Carbon offsets: A good idea
- Nottingham Economics Society
- Mar 1, 2023
- 4 min read
Updated: Aug 24, 2023
At the end of 2022, the European Union negotiators reached an agreement to overhaul the bloc’s carbon market. The deal was labelled a historic move that will gear up the fight against climate change and allow the EU to meet its emission target. Though to some, it is a move that has taken too long since the signing of the Kyoto Protocol in 1997. It was the first international agreement to formally recognize the use of carbon offsets as an Economics means of complying with emission reduction targets. As part of the agreement, the Clean Development Mechanism (CDM) allows industrialised counties committed to carbon emissions reduction locally to meet some of their obligations through financing equivalent emission reduction projects in developing countries.
Carbon offsets, at face value, refer to the actions that intend to compensate for carbon emissions as a result of human activities. In today’s context, carbon offsets refer to corporations buying carbon credits from carbon markets. Carbon credits are tradable certificates representing the right to emit one ton of carbon dioxide or its equivalent.
Even individuals like you and I can make offsets, as many tech companies jump on the ESG bandwagon.
What’s behind those credits?
Projects that eliminate, reduce, or avoid greenhouse gas emissions are behind those carbon credits. Generally, they can be characterised into two categories, nature-based or tech-based projects. For example, one way that carbon credits are generated is through the implementation of clean energy projects, such as solar and wind power plants, which can offset the emissions from fossil fuels. Preservation of forests and reforestation are also well-known examples.
In a nutshell, carbon offsets are a way for individuals or businesses to offset their own emissions by funding clean energy or carbon-reducing projects in other areas.
What makes a legitimate carbon offset?
Several criteria have to be met, and the four main ones are:
1. Additionality: The offset project must demonstrate that the emissions reductions or removal would not have occurred otherwise (baselining). And that is usually the case for projects that would only be economically feasible with the offset money. For example, there is no financial incentive to destroy pollutants unless people voluntarily pay for them.
2. Permanence: The offset project must ensure the net-positive effect is permanent. This means the project must have a long-term plan to maintain the reductions in emissions. This is because carbon emissions stay in the atmosphere for hundreds of years.
3. Leakage: The offset project should avoid shifting emissions from one area to another due to the implementation of the project itself. For example, if a project involves building fences around a preserved forest but meanwhile causes carbon emissions in the manufacturing sector that produces the fences, this is considered a leakage.
4. Verifiability: The offset project must be independently verified to ensure the emissions reductions are real and accurately measured. This helps ensure that the offset project is truly reducing emissions and that the offset credits are valid. Verra, the world’s leading organisation that sets standards for climate actions and sustainable development, is an example of such verifiers.
When a project’s achievement of carbon offsets is verified, the credit it represents will be retired. “Retirement” means removing a carbon credit from the market or circulation, effectively reducing the overall supply. This is a crucial part of the system as it firstly serves as a means for buyers to verify the legitimacy of the emission reduction that they are buying, and secondly, it cannot be used as an offset means in the future (permanence). The “retirement” process is important as it helps ensure the emission reductions are verifiable, permanent and real.
Where is Malaysia on the topic of carbon offsets?
On the 9th of December 2022 (Friday), Bursa Malaysia Sdn Bhd launched the Bursa Carbon Exchange (BCX), which is the world’s first voluntary Shariah-compliant carbon exchange. In a voluntary market, companies can purchase carbon credits to fulfil part of their emission-reduction requirements or even create carbon-neutral products for their customers, which are often being advertised these days.
This is a significant step towards a greener future for Malaysia as it provides companies and entities with a new way that is easier and cheaper to offset their carbon emissions and contribute to the holistic goal of tackling climate change. While that is all good and promising, Malaysia is still far behind in terms of catching up with the development in the carbon credit market, where awareness in the realm of industrial/commercial activities is lacking. This can have consequential impacts. Not just in Malaysia’s endeavour towards meeting its climate objectives but also in its competitiveness in the international market as an exporting country.
Once the overhaul of the EU’s carbon market is formally endorsed by its parliament, it is only a matter of time before our exporters will feel the bites if they are not prepared for it.
So, there is never a time riper to talk about carbon offsets. As to what role BCX play and the potential promises of a local carbon market, we will leave that for a subsequent article of the series.
About the Author
Francis Lau
A UNM-YTAR Scholar studying Economics and International Economics. He always finds Economics fascinating for its all-encompassing nature, as it offers a new perspective into every aspect of life, from personal decisions to global events.
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