10 guiding principles for successful (nature-based) voluntary carbon offsetting

*all views are my own and do not necessarily represent the views of organizations I've worked for previously or will do in the future

This blog follows on from last week’s entry where I set out why I believe that nature-based carbon offsets are a good thing and worthy of significantly more investment. However, they are only a ‘good thing’ if firm principles are applied to ensure their integrity. As the (nature-based) carbon offset market scales, this blog attempts to simplify what buyers and sellers can do to ensure climate, biodiversity and social integrity as well as help the market achieve its full potential.

For buyers:

1) Prioritize cutting your own emissions deeply first and set clear and scientifically valid interim milestones towards the achievement of net-zero. Then make offsetting part of your integrated climate strategy.

Corporate net-zero commitments provide the main driving force behind the projected increase in offset demand. How companies use offsetting to meet their decarbonization targets needs to be carefully considered, with special attention paid to the types of offsets used and precise terminology. A clear starting point, however, is that offsetting should never substitute for an immediate focus on making achievable emission reductions*. I like the ‘mitigation hierarchy’ illustrated in this diagram:

It is crucial that companies undertake regular reviews of milestones and ensure that any claim that they make is both credible and aligned with the Paris agreement target of keeping global warming to ‘well below' 2 degrees C (ideally 1.5). There’s been lots of recent debate about exactly what carbon neutrality and net-zero targets mean and whether offsetting should be included. Here are my recommendations: 

By 2030 at the latest:

• Companies should cut their own emissions by a material amount. As a guiding principle, I would advocate that this should be at least 45% relative to a 2010 baseline (which is in line with UNFCCC recommendations). Exceptions to the 45% could be made depending on individual circumstances but would need to clearly show how they were in line with a 1.5 degree pathway.
• Any residual emissions should be entirely ‘offset’ using verified credits made up of both avoided emissions (sometimes called ‘compensation) and ‘removal’ units. 
• For nature-based offsets, this means avoided deforestation (REDD+) credits can be used up until 2030 at the very least. 
• We need to create a new, clearly understood term for purchasing equivalent VERs that correspond to all residual emissions. ‘Carbon neutral’ has been suggested as the term which could do this. I like that proposal, but fear that the term ‘carbon neutrality’ has too much history and misunderstanding associated with it. 
• Many companies could commit to offsetting/compensating all of their residual emissions much sooner than 2030 (ie tomorrow)

By 2050 at the latest. 

• Own emissions should be cut as deeply as possible (over 90% vs a 2010 baseline). 
• Any unavoidable emissions should be offset by using ‘removals only’ (i.e., only projects which remove carbon dioxide from the atmosphere). This claim is commonly understood to be ‘net zero’. 
• For nature-based offsets, this means only reforestation or restoration credits can be used – those that take CO2 out of the atmosphere through photosynthesis and store carbon in biomass. (I hope that deforestation will have ended by then, but with the best will this, unfortunately, seems unlikely. In that instance, I hope that corporations continue to support forest protection projects for their inherent biodiversity benefits, but they should not use ‘avoided’ credits to make net-zero claims). 
• This graph, borrowed from the science-based targets initiative, illustrates well how I believe companies should treat ‘compensation’ and ‘removal’ offsets in relation to their net-zero targets. Read the 'interim SBT' as the 2030 recommendation and the 'net-zero target' as this 2050 one.

 By 2070 at the latest. Note this is not something which many companies have considered but I believe is necessary and worthwhile to be in line with ‘negative emissions’ needed in the second half of this century. 

• Own emissions cut to zero (zero emissions) and entire historical emissions of the company offset using removals (just as Microsoft has committed to). 
• This can be termed ‘historic net zero’. 
• For nature-based credits, this means reforestation and restoration credits can continue to be used to finance the negative emissions which will be necessary in the second half of this century if temperatures are to be kept ‘well below’ 2 degrees. 

*by own emissions, I mean scope 1 and 2, and ideally scope 3 (use of products). Coordination around scope 3 is required to avoid double counting. 

2) Prioritize support for forest conservation (REDD+) with high biodiversity and social co-benefits.

