial sector. The City of Austin, for example, prefers to source local projects for its offset commitments, and if those cannot be found, geographical scope is expanded to the state and ultimately the country. The same rules apply to most of the offsets that are used to fulfill California Environmental Quality Act (CEQA) compliance. This CEQA regulation requires real estate developers to offset the emissions associated with new developments located in California and typically involve geographic constraints, but the requirements for these offsets vary by jurisdiction.
With these preferences in mind, project developers attempt to meet the market demand for offsets by developing projects from a variety of technology types at different price points and in various locations. With the growing number of companies that have ascribed to net-zero goals, the new demand from airlines regulated by the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation and colleges and universities striving to meet their Presidential Climate Action Commitments and other internal goals, offset project demand in North America is poised for significant growth—which means even more market evolution. While the landscape of carbon offsets gets more crowded, developing preferences and goals in each of these four areas will help corporate buyers sift through a plethora of potential projects.
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