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Understanding Carbon
Tokenomics and Mechanisms
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About Carbon Offsets
The Responsible Use of Offsets
There has been much criticism of carbon offsets in the past, as well as examples of greenwashing by companies and projects that violate best practices. This needs to change if carbon offsets are to play a major role in helping us decarbonise. In short, companies and individuals need to be educated on the responsible use of carbon offsets. Offsets should not be treated as an alternative to reducing emissions, but rather as a means to offset unavoidable emissions. They should only be used temporarily, to avoid delaying society's transition to a low- or zero-carbon economy (UNEP, 2020). The Science-Based Targets Initiative (SBTi) released its guidance for using offsets as part of a robust corporate emission-reduction program, contributing to a growing debate over what “carbon neutrality” is and is not. There have been efforts to strengthen the carbon offsetting methodologies in recent years under the International Carbon Reductions & Offsetting Alliance (ICROA). For more information on ICROA see Appendix 3. Nevertheless, there is still scope for further transparency and standardization.
Importantly, in the DeFi space, it should be known that thus far the supply side of carbon offsets has been quite decentralized, both from a financing, technology and geographic standpoint. Looking ahead, there is a unique opportunity to directly fund these projects via DeFi mechanisms - thus enhancing the decentralized nature of both capital formation and capital deployment to sustainability projects.
Specific Concerns Addressed
Concern 1: Carbon offsets aren’t trustworthy
This is an important one, so let’s take a step back. The concept of carbon offsets has been around for a while, but it really got a boost in 2005 when the Kyoto Protocol took effect. Back then, this was still a relatively novel concept, with its fair share of teething problems, and some cowboys took advantage of poor oversight.
Today, it has matured into a set of robust global frameworks developed by experts over the last 15 years. At its core are internationally recognized certification bodies, that make sure every ton of CO2 offsets they certify is rigorously measured, monitored and verified.
Take the Verified Carbon Standard, and the Gold Standard. They’re widely considered the two highest standards for quality carbon offsetting in the world, and certify all of our projects. They guarantee that every ton of CO2 offset is:
Additional: Wouldn’t have happened without your support
Contained: Won’t cause emissions to go up elsewhere
Permanent: Is protected against destruction by human or natural causes
Sustainable: Has a positive impact on local communities and environment
Verified: Is inspected and verified by an independent third party
Unique: Has a unique ID on a public ledger and can only be counted once
So, while you’ll always be able to find someone online selling uncertified or questionable offsets, going with these standards will make sure your offsets are trustworthy and effective.
Concern 2: Carbon offsets are a license to pollute.
Do people use carbon offsets as an excuse to pollute even more? That would certainly defeat their purpose! So is it true? Researchers from Germany looked into this and found out that it’s quite the opposite: People who offset their emissions also take more climate-positive actions in other areas of their lives.
“Offsets are an effective contribution to climate protection,” explains Prof. Andreas Ziegler. "The frequently expressed reservation that it is a matter of selling indulgences to justify additional CO2 emissions does not apply."
It’s also common sense: if you’re personally invested in a cause, you want to act to make it succeed. Offsetting and reducing go hand-in-hand.
Furthermore, to even begin the process of offsetting, one must first measure their emissions. Without robust data on the emissions of an organization (or an individual), it's quite difficult to take any action to reduce them. Thus, the process of preparing to offset also opens up a world of possibilities for understanding emissions sources and finding ways to reduce them.
Concern 3: Carbon offsets are a license to pollute. [Part 2]
We hear this one all the time, but our research indicates a completely different conclusion: namely, that those companies that do buy offsets are doing so as part of an overall carbon-management strategy, and they’re mostly using offsets to either tackle emissions they can’t eliminate internally or to create an internal “price on carbon” that focuses attention on emissions and accelerates reductions. Among businesses tracked in Ecosystem Marketplace’s (EM) 2016 buyers’ report, 88% of voluntary offset buyers and 92% of compliance buyers have formally adopted emissions reduction targets. In 2014, the 314 businesses that engage in offsetting invested more than US$42 billion in emissions reduction activities, surpassing the combined investment of the 1,522 companies who did not engage in offsetting (US$41 billion). In fact, companies that included offsetting in their carbon management strategy typically spend about 10 times more than the typical company that didn’t offset. Contrary to the “greenwashing” narrative, it appears that using offsets is increasingly the hallmark of a company that’s leading on climate action, rather than bringing up the rear. Source
Concern 4: Offsetting does not directly address emissions.