Avoiding forest loss has to be our number one priority. Research out earlier this week, shows that the problem is getting worse - 12 million hectares of forest (of which over 4m hectares was humid tropical forest) were lost in 2020, a 12% increase from 2019. This resulted in the release of CO2 equivalent to the annual emissions from 525 million cars (the approximate number of cars in the US and China). In addition to the climate imperative of avoiding deforestation, avoiding forest conversion is THE most critical thing we can do to protect biodiversity too.

 Not only is it the right thing to do, but it’s also the cheapest thing to do. The graph above uses the groundbreaking data from the Griscom et al paper I discussed last week and clearly shows that avoided deforestation is the largest ‘low cost’ opportunity (represented by bubble size) to achieve Natural Climate Solutions (with the majority of forest protection options available for much less than $30/tonne and many below $10/tonne). 

Alongside the protection of existing forests, reforestation and forest restoration is crucial and will be a major source of carbon ‘removals’. However, the way the carbon and tree-growth cycles work means that in the near-term much more carbon savings can be achieved by preventing the loss of existing forests as trees take a long time to grow – it can take more than 100 years of regrowth for a tropical forest to recover the total carbon lost from deforestation. Reforestation is also more expensive and riskier – things can go very wrong if done badly. My strong advice is to follow the guidelines for reforestation approaches laid out very clearly in the ‘10 golden rules for restoring forests’  published recently by Botanic Gardens Conservation International (BGCI).

To build on the first point, it concerns me to see many narratives such as the net zero asset managers initiative push for ‘removals only’ offsets only which ignores the immediate need to protect the standing forest. Hopefully, my recommendations in point 1 create a framework to address this.

3) Ensure that nature-based offsets are certified by leading agencies and make sure that projects address additionality, permanence, leakage and community rights

By only purchasing offsets certified by reputable certification bodies, buyers can have more confidence in the product they are purchasing. I personally like and have most experience with the VERRA standards such as Verified Carbon Standard (VCS) and Climate, Community and Biodiversity Alliance (CCB), but Gold Standard, Plan Vivo, American Carbon Registry and the recently created TREES (for Jurisdictional REDD+ projects) also have good reputations internationally. Although all these standards have their detractors and some favor certain standards over others, in my view these standards have come a long way in recent years, and are rigorous and stand up to audit. 

Purchasing from projects verified by one of these reputable certifiers has the added advantage of knowing that your credits are not being purchased and counted by somebody else (i.e., the project is not selling their credits twice). Each issued credit (and its ownership) is tracked in a registry and is then retired by the final user.    

In addition to the reassurance offered by the standards, buyers can conduct their own additional due diligence. Important questions to ask when assessing potential projects revolve around the ‘additionality’ (i.e., would this project absolutely not have happened were it not for revenues from sales of carbon), ‘permanence’ (i.e., will the carbon stay sequestered or avoided even after the crediting period finishes), and ‘leakage’ (i.e., will the emissions in one area be diverted to another). Each project needs to demonstrate how these issues are addressed in their ‘project design document’ and a certain percentage of estimated reductions are always withheld in a ‘buffer pool’ to cover any potential future losses from leakage or project failure. In addition, it’s crucial to check that local and indigenous community rights are respected (and ideally enhanced) in these projects and that people have not been evicted from land to make way for conservation or restoration. A good way of checking for this is by looking for the CCB (Climate, Community and Biodiversity) certification which often accompanies the best VCS projects certified by Verra. Gold Standard and Plan Vivo also have strong safeguards around these issues.

Some, such as WRI, have advocated that 'quality' NCS projects should be conducted at the 'jurisdictional' (national or regional government) rather than 'project' level. Whilst I agree with the theory behind this (notably that it helps address issues of leakage and aligns with government policy measures), my concern is that currently there aren't enough high-quality 'jurisdictional' scale projects available for investment and we can't afford to wait. In the meantime, so long as projects are certified by leading standards, have addressed additionality, permanence etc, and have the potential to be 'nested' (see point 5 below) at a later date, we should not discard high-quality 'projects' too soon.

