Carbon Pricing and Offsets

Carbon Dioxide and other Greenhouse Gases are global pollutants. From the atmosphere’s point of view, it doesn’t matter if they originate on the Isle of Man or in China. As far as global warming is concerned, wherever they originate, each one is as destructive as the other.

The nations of the world agree that gas emissions must be reduced, and even if possible eliminated.

Individuals and companies around the world are recognizing the importance of reducing their Greenhouse Gas (GHG) emissions. As a result, many of them are now reducing their carbon footprints through energy efficiency and other measures. Quite often, however, it is not possible for these entities to meet their targets or eliminate their carbon footprint entirely, at least in the near term, with internal reductions alone, and they need a flexible mechanism to achieve these aspirational goals. Enter the carbon markets.

By using the carbon markets, entities can neutralize, or offset, their emissions by retiring carbon credits generated by projects that are reducing GHG emissions elsewhere. Of course, it is critical to ensure, or verify, that the emission reductions generated by these projects are actually occurring.

Once projects have been certified, project owners are be issued with tradable ‘Carbon Credits’.  Those Credits can then be sold on the open market and what is called ‘retired’ by individuals and companies as a means to offset their own emissions.

Mandatory and Voluntary use of Carbon Credits: The Role of Carbon Pricing

For some time now, there has been what is called a ‘Cap and Trade’ mechanism in place in some countries and economic blocs such as the European Union. Companies that operate in industries that are heavy polluters of greenhouse gases are obliged by law to measure their emissions and then obtain ‘right to pollute’ permits each year.

By restricting the number of permits that are issued to fewer than would normally be required, the issuing government thereby ‘Caps’ the total number of certificates. Companies that are unable to reduce their emissions below their own allocated number of permits then have to purchase an equivalent number of certficates on an open trading system (the Trade).

In a cap and trade scheme central government does not set the price of carbon, and instead the open market sets the price according to demand. Since the number of available certificates is kept deliberately below the probable demand, the carbon price is kept high enough to encourage companies to seek ways to reduce their own demand by seeking and implementing new technology. When they do not do so, and are obliged to purchase carbon credits, the money raised – which is essentially a carbon tax – can then be used by government to support other decarbonisation initiatives such as supporting low income groups who might otherwise not be able to implement their own schemes.

As a consequence, in the European Union where such a cap and trade scheme is in place, the price of carbon has reached over 80 Euros / tCO2eq.

However, as the sample chart above, mandatory cap and trade schemes have widely different carbon values in different countries, and very few countries or economic blocs have implemented them. To access for Carbon Price LIVE DATA please click HERE ,

Currently the demand for carbon credits on non-mandatory or voluntary markets is considerable less than the supply, leading to the very low prices that can also be seen in the chart.

Herein lie particular problems that will need to be resolved. Many of the current carbon credits available on the voluntary market have dubious origins, and companies purchasing them may not have guarantees concerning their validity. Sometimes the project does not exist, or is found later to have changed, (both false accounting) or is sold more than once to multiple parties (double counting).

It is also generally recognised that the price of carbon is not high enough to persuade potential project owners that they should NOT cut down the existing flora – usually rainforest – and replace it with high yield returns such as palm oil or cattle farming.

To cite and example, the Curtis & Associates Ltd Group – who are the owners of the Net Zero Matrix initiative – planted 40 hectares of high value teak wood on the Island of Java, Indonesia almost 20 years ago. Though the Goldteak Project, the estimated carbon sequestration of this project is now approaching 18,000 tCO2eq.

Even assuming an average Nature Based Offset price of $8.47 / tCO2eq as shown in the chart, this is equal to about $US 150,000. However, the teak wood on the plantation has a market value of about $1US 1,000,000, so from an economic point of view only it would make more sense to harvest the trees and take the profit.

In order to make sense of carbon offsetting, wherein nature based solutions such as tree afforestation or protection are economically viable, the carbon price would need to be at least 7 times higher, or about $US 60 / CO2eq.

In addition, to have an equal playing field for all global participants, there needs to be a uniform carbon price, which means that carbon dioxide emissions can be abated efficiently anywhere.

Prices today are just too low to have much of an impact. The average global carbon price is around $3 per ton of CO2; Only 4% of global emissions are priced above $40 per ton. At those prices, companies and governments are simply not incentivised to pay for carbon offsets.

Carbon pricing is of course actually carbon tax, and taxes are never popular. Demographic Governments typically change on 4– 5 year cycles, and political parties in power at the time want to stay in power. Those others with aspirations of power are unlikely to advocate increases in taxation, but any means.

But it seems likely that if the governments of the world are serious about their decarbonisation targets, they will need to bring in mandatory targets, reporting, and a stable system for carbon pricing and carbon offset schemes, wherein companies invest in projects which stabilise or even remove carbon from the atmosphere. Since national schemes to increase taxes seem likely to fail, only a commitment to a global policies, such as the Kyoto Protocol and later the Paris Agreement, are likely to succeed.

Mandatory targets and reporting beyond the few cap and trade schemes are certain to be introduced eventually. Rapidly increasing numbers of companies are setting their own Net Zero Targets and reporting Progress, on a voluntary basis, knowing that sooner or later they will be subject to regulation. Although the focus at the moment is on absolute reductions of Scope 1 (direct emissions) and Scope 2 (indirect emissions), we see an increasing number of companies purchasing carbon offsets and detailing that in their corporate reports. Mandatory reporting is coming, and very soon.

The only question appears to be how far down the company size scale such regulation will go. Small to Medium size companies of 250 employees or more may well be subjected to regulation, but smaller companies and individuals will not, unless ambitious schemes such as National Offsetting Schemes are introduced.

In such a scheme, governments will essentially introduce carbon taxation schemes upon almost every aspect of our lives.

Such schemes will face fierce resistance. The omens do not look good. High carbon prices and efforts to impose carbon taxes have already inspired political pushback.

Sudden introduction of carbon pricing and other taxation in democratic states will introduce immediate push back and elaborate ways to avoid the cost. Small incremental changes are likely to be more successful, but the need to mitigate climate change is urgent.

Nevertheless, it is hard to imagine most countries succeeding at decarbonizing without a carbon price, even if it won’t solve the challenge on its own. A minimum carbon price at a low entry point may be acceptable to society, and can reassure every actor in the economy that there will always be a cost to add another ton of CO2 to the atmosphere.

In the separate section on this website entitled Net Zero Targets, we explain how large international companies, including ‘Energy Companies’ who produce fossil fuels, are setting themselves ambitious voluntary targets to move to Net Zero typically by the year 2050. We say ‘voluntary’ here as they have not (yet) been mandated to introduce such targets, but those companies have one eye on future mandation, and the other on increasingly active investor groups who are insisting that the company should move towards strong ‘Environmental, Social and Governance’ credentials. Without these large companies, who mostly compete in a capitalist structure, we believe that Net Zero would be very hard to achieve. As it is, they may very well save the planet. The relationship between these ESG credentials, profit and taxation – both fiscal and carbon – is examined further in that section.