Carbon Offsetting Debate - A summary

Author

Luke Jelleyman

The OCS’ 6th week event highlighted a topical issue brought up during the Paris Agreement- should various economic actors such as member states and companies be responsible for their past emissions, and therefore be forced to compensate for such emissions? Emissions trading is a government-mandated market approach that would provide incentives for achieving such reductions in emissions, through the purchase or allocation of a finite number of permits and has its largest implementation within the EU covering 45% of emissions and 12k installations. Offsets are a similar concept, whereby companies earn emission rights not through purchasing but rather the implementation of a clean energy scheme elsewhere when they exceed their current permitted emissions. These economic policies were analysed in detail by our two expert speakers, Ben Caldecott and Pedro Moura Costa.

Dr Ben Caldecott is the Founding Director of the Sustainable Finance Programme here in Oxford, and has worked in finance, government and academia. He began the evening with a critical analysis of carbon pricing. Firstly, these are undermined by politics; implementation of the pricing is very difficult to get right, as governments are forced to assess the whole economy and calculate a price to apply to the vast majority of carbon emissions.  This price, along with the number of carbon permits (giving a right to emit), are essentially set for around 5-10 years ahead as part of the cap and trade system; this only adds difficulty in predicting future economic trends, since the price set in any one year may be inappropriate some time later due to a variety of factors. These include a change in governmental policy or discovery of new non-renewable resources, and can be adjusted to increase efficacy by the annual taxation process in comparison. This long-term issue creates further problems for investors, who play a large role in carbon markets but simply cannot predict political trends that affect carbon pricing significantly and thus estimate the price lower in their long-term budgeting than policymakers intended.

Caldecott went on to critically analyse offsets as an alternative, referring to his previous experience with an investing firm from 2004-9. Whilst offsets expand the availability of pathways offered to companies (through allowing them to ‘compensate’ for forthcoming emissions through clean projects instead of financial costs), the issue of scale is a significant one; like before with the pricing difficulty, how do governments decide the sufficient emissions quantity saved by a clean project to ‘count towards’ their carbon budget? This doesn’t even consider the difficulty of calculating then regulating such carbon savings, given that the location is generally in a low-income country with substantially less resources or authorities! Furthermore, a carbon price set too low would create insufficient incentive for companies to go through the trouble of investment abroad, as they’d rather just pay for the carbon emissions themselves. Subsequently, offsets are even more sensitive, and reliant, on market conditions to be effective for the global reduction of carbon emissions. These problems led Caldecott to conclude that programmes should proceed with caution about the inclusion of offsets within emissions trading scheme, and that we should look at other financial mechanisms, which focus on rewards based on the results produced.

Pedro Moura Costa possessed a different perspective on the issue, owing to his business background as an entrepreneur involved with climate finance. He described himself a big proponent of offsets, as they inherently contribute to overseas development projects that are promoted by the UN Sustainable Development Goals. His similar preference for carbon pricing, owing their internalisation of a damaging externality (pollution) into market processes, is unfortunately undermined by their universal inadequate implementation in the majority of cases.  For example, the excessive supply of carbon credits isn’t incentivising land owners towards sustainable agriculture, aggravating deforestation rates. However, Costa did provide a positive memory of working on the first offset project in the world, whereby his company in Borneo needed money for clean infrastructure which was donated by the Dutch government, as they desired to compensate for their emissions at the time. He went on to found ‘Eco Securities’, a company that develops and sources both carbon credits and offsets throughout global emission reduction projects; this had 700 projects during the Kyoto Protocol period and now holds a stake in a tenth of the 8000 current schemes, having been recently sold to JPMorgan for $204m. His positive view of combining our two main policies, carbon credits and offsets, contrasts with Caldecott and contributed to an interesting discussion.

Discussion

There were three particularly relevant questions asked during the very long discussion period, all relating to the disadvantages of emission trading schemes. The first one asked of the ethics of carbon pricing, given it subjects developing nations to ‘unfair’ restrictions on their development; Caldecott took a different perspective arguing that the emerging economies’ contribution has been accelerating recently, namely China and India, and that there must be cumulative carbon responsibility among all nations for these economic policies to work. Costa pointed out that the effective locational attribution of emissions, that is the ‘allocation of blame for climate change’, is impossible since it doesn’t acknowledge the relative needs of different places such as transport and heating costs in larger or colder territories respectively. The second question asked about the inherent flaws within Emissions Trading Systems (ETS); Costa countered by stating the issues aren’t flaws but simply consequences of sub-optimal political interests, including fluctuation of party attitudes, self-gain motivations and so on. Our final question asked about the case whereby emission reduction projects don’t achieve their goal, but still count towards the investing country/companies’ emissions budget; Caldecott reminded us that project progress must be verified before such benefits are accrued, and that underlying scandalous agendas are uncovered in the majority of occurrences.