4) Be prepared to pay higher prices to account for underlying costs, unlock more projects and ensure communities get a fair deal that reflects opportunity costs

Even though NCS offsets are some of the cheapest around and the price of voluntary offsets will (and should) be set by the fundamentals of supply and demand, buyers should be prepared to pay higher prices to better reflect underlying costs, enable more projects to be unlocked and ensure that communities get a fair deal which reflects their opportunity costs (the money they could have made from alternative land uses). According to Ecosystem Marketplace research, in 2019, sales for the two most common types of nature-based carbon voluntary offset projects (REDD+ and re/afforestation) were $3.8/tonne and $7.69/tonne respectively. This is someway off the estimated cost of carbon to society of around $100/tonne and even EU ETS credits of 40 euros/tonne.

Rising prices are needed not only to provide better incentives for landowners and communities to adopt NCS approaches but also to unlock new projects and deliver larger volumes of NCS. Although the current low prices may well be enough to incentivize some projects where land and opportunity costs are very low, in order for NCS to deliver its full potential, significantly higher prices will be needed.

The graph above is from the World Economic Forum (WEF) and Mckinsey (2021)*. It shows that even though the majority of NCS can be unlocked for below $20/tonne, prices around $40 will be needed in the key areas of Brazil and Indonesia, where opportunity costs are high (from valuable export commodities such as soy or palm). 

My advice to buyers seeking to understand whether the price they have paid is ‘fair’ and likely to result in a long-term sustainable project is to ask ‘are these payments fully realizing the opportunity costs of the community or landowner in question?’ If not, then the incentive would be to sooner or later return to the alternative land use. 

 This graph from Busch at al 2019 uses a slightly different methodology and dataset, only looking at avoided deforestation (reduced emissions) and reforestation (increased removals) in tropical forests. It shows a similar story to the Mckinsey graph, but shows more clearly the significantly higher prices required to incentivize reforestation, which often can have establishment costs of more than $1000/hectare. Higher carbon prices for reforestation will also likely incentivize more biodiverse tree planting efforts as the carbon value of growing an indigenous tree and leaving it standing will be able to outcompete growing a tree for timber purposes (which often results in exotic monocultures). 

Some have also suggested higher prices should be paid for ‘charismatic carbon’ with high community and biodiversity co-benefits. My suggestion here would be to clearly label co-benefits (in line with the Sustainable Development Goals) and let the market decide what premium they want to apply. 

*Owing to slightly different methodologies, the total WEF/Mckinsey NCS potential by 2030 is lower (6.7 billion tonnes) than the Griscom et al paper (11 billion tonnes) I have cited before.

5) Get to grips with technical terms such as nesting and corresponding adjustments, but don’t use them as an excuse to delay much-needed action today.

As I alluded to in the previous blog, these are commonly cited issues that confuse people and hold investment back. Although these remain unresolved to everyone’s satisfaction, in my view they can be (fairly) easily agreed upon and should not distract from the urgent need to act now. To borrow (and slightly adjust) a commonly used phrase, ‘don’t let perfection be the enemy of action’. 

I also believe these issues are overstated. It is highly unlikely that existing certified credits will be voided, and going forward it is in nobody’s interest to disincentivize private investment – meaning it’s in the interests of all parties to find a way to agree. At worst, private projects may need to adjust baselines (which could theoretically mean fewer credits issued than projected), at best projects are seamlessly integrated into national programs and more investment opportunities arise as large-scale government-led projects are able to attract private sector finance through carbon markets. To add a little more detail on each specific issue:  

Nesting – for nature-based offsets, this primarily involves private-sector avoided deforestation (REDD+) projects, and is designed to ensure that forest conservation projects (typically in the range of 50,000-500,000 hectares in size) are integrated into larger ‘jurisdictional’ (for example county- or national-scale) programs. Without being integrated, the concern is that they don’t use common deforestation rate baselines and risk the emissions reductions being counted, claimed and paid for twice (once by the project, and once by the jurisdiction in which it sits). Although many groups within the conservation movement disagree as to whether REDD+ is best implemented at the project or jurisdictional level, I strongly believe that both approaches are needed and can be complementary. 

