New Federal Regs Target Carbon Offsets

With the pressure from investors and regulators for the CRE industry as others to reduce their carbon footprints, eventually reaching net zero, you might expect companies to look for the fast track.

For years, that has been carbon trading and offsets. Company A finds a way to claim the ability to lock in carbon and sells credits to Company B. It’s like buying an indulgence during the Middle Ages — pay some money for a happy dose of forgiveness.

But such maneuvers have been the subject of criticism over the years. Some companies will oversell credits or be unable to verify and guarantee the amount of carbon captured. The entire concept can go haywire if companies providing credits are not doing anything extraordinary, raising the question of whether there are any overall incremental actual improvements. Under the arrangement, Company B isn’t reducing the amount of carbon it generates as there’s no pressure to reduce the total carbon of all the participants in such voluntary carbon markets (VCMs).

The White House through the Treasury, Department of Energy, and Department of Agriculture, released a VCM joint policy statement and principles.

“Though decarbonization outcomes can and must be accurately measured or estimated, they generally cannot be directly examined by the buyer,” they wrote. “As a result, credit integrity is paramount.”

The guidelines and principles, based on trust, are also voluntary.

“High-integrity VCMs offer significant potential economic and climate opportunities,” Treasury Secretary Janet Yellen said in a recent speech. “They can enable buyers to source cost-effective credits from different technologies, ecosystems, and geographies. And they can channel capital towards the most effective climate solutions. Today, VCMs are relatively small. But these markets have the potential to support significant decarbonization—if we address some key challenges.”

One is finding a way to assess the quality of the credits, as “the emissions savings associated with a carbon credit are generally ‘delivered’ to the atmosphere,” eliminating the ability to assess whether they deliver the claimed improvements.

Market designs need greater attention. There are challenges to ensure the existence of three characteristics that experts say are necessary: additionality (specific projects wouldn’t have taken place anyway), leakage prevention (keeping a change in one place from triggering a countermeasure elsewhere), and permanence (ensuring that benefits are long-lasting).

Companies looking to purchase credits also must look for operational and purchasing efficiencies, cutting back carbon genuinely.

Also, “Many participants have told us that transacting in VCMs is difficult. It’s a fragmented market, with high search costs and low transparency,” Yellen. “We encourage market participants to continue efforts to address these challenges through innovative products and services and believe government could play a role here too.” In other words, carbon credits are useful, but companies should cut their actual emissions and not rely on accounting practices.

The guidelines mentioned seven points:

• “Carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization.”
• “Credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing.”
• “Corporate buyers that use credits (“credit users”) should prioritize measurable emissions reductions within their own value chains.”
• “Credit users should publicly disclose the nature of purchased and retired credits.”
• “Public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high integrity standards.”
• “Market participants should contribute to efforts that improve market integrity.”
• “Policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.”