In the past, when judging the quality of an offsetting project, most people looked at questions such as: is the methodology used to calculate emission reductions well designed, and are the social impacts of the project taken into consideration?

As the carbon market developed a pattern of producing questionable credits, researchers started looking at whether the projects truly reduced emissions. Studies have shown that a majority of projects under the different Kyoto mechanisms, Joint Implementation (JI) and Clean Development Mechanism (CDM)  did not reduce what they claimed. The report by Stockholm Environment Institute adds another filter to judge projects – the Paris Agreement rules for markets, specifically for avoiding double counting

What makes a good credit?

Offset financing is essentially a subsidy for a climate project. If the project is dependent on that revenue then the offset money contributes to new emission reductions, and the project is considered “additional”. If the project would have been carried out anyway and did not need the financing, it does not reduce emissions.

The global carbon market has currently billions of credits and very few buyers, meaning that offset money has stopped flowing. Projects that depended on these contributions are vulnerable to stopping the actions required to reduce emissions. These vulnerable projects are by definition additional, and amount to around 800 million credits, according to the SEI study.

Double counting on us?

Additionality is not the only screen that determines if a credit is worth a reduced tonne of pollution though. Many countries have declared 2020 emissions reduction targets which are called “Cancun pledges”.

Some of the emissions reduction from offsetting projects have been counted towards achieving the Cancun pledges. It goes without saying that these offset credits cannot be sold anywhere else. Either the offset helps achieve Cancun pledges or they compensate someone else’s climate target – but not both.

The study goes on to find that 77% of CDM credits fall within the scope of Cancun pledges. So what happens when you overlay additionality and accounting restrictions? How many credits are left?

Only 1% of available credits meet the required criteria

If offset buyers restrict themselves to buying credits that were additional at the outset, that are vulnerable to discontinuing their reduction activity without additional revenue, and that are not double counted with 2020 targets, only about 300 million credits will be left. If one were to further limit these to only certificates from developing countries most in need, only about 40 million credits would be eligible, corresponding to about 1% of the overall supply potential.

The Paris Agreement has made many offsets unsuitable for use, and with reason, as a more comprehensive climate framework requires more comprehensive rules. The agreement has added complexity in a world where separate carbon market initiatives interact. This is an expected evolution of markets whose goal as a policy instrument is to raise ambition in the most cost effective way.

What is clear is that the accounting rules and instruments of the Kyoto protocol have not kept up with the times and are insufficient for the challenges of climate change both now and after 2020. In order to meet the Paris Agreement goals and to avoid the worst effects of climate change, we must rapidly reduce emissions, not just compensate for increased emissions through offsets.

Kelsey Perlman