Recent advances in resolving the issues are encouraging; Verra is developing a Jurisdictional and Nested REDD+ framework (JNR) which will address issues such as ‘baseline allocations’ and ensure new projects align with jurisdictional programs from the outset. In the meantime, for concerned buyers from existing projects, the issue can be addressed in a number of ways such as getting a letter of no objection or endorsement from the relevant government which essentially shows that this is either not an issue, or that there is goodwill (and common interest) to resolve it. For more on this topic, see Donna Lee’s excellent article here. 

Corresponding adjustments – this refers to the debate regarding whether the country hosting the project or the buyer of the credit can count or ‘claim’ the emissions reduction. The argument goes that if both ‘claim’ then that is double-counting and risks the integrity of Nationally Determined Contribution (NDC) accounting and reporting under the UNFCCC. To resolve this, the issue of requiring a corresponding adjustment has been proposed, by which the host country would deduct the purchased emissions reductions from its own NDC achievements. 

This is a complex issue, subject to much debate as illustrated in this recent paper by Trove research. It is clear that if one country is paying another for offsets to meet their own NDC target (under Article 6 of the Paris agreement) and as evidenced recently by a Switzerland – Ghana transaction, or a corporation is paying for a carbon offset as part of a compliance regulation to help them meet reduction obligations of the countries in which they operate, then a corresponding adjustment is valid and necessary.

However, where transactions occur on the voluntary market, my view is that this is a time-consuming distraction away from the key issue of getting finance flowing to nature and making sure that projects are of the utmost integrity. I believe that if a corporation is paying for a voluntary offset for its own climate strategy, then no corresponding adjustment is required (in the short term this will be the case for the majority of transactions between corporations and projects in developing countries). Corporations are not required to submit their emissions reductions under UNFCCC – all their emissions reductions should get reported at the national level when the submission is made by each country that they operate in. If a corporation wants to ‘offset’ its own emissions to make a voluntary claim, and in so doing help a developing country meet their own NDC, then that’s great! Let them do it! All NDCs are already dependent on private sector investment anyway – it’s unrealistic to expect public sector and public funding alone to achieve them. If the NDC target looks like it will be achieved earlier than expected as a result of more private sector investment than anticipated, then the target can be increased during the 5-year review periods. Again, this is a good thing and should be encouraged. Requiring a corresponding adjustment to a host country’s NDC from a private corporate buyer, is in my view the equivalent of requiring a ‘corresponding adjustment’ to that country’s annual GDP every time a corporation investing in that country publishes its profit and loss account. It’s unnecessary and distracting. 

For an excellent article dedicated to this topic see Charlotte Streck’s recent blog post.

6) Use most recently issued credits where possible. 

Carbon credits, like wine, have different ‘vintages’ (i.e., labeled years in which they were produced). Typically projects verify and issue VERs every 2-3 years – hence a batch of credits for a specific time period (say, 2017-2019) are often issued together. Unlike many wines, however, carbon credit vintages do not age well. There are many ‘historic’ vintages left unsold on the market (there are over 100 million tonnes of issued but not retired REDD+ credits alone according to recent research), which means it’s possible to purchase a credit (at a discount) for an emission reduction which happened in 2012, 2013, etc. 

Where possible buyers should prioritize newer and future vintages as these will clearly have higher claims to ‘additionality’ than credits associated with project activities that have been completed many years ago. However, older vintages should not be entirely ignored. So long as these older credits are already following the other principles laid out in this blog, there is still value in these being purchased. Purchasing them helps generate much-needed near term cashflow for communities/landowners and helps to build the trust required between community/landowner and project developer that money will flow to reward their work. Without that, the risk is that communities/landowners lose faith in the project and revert to the previous land use.

7) Be proud and shout about it 

Assuming the above principles have been followed, shout about your offsetting. Talk about the huge benefits of the projects from a climate, biodiversity, and livelihoods perspective. This is nothing to be ashamed of, and the more people know about the benefits of the projects and the integrity of the claim, then the more chance we have of unleashing the amount of financing required. 

For carbon credit producers/sellers:

8) Hold buyers to account to avoid greenwashing

As discussed in my previous blog, this is an unprecedented opportunity for the environmental/conservation movement to hold companies to account to deliver on their ‘net zero’ plans and make sure they are ‘Paris aligned’. Don’t pass that up and give buyers a free ride. If this seems unrealistic or too time-consuming for small producers, an industry association could advocate on their behalf. In the same way as potential buyers are forming coalitions and institutions such as the ‘net zero asset owners alliance’, carbon offset providers should do the same to set their groundrules for selling carbon. WEF’s Natural Climate Solutions Alliance or the International Carbon Reduction and Offset Alliance (ICROA) could be a good starting point for this.

