The rapid growth of environmental and social markets brings with it a need for clear information. Below we have answered many introductory questions about carbon markets. In the future we will expand this page to include information about other environmental and social markets.
CARBON Offsets
A carbon offset represents a reduction or removal of one metric tonne of carbon dioxide (CO2) from the atmosphere that is used to compensate for emissions that occur elsewhere.
Carbon offsets can be generated by the reduction or removal of any greenhouse gas (GHG) known to cause climate change, but carbon dioxide is used as the point of reference because it is the most common GHG in the atmosphere and remains in the climate system for a very long time.
Carbon offsets play an important role in minimizing the carbon footprint of organizations and individuals and should be used to counterbalance emissions that cannot be directly reduced, removed, or avoided.
The first step towards generating a carbon offset is to produce an emission reduction or removal (ERR). Once an ERR has been certified under a reputable standard, it can be issued as a tradable unit and is called a “carbon credit”. When a carbon credit is used to compensate for emissions elsewhere, it is “retired”, i.e., taken out of circulation and can no longer be sold; at this point, a carbon credit becomes a carbon offset.
The carbon credits generated under Verra’s Verified Carbon Standard (VCS) Program are called Verified Carbon Units (VCUs).
The current climate crisis requires urgent action to reduce greenhouse gas (GHG) emissions, which, by 2030, need to fall by about half from 2010 levels. To achieve this, we need to follow a hierarchy of climate actions:
- Measure. The first step in managing one’s carbon footprint is to measure it.
- Reduce. Companies and individuals then need to reduce their carbon footprint wherever possible, for example by investing in energy efficiency measures, purchasing renewable energy, minimizing air travel, and reducing meat consumption.
- Offset. To counterbalance emissions that cannot, at this point in time, be directly reduced, removed, or avoided, organizations and individuals can purchase carbon offsets to further mitigate their climate impacts.
For example, until it is technically and financially feasible to decarbonize the aviation sector, airlines should minimize emissions as much as possible (e.g., by purchasing sustainable biofuels) and then further reduce their footprint by purchasing carbon offsets.
Offsetting carbon is not the single long-term solution to the climate crisis, but is one of the few and invaluable tools that we have right now to drive real GHG emission reductions and removals as quickly as possible.
Research has shown that companies which buy offsets are generally much more likely to be making internal reductions as well. This indicates that companies using offsets also tend to do the most overall to reduce emissions.
A carbon offset can be generated through a number of activities that reduce or remove emissions, ranging from planting trees, preserving forests, changing agricultural practices, distributing fuel-efficient cookstoves, capturing and destroying landfill gas, and more.
To ensure that the emission reductions or removals are real and are accounted for accurately, they need to be certified under a reputable greenhouse gas (GHG) crediting program.
All reputable GHG crediting programs embrace a number of best practices that underpin the credibility of the carbon credits they issue.
Learn more about the components of this certification process in Verra’s Verified Carbon Standard (VCS) Program.
Carbon Offset Projects
Carbon offset projects implement activities that reduce or remove emissions from the atmosphere, for example planting trees, changing agricultural practices, distributing fuel-efficient cookstoves, and more.
How to develop a project with the VCS Program.
Types of projects that can be certified in the VCS Program.
Nature-based Solutions (NBS), are “actions to protect, sustainably manage, and restore natural or modified ecosystems, that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits” (IUCN).
Natural Climate Solutions (NCS) are a subcategory of NBS focused on avoiding greenhouse gas (GHG) emissions and/or increasing carbon storage in landscapes, particularly in respect of using climate or carbon finance to do so. NCS have the potential to deliver a third of the emissions reductions needed by 2030 to keep global warming below 2 degrees at comparatively low cost. They also conserve biodiversity, sustain water supplies, enhance agricultural productivity, and provide livelihood opportunities.
Natural Climate Solutions currently receive just 3 percent of total climate investment globally, which has prevented these solutions from reaching their full potential. To address this gap, Verra is identifying and prioritizing approaches to scale up financing for such approaches through the evolution of existing standards and the development of new frameworks and tools.
“AFOLU” stands for Agriculture, Forestry and Other Land Use (AFOLU). The AFOLU sector encompasses land-based solutions for addressing climate change. The VCS Program has been a leader in bringing AFOLU-based activities into carbon markets.
Common project types in the AFOLU sector include REDD (Reduced Emissions from Deforestation and Forest degradation), ARR (Afforestation, Reforestation and Revegetation), ALM (Agricultural Land Management), Improved Forest Management (IFM), and blue carbon.
REDD projects focus on conserving forests that are at risk of becoming deforested, with the carbon credits from these types of projects representing the amount of carbon that has been prevented from being emitted to the atmosphere (e.g., by the burning of trees).