Unlike the allowances used in cap-and-trade markets, offsets always represent real removals of carbon dioxide from the atmosphere or avoided emissions somewhere in the world, and carbon standards require that developers demonstrate “additionality,” which means they have to show that the emission reduction wouldn’t have happened without the project and its associated financing. What’s more, EM’s latest report found that 79 companies are generating offsets within their own operations or supply chains by reducing emissions above and beyond regulatory requirements and economic incentives. L’Oreal, for example, distributes efficient, cleaner-burning stoves to women in Burkina Faso who boil the shea nuts used in its cosmetics products. These stoves reduce emissions by reducing the need to chop down trees, thereby saving forests, and they also reduce the health hazards of indoor smoke. Source
Additional Resources
What are carbon offsets?
Emitting carbon into the atmosphere is what economists call a ‘negative externality’: it is a by-product of economic or other activity that creates damage now and in the future. Companies and consumers do not pay (enough) for these negative externalities, and are therefore emitting too much carbon. This is a market failure – the market by itself does not internalize the costs of these emissions and so collective action is needed to obtain the socially desired result. In economic theory, explicit pricing is the solution for such an externality. This can be done by either introducing a tax on carbon or introducing a marketplace for allowances to emit carbon.[1]
We can distinguish between compliance and voluntary markets. Carbon markets can trade either quotas or credits. Allowances are units of quota issued by the government, or tradable, bankable entitlements to emit pollutants. An example is the European Emission Trading System (EU ETS).
What is additionality and why does it matter?
To achieve additionality, the carbon crediting program needs to provide incentives for implementing activities to avoid or sequester emissions which would not have happened without the crediting program. These credits are created voluntarily outside the scope of compulsory carbon pricing initiatives (i.e. in different companies, sectors or countries), which is a fundamental difference to allowances or credits in compulsory carbon markets. The voluntary carbon credits can be used as ‘offsets’, to compensate for individual or organizational emissions.
ICROA Code of Best Practice for Offsets
ICROA: The International Carbon Reduction and Offsetting Alliance
- Real: All emission reductions and removals – and the project activities that generate them – shall be proven to have genuinely taken place.
- Measurable: All emission reductions and removals shall be quantifiable, using recognized measurement tools (including adjustments for uncertainty and leakage), against a credible emissions baseline.
- Permanent: Carbon credits shall represent permanent emission reductions and removals. Where projects carry a risk of reversibility, at minimum, adequate safeguards shall be in place to ensure that the risk is minimized and that, should any reversal occur, a mechanism is in place that guarantees the reduction or removals shall be replaced or compensated. The internationally accepted norm for permanence is 100 years.
- Additional: Additionally is a fundamental criterion for any offset project. Project-based emissions reductions and removals shall be additional to what would have occurred if the project had not been carried out.
- Independently verified: All emission reductions and removals shall be verified to a reasonable level of assurance by an independent and qualified third-party.
- Unique: No more than one carbon credit can be associated with a single emission reduction or removal as one metric ton of carbon dioxide equivalent (CO2e). Carbon credits shall be stored and retired in an independent registry.
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Contents
The Responsible Use of Offsets
Specific Concerns Addressed
Concern 1: Carbon offsets aren’t trustworthy
Concern 2: Carbon offsets are a license to pollute.
Concern 3: Carbon offsets are a license to pollute. [Part 2]
Concern 4: Offsetting does not directly address emissions.
Additional Resources
What are carbon offsets?
What is additionality and why does it matter?
ICROA Code of Best Practice for Offsets