Means&Matters
Stories of Money and sustainability

The Pros and Cons of Carbon Offsetting

BY RP Siegel

Oct 19th 2020

Elias Calderon Monge had an idea that could help Costa Rica achieve its ambitious goal of becoming carbon neutral by 2021. He would leverage wind to provide much-needed power to COOPESANTOS, the electric co-op he managed in a remote agricultural region that lacked a reliable grid.

The idea was big, and so was the challenge. The type of wind power project Monge envisioned was nearly nonexistent in Costa Rica. The cooperative lacked financial resources and technical expertise. They’d need to purchase equipment from abroad. Regulators were skeptical. In truth, they had little hope of receiving financing.

According to Wolfgang Brueckner, managing director at environmental project management firm Carbonbay, it was only when the cooperative showed that the project qualified as a certified provider of emission reduction credits that a bank agreed to provide a loan. The fact that the cooperative would receive additional revenue from carbon offsets made the bank’s decision much easier.

The wind farm, with its capacity of 12.75 MW, now produces power for roughly one-third of the co-op’s 37,000 associates, eliminating 15,000 tons of carbon dioxide emission annually in the process.

This is just one example of how carbon credits are changing the world.

What Is Carbon Offsetting?

Carbon offsetting is a process by which funds are directed to projects that help reduce global emissions. Companies or people often buy carbon offsets instead of reducing their carbon footprints, or they do both to make their emission reduction efforts go further.

In addition to renewable energy projects like Costa Rica’s wind farm, other carbon offset projects include efficient cook-stoves in rural villages, bio-gas production from organic matter, and a variety of projects aimed at reducing deforestation or regenerating degraded forests.

The process of certifying a project as eligible for carbon offsets isn’t easy. Carbonbay is in the business of shepherding projects through the Byzantine maze of regulations that have been put in place under the UN’s Clean Development Mechanism (CDM) to ensure that not only are the emission reductions legitimate, but that there is no pre-existing funding available for a project of this nature. That usually means that they are a departure from business-as-usual and have little chance to succeed without the credits. Emissions reduction credits allow projects to receive compensation for every metric ton of carbon emissions avoided. These can be certified by CDM or other respected standards, including The Gold Standard, and the Verified Carbon Standard (VCS).

Carbon offsettinghelps environmental projects that can’t secure funding on their own.

The Pros of Carbon Offsetting

Carbon offsetting has benefits at both ends of the process: it helps environmental projects that can’t secure funding on their own, and it gives businesses increased opportunity to reduce their carbon footprint.

Many companies can’t reduce their emissions as much as they’d like to. In some cases, this is because their footprint is already small (e.g. software company), but they want to do more. Other industries, such as heavy equipment, or ocean shipping, simply don’t have low-carbon options available to serve their markets at the present time. By helping to fund environmental projects that reduce emissions, businesses can make up for the emissions they can’t eliminate themselves.

While many offset purchases are voluntary, there are some jurisdictions where they are necessary to comply with local standards and regulations and avoid penalties. This is another benefit to the carbon offset system: It gives regulators a tool to enforce environmental policies.

Other companies use offsets to credibly claim that all or some portion of their business is “carbon neutral” or even “carbon negative.” It also provides a structure for these companies to track their own carbon footprint. Many consumers today prefer doing business with such companies.

Carbon offsetting provides valuable resources to projects that generally either sequester carbon, through forest growth and other mechanisms or avoid emissions, such as renewable energy generation or clean energy appliances. By focusing on projects that are less likely to attract other types of funding, such as a first-of-its-kind in a given region, they provide a valuable alternative to more conventional finance mechanisms.

Once a successful project has been achieved through offsetting, and proven its viability, it is generally easier for similar, follow-on projects to attract other funding sources.

Reputable studies have found offsetting to be an effective way to reduce greenhouse gases.

The Cons of Carbon Offsetting

Several criticisms have been aimed at carbon offsets, too. Some are philosophical in nature, objecting to the idea that wealthy companies can buy their way out, rather than taking more direct responsibility for their emissions. Others claim that they weaken the push for more aggressive collective action, such as a carbon tax. Do offsets let polluters off the hook too easily?

Others point to more pragmatic concerns:

  • Some forests protected through offsets have later been found to have burned or been logged. This may or may not have been deliberate on the part of those receiving the credits.
  • Are the credits truly necessary, or could the project have been completed without them?
  • Are carbon measurements accurate, and can the entities monitoring them be trusted to do proper accounting?
  • What about fraud?