REDD and afforestation, reforestation, and revegetation (ARR) are often combined and referred to as REDD+, which stands for reducing emissions from deforestation and forest degradation, and fostering conservation, sustainable management of forests, and enhancement of forest carbon stocks.
The concept was formalized under the United Nations Framework Convention for Climate Change as a means of identifying pathways for financing forest conservation and restoration.
In practice, REDD+ attaches a financial value to carbon stored in forests, incentivizing investors and governments to pay to protect and restore forests. REDD+ projects implement site-specific activities that are highly effective at stopping deforestation and forest degradation, along with direct community engagement and the establishment of clear carbon rights which help to maximize a country’s climate and sustainable development outcomes in a robust and credible way.
The VCS Program has certified the largest number of REDD+ projects around the world.
Nesting is a set of provisions by which project-level emissions accounting and social and environmental safeguards are aligned with broader jurisdictional ones.
While the vast majority of REDD+ projects were developed as standalone project activities, many are now actively working with their host governments to integrate into emerging national programs (known as “nesting”) designed to protect forests at scale. The nesting of REDD+ enables projects to efficiently drive private sector finance to high-impact, on-the-ground mitigation that goes beyond what government policies and programs can tackle alone; this, in turn, will benefit and empower local communities to protect the high-threat forests they depend on. It also supports the development and implementation of government-led REDD+ programs and helps countries to meet their climate goals while enabling greater greenhouse gas (GHG) mitigation ambitions.
THE ROLE OF CARBON STANDARDS AND CERTIFICATION
Carbon standards assure the credibility and high quality of carbon credits issued for trading. Projects seeking to get certified in a reputable standards program follow a rigorous assessment process to generate carbon offsets that are additional, accurately calculated, permanent, not claimed by another entity, and have not caused any social or environmental harm. Standards ensure that the carbon reductions or removals claimed by projects actually happen.
Standards play a critical role in the voluntary carbon market which is not regulated by any government agencies. It is worth noting that voluntary carbon standards are now operational in various compliance markets to help them achieve their climate goals (e.g., Colombian and South African domestic carbon markets).
The Verified Carbon Standard (VCS) Program is the world’s leading carbon standard. Verra periodically updates the rules and requirements for the Verified Carbon Standard (VCS) Program to expand the program’s scope and to ensure it continues to reflect the latest science and technology. For example, as of 2019 the VCS disallows large-scale grid-connected renewable energy projects in most cases.
Additionality means that the reduction or removal of a greenhouse gas (GHG) emission arises from an activity that would not have occurred without the revenue from the sale of carbon credits. A first and critical step in this context is to determine that a project activity is not required by law or regulation.
All VCS-approved methodologies must include a detailed approach for determining the additionality of a specific project activity. The independent validation/verification body (VVB) audits the demonstration of additionality to conclude whether the project meets VCS rules and requirements.
The baseline is the reference point against which a project’s emissions reductions or removals are measured. The baseline scenario represents the activities and greenhouse gas (GHG) emissions that would occur in the absence of a project. It is determined according to the specific carbon accounting methodology applied to the project.
Emission reductions or carbon removals in excess of the baseline level are considered additional and, thus, eligible to generate a carbon credit.
In the context of land-based carbon offset projects, leakage refers to the concept that changes in land management in one place (e.g., decreasing deforestation in forest A) may shift the problem to another location (e.g., increasing deforestation in forest B). For instance, an improved forest management (IFM) project is likely to cause market leakage (i.e., timber harvesting elsewhere), whereas an ARR project is more likely to cause activity-shifting leakage, where landowners move subsistence farming elsewhere.
The VCS Program requires all AFOLU projects to account for leakage, which includes monitoring leakage emissions in nearby areas and deducting them where and when they occur. Specific leakage requirements are set out under each methodology.
The most successful efforts to mitigate leakage address the underlying economic incentives that drive deforestation and other land degradation. For example, projects that finance improvements in farming can help communities increase the productivity of their farmlands, thereby reducing pressure on nearby forests.
In the context of land-based carbon offset projects, permanence refers to the condition where carbon emissions reduced or removed from the atmosphere will remain out of the atmosphere in the long run.
Factors that could result in sequestered or removed carbon being released back into the atmosphere include logging, mining, fires, or drought (reversal).
To ensure the permanence and the environmental integrity of all Verified Carbon Units, the VCS Program requires all land-based projects to set aside a risk-adjusted percentage of the emission reductions and removals achieved, which are then placed into a global buffer pool. These “buffer credits” are managed by the VCS (not by the project owner) and can be canceled when reversals occur. At the end of a project’s last crediting period, all buffer credits are canceled.
