Carbon Insetting

by Georges Dyer, Senior Fellow, Second Nature

Over the past 20 years as nations, communities, businesses, schools, non-profits, and individuals have searched for innovative and effective ways to reduce greenhouse gas emissions – in attempts to minimize the negative impacts of climate disruptions – one of the most controversial methods to emerge has been carbon offsetting.

Most of us are familiar with the concept at this point – an organization pays for offset credits that can count against their own emissions inventory that they can’t or won’t avoid at that time for whatever reason.  The credits are generated from projects that reduce, avoid, or sequester emissions elsewhere.   Project types run the gambit from energy efficiency to renewable energy, landfill gas, tree planting, traffic-light optimization, fuel switching, and the list goes on.

At their best, investments in carbon offsets result in real, measurable, verified emissions reductions that would not have happened otherwise, and achieve a greater reduction in tons per dollar than would have occurred by investing in internal carbon reductions.  The emission reductions are permanent, the projects are transparent, raise awareness, and result in ancillary social and environmental benefits without negative side effects, and the credits are not double counted or resold.

At their worst, investments in fraudulent offset projects might generate no emissions reductions, introduce artificial drivers into the market, create confusion, and generate a counter-productive, false sense of satisfaction that dampens ongoing efforts to reduce internal emissions.

There have been scores of excellent efforts to promote offset quality, and to ensure that these investments are as close to their best as possible and never near their worst.  These include the UNFCCC’s Clean Development Mechanism, the Gold Standard, theVoluntary Carbon Standard, the Offset Quality Initiative, and many more.  I had the privilege of helping to bring a collective voice from leaders in the higher education community to this work by coordinating the development of the ACUPCC Voluntary Offset Protocol.

Regardless of quality, one thing these investments always do is internalize at least some portion of the true cost of greenhouse gas emissions. I believe this is a value attribute inherent to any offsets.  Sending a price signal – even if self-imposed – to your organization and departments within your organization can be a powerful driver of real emissions reductions.

Of course, no one wants to run the risk of just throwing that money away.  Using that money to purchase offset credits to meet emission-reduction targets or claim climate neutrality for an event, a product, or your operations as a whole can create real value for an organization and drive real emissions reductions in the short term.  But for some, the concerns about the quality and effectiveness of offsets will keep them out of the market no matter what.  And for those organizations, I’d like to suggest another mechanism for realizing the benefits of internalizing some of the true costs of carbon.

The concept is to measure your greenhouse gas emissions, and for each ton, pay a set amount into a fund.  The price per ton can be set more or less arbitrarily, but it would make sense to keep it in the ballpark of what high quality offsets cost – of course this varies, but let’s say $10 per ton for a reasonable start.  (This doesn’t really come close to internalizing the true costs associated with putting a ton of CO2e into the atmosphere – most estimates I’ve seen put that well over $100 per ton – but it’s significant enough to catch attention without causing too much of a shock to the system).

This fund would then be used as a reserve for emission-reduction activities.  Of course, an institution or individual could not take credit for any emissions reductions associated with this payment, because there wouldn’t be any immediately.  But they would be sending that all-important price signal internally, without having to send that money outside of the organization.  After a year or two or three, the fund would grow enough to finance internal emissions reductions projects such as a green building retrofits to dramatically reduce energy demand, or an onsite renewable energy projects to move the organization away from dirty fossil fuel power.   So while the funds wouldn’t go to offsets that enable claims of climate neutrality today, they would go to helping the organization eliminate its emissions eventually.

In our $10 a ton example, an organization with a GHG inventory of 50,000 tons of CO2e in year one would deposit $500,000 into the fund in year one.  These funds would come out of the departmental budgets responsible for the emissions, highlighting in real dollars where the potential savings are and where efforts can be focused.  In year two, let’s say the inventory is cut 10%, down to 45,000 tons – the deposit to the climate action fund would be $450,000.  Year three, another 5% in emissions reductions brings the total emissions to 42,750 tons, and the deposit to $427,500.  The fund is now up over $1.4 million assuming a modest savings rate, and can be used to fund a significant emissions reduction project.

This isn’t carbon offsetting –it’s more like carbon insetting* – in a sense, it’s self-imposed internal carbon tax, the proceeds of which go to fund emissions reduction projects.

I’m sure that many colleges and universities, businesses, non-profits, and even households around the world are experimenting with something like this approach.  I only know of one specifically, and that is Arizona State University, which indicated in its Implementation Profile for the ACUPCC that air travel paid for by the institution will have a per ton fee, and funds will go towards campus emissions reduction projects.

Carbon insetting emphasizes internalizing the costs of carbon, which can have a powerful affect on budgeting and investment decisions.  Because the money is not sent outside of the organization, there likely to be less resistance from stakeholders (Board members, customers, students, financial officers, etc.).  It doesn’t have the benefit of driving real emissions reductions immediately, like high-quality offsets do, but provides a viable financing strategy for reaching some of the higher-hanging fruit in terms of internal emissions reduction opportunities that have a higher marginal cost per ton of CO2e.

A quick Goodsearch showed that some folks at an organization called Ecometrica in the UK released a paper using that term to describe the similar but different concept of investing in emissions reduction activities that benefit stakeholders – employees or companies in your supply chain – to generate offsets.  This is akin to a preference among many institutions to invest in ‘local’ offset projects with the hopes that geographic proximity will lead to more direct engagement and assurances that the projects underlying the credits are of high quality.   I think it’s a great strategy, but I also think it’s still technically an offsetting strategy as they’re talking about emissions reductions outside the organization’s own boundaries– which they define as WBCSD’s Scopes 1 and 2 – to generate credits that can be applied against an emissions inventory to claim climate neutrality.  Even if the activity is inside your sphere of influence, it’s outside your organizational boundary.  (To make things more confusing – if you’re organizational boundary includes some of the Scope 3 emissions that Ecometrica puts forward as possible carbon insets – such as employee commuting – which ACUPCC signatories include within their organizational boundaries – you wouldn’t be able use those reductions to offset other portions of your inventory, they’d just be counted once as reducing that portion of your inventory from commuting).