9) Think big and focus on the areas that matter

If Natural Climate Solutions are to achieve their full potential, they need to reduce and sequester a similar amount of CO2 (11 billion tonnes each year) to that released through the global consumption of oil products (12 billion tonnes CO2 annually). Even if offsets only achieve a fraction of that (2 billion tonnes annually by 2030 according to TSVCM), that’s still potentially a $60bn per year industry (assuming $30/tonne). Yet on the supply side, the NCS (and specifically offset) world is still dominated by (relatively) tiny social enterprises and NGOs. We need NCS entrepreneurs to show the same zeal to build large companies that sequester carbon as that shown by the oil industry entrepreneurs of the 1920s who built the oil majors who extracted it. Who is going to be the BP of developing nature-based carbon offsets, operating in 100 + countries globally, publicly listed and employing tens of thousands of staff? 

As well as creating large and competent ‘NCS companies’, project proponents need to think about how they will partner with local private, public and civil society entities to develop projects at ever-larger (some would say national) scales. A few trees planted or saved here and there just isn’t enough – projects need to be thinking in terms of millions of hectares and hundreds of millions of annual tonnes of CO2 reductions. I appreciate this is no easy task as NCS projects are inherently more complex and require large coalitions, and pulling together these disparate stakeholders across huge landscapes is a major barrier in itself. 

Last, project proponents should use the latest scientific tools to focus on the areas with the highest potential for NCS. In the same way as oil companies shoot seismic surveys to define where to drill, proponents should take advantage of the latest technology to pinpoint exactly where to develop projects. Historically, projects have been located haphazardly, often because they happen to have been where the founder of the project was living or they were invited through a connection. This has been great for proof of concept, but now it’s time to get more scientific to optimize and rationalize the scale-up. The N4C atlas and Global Forest Watch are good places to start for this and the scientists behind those platforms are working hard to make the maps more granular to better identify specific NCS potential at a much finer resolution. 

10) Know your costs and share them transparently.

As alluded to in point 5, prices need to rise in order to better reflect costs, reward communities, and unlock more projects. Although I firmly believe that carbon should be treated like other common commodities with prices set by the fundamentals of supply and demand, currently there is not enough understanding of how much projects actually cost. The result is random prices being paid and often a feeling from project developers that they aren’t receiving a fair price. To date, prices have been kept artificially low due to donor subsidy of upfront costs, which has meant that project developers have been able to sell at below the full cost of the project. This puts new projects being started today at a disadvantage as there is a perception that NCS projects can be done for less than $5/tonne. 

As well as sharing some of the macro analysis presented in point 4, project developers could also share their actual project costs, opportunity costs and revenue share agreements with communities more transparently to demystify the actual costs and revenue flows on the ground. For private sector developers, don’t be shy about sharing your profit margin too. So long as this isn’t unreasonably at the expense of communities, most private sector buyers will appreciate the risk being taken and the need for a certain level of profit to grow the company. Profitable companies also mean the chances of the company surviving to deliver the product into the future are higher which will give long-term forward buyers greater assurance too.

For reasons of commercial sensitivity private project developers may want to keep some very sensitive details back, but in general whilst the market is still nascent and the price point is still being found, sharing this information transparently would go a long way to helping buyers understand true costs and also address some of the misconceptions which the large body of anti offsets media may have. A third-party independent study and publication on this topic would also help. 

Other recommendations

There are also a number of useful recommendations made by the TSVCM led Mark Carney, mainly centered around the infrastructure needed to scale voluntary carbon markets. This tackles issues such as creating an exchange-driven core carbon price which other ‘grades’ of carbon offset could be priced against in the same way as other common commodities such as corn and oil are traded. I mainly agree with those recommendations, although they are outside the scope of this blog which was intended to take a step back and look at some of the higher-level principles for successful nature-based carbon offsetting.