Any project that experiences a likely loss event is required to notify Verra of any substantial impact within 30 days of the date of discovery. The project then has 2 years to quantify the loss and submit a formal report. If any significant impact has occurred, we will put buffer credits on hold when notified, and ultimately cancel them based on final reported losses.
All VCS projects are audited by independent third-party auditors, whose work is overseen by Verra, and then by Verra itself. These third-party auditors (referred to as validation/verification body, or VVBs)
– validate the project design (i.e., assess if the project description meets the requirements of the VCS Program), and
– verify the emission reductions or removals achieved (i.e., audit a project’s monitoring report to determine whether the emission reductions and/or removals have been quantified according to the respective requirements).
The reports produced by the VVBs are then reviewed by Verra and finalized when all outstanding issues have been resolved.
The calculation of emissions reductions and removals (which become carbon credits once they are issued for trading) is specific to each carbon accounting methodology. Projects undertake the monitoring in accordance with the procedures in the methodology and must contract a third-party auditor — an approved, independent validation/verification body (VVB) – to verify that all emission reductions or removals are quantified according to VCS requirements.
THE VOLUNTARY CARBON MARKET
Carbon markets allow entities to trade emissions. Carbon markets exist as 1) compliance markets and 2) as voluntary markets.
- In compliance markets, entities participate to fulfill regulatory requirements. For example, in cap-and-trade systems, entities may only be permitted to produce a certain level of emissions; if they generate more emissions, they may be taxed on the overage or have the option of offsetting it through the purchase of carbon offsets.
- Voluntary markets offer a place for companies, NGOs, and individuals to purchase offsets who wish to minimize their carbon footprint.
By definition, the voluntary carbon market is not regulated because it occurs outside of government regulation. However, the voluntary carbon market has undergone a significant amount of self-regulation, which has resulted in robust accounting methods and requirements. For example, today all credible greenhouse gas (GHG) programs (such as the VCS Program) are managed by non-profit organizations and require that projects issuing carbon offsets (1) use a robust accounting methodology that is backed up by scientific literature, (2) are evaluated by independent third-party auditors, and (3) list all project documentation on a registry.
The self-regulation in the early 2000s when carbon offsets did not have to meet many requirements, were often not reviewed by independent third-party auditors, were issued on an ex-ante basis (i.e., based on forecasts; for example, a tree planting project would assume all its trees would grow to maturity and claim credits for all the carbon that would be stored in the trees in the future), and when the data and information behind these projects was not accessible. At the time, there were more than 10 “standards” in the market.
Nevertheless, several companies and organizations saw the potential behind the voluntary carbon market and worked to ensure the credibility of the market. For instance, several non-profits launched the Offsets Quality Initiative to address some of the early concerns. In 2008 a number of companies came together to create the International Carbon Reduction and Offsetting Alliance (ICROA), whose goal is to deliver quality assurance in carbon management and offsetting through their member’s adherence to the ICROA Code of Best Practice. These, and other, efforts served to inform what today is broadly accepted as a credible carbon offset.
Today the voluntary carbon market consists of several credible GHG programs that issue real emission reductions, and buyers can trust the qualities of credits issued by these GHG programs.
The robustness of several GHG programs operating in the voluntary carbon market have also served as models for certain climate change regulations. California’s offset program, which forms part of its cap-and-trade system, is largely modeled off of work done by the Climate Action Reserve. And the governments of Colombia and South Africa allow companies that have carbon tax liabilities to surrender carbon offsets issued by the VCS Program, the Gold Standard, or the Clean Development Mechanism (of the United Nations).
Between the conception of a carbon offset project to the retirement of the credit, multiple players interact to ensure greenhouse gasses are reduced or removed from the atmosphere.
Standards issue the rules and requirements for greenhouse gas crediting programs. They review and run public consultations for these rules and methodologies and ultimately approve them. They also review initial project design documents, and review and approve the verification of carbon credits.
Project Developers are entities that manage a project which reduces GHG emissions. They select a methodology, or protocol, and draft a Project Design Document.
Validation/Verification Bodies (VVBs) undertake validation of the project design document, i.e., assesses whether the project design meets the standard’s criteria and is designed according to the methodology. VVBs are critical to ensuring the integrity of the projects registered with the standard’s program. After a project implements its activities and monitors progress – documented in monitoring reports – a VVB undertakes verification, i.e., confirms that all emission reductions or removals are quantified according to the standard’s requirements. The emission reductions and removals are then issued as carbon credits and released for trading. Each credit is assigned a serial number in a registry.
Buyers or intermediaries (brokers or retailers) buy credits from projects. When a buyer uses a credit as an offset, it is removed from the market and retired.