Reduce climate-related financial risk with offsets: Basic criteria for offset project eligibility

Investors are putting increased pressure on corporations to address their carbon footprints [1]. BlackRock, the world’s largest asset manager, has even suggested divestment of companies that do not set GHG emission reduction goals under the Task Force on Climate-related Financial Disclosures (TCFD) and align their underlying business practices to incorporate climate change risk [2]. Companies looking to lower their carbon footprints have a variety of options:

• they can reduce their emissions directly by implementing energy efficiency measures or switching to green power;
• they can look to develop new products and services that are less GHG (greenhouse gas) intensive; or,
• they can purchase offset credits from other organizations that take action to reduce GHG emissions or remove it from atmosphere.

One of the most common types of offset credits are those that originate from forestry-related activities such as reforestation or improved forest harvesting practices. Company’s looking to offset their emissions are drawn to forest carbon offsets for reasons that extend beyond the emission reduction or removal benefit. Forest carbon offsets also have secondary environmental benefits for water, soil, and biodiversity. Given the attractiveness of forest carbon offsets, it is important for corporate purchasers to understand their potential pitfalls. To do this, we must first understand the basic criteria for offset project eligibility and how these relate to the unique characteristics of forest carbon offsets.
 

Offset project criteria

When considering a specific offset project type, it is useful to understand the basic criteria for offset project eligibility. Forestry carbon offsets are no different. They must adhere to a set of general offset project eligibility criteria if they are to be widely recognized. The following provides an overview of general offset project eligibility criteria. These criteria were identified in a document titled Canada’s Carbon pollution pricing: options for a Federal Greenhouse Gas Offset System [3] but are broadly consistent with other offset systems including Alberta’s offset program [4] and the Voluntary Carbon Standard [5].  
 

Scope

To be eligible to generate offset credits, project activities typically must have begun after a certain date. If voluntary and regulatory carbon markets allowed activities that were undertaken a very long time ago to earn credits, the market could soon be flooded. There is also a potential issue with data and verification errors for activities that occurred in the past. The date of the project activity is just one aspect of project scope. Other aspects of scope that can limit which project activities are eligible to generate offsets include the geographic location and GHG type. For forest carbon offsets, the start date and eligible geographic location are dictated by the offset program. For regulatory programs, offset credits may be limited to the jurisdiction where the regulation applies. Voluntary programs typically have fewer stipulations on the location of a forest carbon offset project.
 

Real    

To be considered “real”, the offset project activity must be a specific and identifiable action that results in a net reduction of GHGs. The offset project also must demonstrate it has been implemented in in accordance with a recognized offset protocol. The offset protocol typically requires the project to be functionally equivalent to its baseline. For example, offset credits cannot be earned for reducing the output of an industrial facility. For forest carbon offsets, the “real” action is typically related to one of the following types of activities: afforestation/reforestation, avoided conversion, or improved forest management practices [6].
 

Quantifiable  

An approved protocol must exist for an offset credit to be created. A protocol includes all project and baseline sources, sinks, or reservoirs that are relevant for the project. The protocol helps to ensure that GHG reductions from the project are quantified in a transparent and repeatable manner using scientifically established standards, acceptable statistical precision for the project or equipment type, and conservative assumptions and approaches to avoid the over estimation of GHG reductions. For forest carbon offsets, quantification can present a challenge. Emission reductions occur over a very long timeframe and accurately measuring and monitoring changes in carbon stock requires significant resources.
 

Additional     

The project activity must be additional to a business-as-usual scenario. The business-as-usual scenario is referred to as the baseline. The baseline is usually defined for the project activity in the protocol. In some cases, the protocol may provide flexibility in establishing the baseline scenario. For a project to be additional, the GHG reductions must be surplus to legal or regulatory requirements in the jurisdiction where the project activities will take place. In addition, the project activity cannot be covered by carbon pricing. This criterion makes voluntary offset project development in Canada particularly challenging given that an economy-wide price on carbon covers most GHG emitting activities. Land use, land use change, and forestry activities are the only major categories of activity that are not cover by a price on carbon.
 

Incremental to other incentives

In some offset programs, a project’s GHG reductions must be beyond what would have occurred when accounting for the receipt of other climate change incentives. This issue is closely related to the concept of additionality and is relevant for project activities that receive grant money. It should be noted that not all offset programs require that the offset project incorporate grant money or other climate change incentives when determining whether a project is enabled by the revenue earned from the sale of offset credits. 
 

Unique           

The offset project must not be registered under another offset program (no double registration) or issued for the GHG reductions under another compliance or voluntary offset system.
 

Verifiable       

A GHG reduction must be verifiable. Usually verification to a reasonable level of assurance is required and this verification must be done by an independent verifier. The verifier typically requires accreditation from a designated verification body. The underlying project data and information must be monitored and documented in accordance with an offset protocol so that the verifier is able to review enough evidence to determine whether the project activities conform to regulatory and program requirements.
 

Conclusion

This newsletter discussed the basic criteria for offset project eligibility and how these relate to the unique characteristics for forest carbon offsets. A firm understanding of offset project eligibility is important for any corporate offset purchaser, but the sense of importance is heightened when purchasing forest carbon offsets. The issues of setting a project baseline, determining project additionality, and quantifying the GHG benefit in an accurate and verifiable way pose considerable challenges. As corporations look to make progress on their GHG emission reduction target through the purchase of carbon offset credits, understanding these issues can mean avoiding potential pitfalls. Make sure you are diligent in your selection of projects and have the expertise to know a bad project when you see it. If you are picking good projects, offset credits are a great way to reduce climate-related financial risk.
 

References

[1] https://mailchi.mp/a409e3edfd48/sustainability-in-the-spotlight-is-your-company-ready
[2] https://mailchi.mp/daf7e0a1514b/sustainability-in-the-spotlight-the-tcfd-has-arrived
[3] https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/federal-offset-system.html
[4] https://open.alberta.ca/dataset/db089833-59cc-404b-99ed-56b51bbd9242/resource/726366d0-25fa-4bd8-b333-3df78eed1eb2/download/offsetprotocoldevelopment-jul31-2018.pdf
[5] https://verra.org/wp-content/uploads/2019/09/VCS_Program_Guide_v4.0.pdf
[6] https://content.ces.ncsu.edu/an-introduction-to-forest-carbon-offset-markets