Regulators need to determine how offsets are developed and the way in which environmental integrity is safeguarded. This is provided for by the methodologies and Measurement Reporting and Verification requirements of different offset programs, which include processes to assess additionality of projects and baselines against which reductions are credited.
It is important to ensure that all offsets are generated following sound methodologies, either using an existing offset program for sourcing reductions domestically or internationally, or by creating a new offset program to achieve a set of specific policy objectives.
When using standardized methodologies, the approval process for projects is easier, more transparent, and streamlined than with project by project methodologies—evaluators only have to check whether the project meets the defined standards, rather than individually assess additionality, for example. Although this approach induces less subjectivity in the approval process, it may allow for subjectivity in the design of standards. In addition, the upfront cost of designing standards and the cost of updating those standards as needed, may be large.
Once any qualitative and quantitative limits have been set and acceptable methodologies identified, the offsets can be integrated in the Emissions Trading System (ETS). This involves adopting a process for project registration and credit issuance, and determining liability in case of reversal of emissions reductions.
The underlying principle behind quality offset projects is called additionality—if a change in practice, or a carbon reduction would have happened regardless, due to regulation, or in the course of business as usual, no offset is created. In this way, carbon markets ensure they are incentivizing, rather than simply rewarding, practices that reduce carbon. Companies that currently produce high volumes of carbon emissions are by-and-large under no obligation to reduce those emissions or to pay for their release; carbon “compliance” markets created via regulation, have in some cases been built to address this. In a compliance market, companies are required to turn in allowances that reflect their emissions for the year, and can typically use offsets produced in non-covered (or non-regulated) sectors to meet some portion of this obligation—incentivizing the creation of more carbon offset projects.
Offsets involve assessing whether the emissions reductions are additional to those that would have materialized without the incentive of being able to sell the credit. This requires the estimation of a baseline or counterfactual scenario. Because regulators cannot accurately estimate baseline emissions of a project, there is a risk that the offsets generated may not represent genuine emissions savings. Various ways to address additionality have been developed in different offset methodologies, including aggregating reductions across a broader set of actors in a jurisdiction to reduce the self-selective nature of the voluntary program.
Emissions Trading In Practice: A Handbook on Design and Implementation | 2016
Why Purchase Offsets: A Primer, Part 1 | May 31, 2016
Incentivizing Investment in Climate Change Infrastructure | March 2, 2015
Attribution: Content from Partnership for Market Readiness (PMR) and International Carbon Action Partnership (ICAP). 2016. Emissions Trading in Practice: a Handbook on Design and Implementation. World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IG