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This week’s story
Amidst an urgent need to reduce greenhouse gas emissions globally, much attention is often focused on the annual United Nations Climate Change Conferences (UNCCC). COP28, representing last year’s edition of the conference, was no different, garnering widespread attention not only for the oil-rich nature of its hosts but also for the perceived lack of progress in reducing carbon emissions.
One of the key areas that became top of mind during and after last year’s conference was carbon offsetting, highlighted as a critical component of Article 6 of the Paris Agreement, which guides international cooperation to tackle climate change.
Why the buzz?
Most climate-related goals center on the concept of carbon neutrality, which can be broadly broken down into two categories:
- Net zero, representing the neutralization of carbon emitted by a product or activity. This is usually achieved by removing the same amount of carbon emitted from the atmosphere using other means.
- Zero carbon, referring to products and activities that do not emit any carbon emissions.
Carbon offsetting is a critical approach undertaken by companies pursuing net zero status. In general, it entails transacting carbon credits—a sort of currency denominated against carbon removed—between emitters, the entities that conduct carbon-emitting activities, and removers, the bodies that help remove the emitted carbon from the atmosphere.
Zero carbon is generally still a niche space, particularly due to limitations in technology, resources, and infrastructure, especially in developing areas. Additionally, it is more challenging to achieve in hard-to-abate sectors, such as steel, cement, and chemicals, which rely on carbon as an integral part of the production process. Thus, achieving carbon neutrality, for the moment, remains heavily reliant on becoming net zero.
For example, Singapore, a land-constrained country, recently inked a deal with Papua New Guinea in December last year, allowing companies operating in the former to offset part of their emissions by working with carbon removers in Papua New Guinea. The deal allows them to offset up to 5% of their taxable emissions starting this year, at a carbon tax rate of SGD 25 per ton, fivefold of the previous rate.
The big picture
On a broader level, carbon offsetting fits into a three-pronged methodology used to address climate change:
- Solutions that facilitate carbon offsetting, primarily focusing on improving how carbon offsets are measured, reported, and verified (MRV). One example is Arkadiah Technology, a startup that utilizes artificial intelligence, satellite imaging, light detection and ranging (LiDAR), and ground truthing to improve the transparency of forestry-related credits.
- Solutions that reduce the amount of carbon emitted by an existing practice. For example, transitioning from traditional fuel-based vehicles to electric vehicles would technically reduce the amount of carbon emitted, on the caveat that the energy sources utilized by the new vehicles are renewable and sustainable.
- Solutions that remove carbon from the atmosphere. A bulk of these approaches are collectively known as carbon capture, utilization, and storage (CCUS), whereby carbon is captured at its source for subsequent use or storage, typically in underground formations.
One of the primary issues with carbon offsetting is that most of the resultant credits are generated against a hypothetical baseline. This relates to the concept of “additionality,” which debates whether a reduction would have taken place regardless if it was not initially accounted for as an offset.
Several other issues also exist if the test of additionality is passed:
- Double counting, which refers to instances when a carbon offset is claimed by more than one entity.
- Difficulty of forecasting, especially as offsets entail predicting how much carbon a particular action or activity could potentially remove in the future.
- Lack of clarity, which is common in the industry due to reluctance or inability of carbon offsetting facilitators to be transparent about how offsets and credits are calculated and delivered.
- Fragmented trading of credits, as there are multiple carbon marketplaces emerging but without a centralized entity to set a unified guideline, making it challenging for emitters and removers to transact credits at a fair value.
Some observers may also argue that having the ability to offset emissions can be counterintuitive in the long run, as it can be seen as granting the license to pollute legally and is therefore a form of greenwashing.
Given that the world is on a short timeline to resolve the climate crisis, such considerations make resource allocation a precarious process for those trying to identify the most effective solutions. While carbon offsetting holds potential in helping address the crisis, one can’t help but wonder whether resources that would be utilized for this cause would be better invested in other areas, such as technologies with a clearer carbon reduction impact.