There are some very legitimate questions here. While no system is perfect, most of these concerns have been acknowledged and are being addressed as both carbon standards and practices evolve.

For starters, carbon offsets are not intended to be a substitute for direct action, but rather as a supplement—or in some cases, as the only available option. The airline industry, for example, uses a lot of offsets, since there is no practical way that commercial aircraft can fly today without the use of fossil fuels. Under an international scheme known as CORSIA, they will freeze 2019/2020 emission levels and pledged to offset any growth in emissions from 2021 onwards.

As to the question of forests that disappear after qualifying for offsets, this was addressed in the latest VCS standard, which only allows for payments to be made for forest carbon sequestration that has already occurred, say over the last decade. To manage further risk, a percentage of funds paid in credits are set aside in “pooled buffers” to cover unforeseen losses, much like an insurance policy.

Measurement is also evolving. Renewable energy projects are easiest to measure, since one needs only to read the meter. Forestry and other land-use projects may be more challenging, but models are improving, and technologies like GPS, satellite imagery, and drones have become helpful in forming a more detailed picture of how much carbon is remaining stored.

How You Can Track and Offset Your Carbon Footprint

Carbon offsetting is common among companies. But banks are working with tech companies to help get consumers involved. For example, Swedish fintech startup Doconomy, has partnered with Finland’s Åland Bank to help regular people understand the carbon impact of most purchases.

The Åland Index calculates the carbon footprint of any item being purchased by a consumer based on some 200 parameters. Paula DiPerna, who was instrumental in establishing the world’s first cap and trade system in 2003, calls the index “a game-changer” that synthesizes intangible values into a dollar value. Consumers can then use that dollar value to offset the emissions generated by an item to make their purchase carbon-neutral.

The index was created … to give the planet a voice in every wallet and at every point-of-sale.

—Helena Mueller, head of Åland Index Solutions and co-founder of Doconomy

According to Helena Mueller, head of Åland Index Solutions and co-founder of Doconomy, “the index was created to establish a mutual language for the climate in all personal finance management, setting a credible, global standard, as well as to give the planet a voice in every wallet and at every point-of-sale.”

Customers can access the index through the DO app. It’s currently only available in Sweden, but Bank of the West teamed up with Doconomy to bring it to the US as part of its 1% for the Planet account1,2. With the mobile banking app, the Åland Index is applied to transactions to automatically calculate the carbon footprint of purchases made with the 1% for the Planet debit card.

“The carbon footprint is presented in pounds and/or kilo carbon emitted as well as with the social cost of carbon, i.e. the ‘true price’ of a product or a service, when the negative effects of climate change is accounted for,” says Mueller. “The bank, in this case, Bank of the West, has then the choice to help their customers view the carbon footprint by transaction, by day, week, month, and year.”

Armed with that information, individual consumers can take charge of their carbon footprint. After all, you can’t change what you can’t measure.

Disclosures

1% for the Planet Disclosures

1) The 1% for the Planet account is the Any Deposit Checking account that donates 1% of the net revenue to environmental nonprofits through the 1% for the Planet organization. With 1% for the Planet with Any Deposit Checking the $10.00 monthly service charge is waived with one deposit of any amount each statement cycle. Deposits include direct deposit, mobile deposit, ATM deposit, or an in-branch deposit of any amount. Deposits do not include fund transfers between Bank of the West accounts or any credits from Bank of the West. Monthly service charge also waived if any account owner is under age 25. Net revenue is defined as fees charged directly to the account, plus interest income, minus losses. Net fees is gross fees charged less reversals. Interest income is defined as the lowest end of the target Fed Funds range during the time period being assessed, multiplied by the average balance of the account and the percent of days in the year during which balances were held. Debit card revenue is not included in the account revenue calculation.

2) The carbon impact tool for 1% for the Planet with Any Deposit Checking account, uses the Åland Index, a cloud-based service for carbon impact calculations to provide a measurement of the potential carbon impact of purchases made with the debit card for your 1% for the Planet with Any Deposit Checking account. The calculation is based on the Merchant Category Code assigned to your debit card purchase and indicates the classification of goods or services a company provides, as well as the amount of the purchase. The actual carbon impact may be higher or lower than measurement provided. The Åland Index is the leading index solution for carbon emission calculations for payments and financial transactions. The Åland Index Solution is a joint venture between Ålandsbanken and Doconomy. Bank of the West licences the Åland Index from Doconomy. To learn more visit alandindexsolutions.com. Bank of the West does not control or guarantee the accuracy of the information provided by the Åland Index and makes no representation or warranties regarding the services.

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