Does Investing In Carbon Offsets Really Reduce Your Climate Impact?
Carbon offsets could provide a way to easily offset your carbon impact, but are they all they're cracked up to be?
The Takeaway:
Carbon offsets offer a quick way to reduce your climate impact, but often aren’t all they claim to be.
Projects that focus on preventing deforestation and preserving wetlands are more impactful than projects that focus on planting new trees.
Carbon Credit EFTs offer a way to gain exposure to carbon markets and increase the value of your portfolio.
Carbon offsets are a controversial, and often misunderstood, tool in the battle against climate change. They are designed to provide a market-driven way to encourage businesses and landowners to reduce their carbon footprint.
This process typically involve trading a “token” that represents one metric tonne of carbon emissions. Their purpose is to enable a polluter, who cannot reduce their own carbon emissions, to pay someone else to do so. This is often done by investing in projects that plant or preserve forests and wetlands.
Protecting forests and wetlands are an effective way to sequester carbon (source)
In theory, this sounds great. Carbon offsets act as a more positive alternative to carbon-credits. Instead of punishing businesses for breaching emission limits, you reward them for investing in carbon sequestration projects, and you bring the world a step closer to net-zero emissions.
There’s just one elephant in the room, and his name is transparency.
Carbon Offset Programs Have Historically Been Mired In Fraud
Carbon Offsets are not new, as early as 2007 the Vatican declared itself the first “carbon-neutral” country in the world. They did this by leveraging carbon offsets to plant millions of trees in the Hungarian Tiszakeszi countryside.
The problem? The company hired to plant the trees, KlimaFa, simply didn’t follow through with the project, despite the Vatican paying them to do so.
This same story has replayed countless times across the last decade. A deep dive from ProPublica sums it up aptly. Even in cases where there were strong controls in place, many projects simply didn’t work.
Even the Clean Development mechanism, part of the UN’s Kyoto protocol, failed to deliver. The program funded thousands of projects, but a 2016 report found that 85% of offsets had a “low likelihood” of having any real impact on climate change.
Major projects, such as REDD+ are sadly no exception. A report from the Norwegian government highlighted that despite spending $3 billion, the complexity of the science, and uncertainty surrounding the longevity of a project, meant that they couldn’t quantify the impact their investments actually had on climate change.
Does That Mean We Shouldn’t Invest In Carbon Offset Projects?
If every carbon offset project is so ineffective, why am I even talking about them? The problem is that we don’t actually have much choice but to use them.
Retooling power grids to renewables or nuclear takes time. Switching to electric cars takes time. Everything governments or businesses can do to reduce their impact takes time.
Unfortunately time is the one thing that we do not have. This means that we have no choice but to find a solution that fixes the problems with previous carbon offset projects like REDD+.
Proper Monitoring Is Key
The area where carbon offsets are most useful is in protecting forests and wetlands. Each hectare of forests draws between 1 and 10 tonnes of C02 annually. Wetlands are often overlooked, but are equally important and account for approximately 35% of all terrestrially absorbed carbon, despite only covering 9% of the global land area.
These numbers do not include the local environmental benefits of allowing wild forests and wetlands to thrive. Clearing land use for farming removes habitat for many local species and hampers biodiversity. Maintaining existing forest and wetland, particularly ancient landscapes, is the best way to defend local biodiversity.
A key caveat here is that natural, existing, forests and wetlands and are by far the most effective carbon-sinks. Newly planted forests will take at least 10 years to start absorbing enough carbon, and if trees are cut down and burned, that carbon is simply released back into the atmosphere. This means that preventing deforestation is the best way to fight climate change, rather than just supporting Afforestation efforts.
If you are a landowner, ensuring that your land is used sustainable should be a priority. Engaging in carbon-neutral, or negative, projects could make you a candidate for carbon offsets. Just remember that there is a caveat, you will need to do this for a long time.
Land needs to be managed sustainably for an extended period, in order to be an effective carbon sink. For example, it is generally agreed that trees should remain standing for a minimum of 100 years to be an effective source of carbon absorption.
The Key Is Finding The Right Platform
The difficulty with carbon offsets is trusting the provider. Even very large organizations have failed to actively monitor sites, often extolling customers to “do their own research”. The other challenge is that there is little upside for investors unless they’re willing to play the futures markets.
Typically, when looking for a carbon offset broker, you want to look for the following features:
Transparency - Specifically the reporting requirements for participants in the project.
Ease of redemption - Platforms that allow you to easily track your personal impact are more useful.
Incentives for landowners - An often overlooked aspect of climate offsets is providing continuous incentives for landowners. Lump sum payments, or payments without strings attached, simply don’t work.
The problem is that there are very few carbon offset brokers that actually meet these criteria. Even established brokers like Native Energy, which regularly tops lists of carbon offset brokers, have had their share of problems, including some dodgy renewable energy projects in Alaska.
However, a crop of emerging companies are trying to find ways to build better carbon offset tools. One of the most promising also happens to use a favorite innovation of mine: blockchain technology.
Singe.Earth raised $7.9 million in July 2021 to tokenize the carbon offset industry. There are two key differentiators for this company compared to traditional carbon offset brokers.
The first is that it focuses on the sustainable maintenance of forests, wetlands, and other natural resources, rather than the construction of new renewable energy projects. These projects are then monitored by using satellite footage. This is important because it demonstrates that Single.Earth is taking ownership of the monitoring process, rather than pushing it onto the landowner.
The second is that the company is tokenizing carbon absorption. Whenever a landowner’s property is deemed to have absorbed 100 KG of carbon, they receive a MERIT token. They are then able to sell this on a marketplace, and gain liquid capital for sustainably using their land.
It should be noted that the project is still in its infancy, their tokens are not yet live, and they’re only engaging in the pre-sale. However, it is certainly worth keeping an eye on them as it could provide a nice alternative to traditional carbon offset brokers.
What About ETFs?
There are some Exchange Traded Funds (ETFs) that focus on exposure to carbon credits and carbon offsets. These are typically viewed as a hedge against increased carbon prices denting the rest of your portfolio, but can be nice little money-makers in their own right.
One of the best performers YTD is KraneShares Global Carbon ETF (KRBN). The fund focuses on exposure to cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts. It has an expense ratio of 0.78% and has grown by 60% YTD, compared to the DOW’s 15.3%.
However, KRBN doesn’t give eco-conscious investors any real guarantees that their money is making an impact. For investors more concerned about the environmental impact of their portfolio, the iShares MSCI ACWI Low Carbon Target ETF (CRBN) might be a better option.
At just 14.5% growth, CRBN slightly underperforms the DOW year to date. However, it is weighted towards companies with lower carbon emissions. This makes it a more environmentally friendly alternative to typical ETFs.
Carbon Offsets Provide a Useful Stop-Gap
The key takeaway here is that carbon offsets and cap-and-trade programs should be considered a stop-gap. They make a useful hedge in an eco-investor's portfolio, and can provide a temporary solution to offset carbon emissions that can’t be mitigated any other way.
However, any green investor should be aware that there are many problems with the carbon offset industry. Many projects are poorly managed, and you will need to do your research before putting any money behind a project. Hopefully new solutions, like Single.Earth, will make it easier to find plausible climate projects.
Until then, there are some simple rules of thumb you can follow when looking at investing in carbon offsets:
Preventing destruction of natural carbon sinks is more important than planting new trees.
Investing in local projects allows you to see how they are managed for yourself.
Don’t always trust the reporting from carbon credit brokers, researching the projects yourself is important.
Remember that carbon credits are not a substitute for cutting your impact. They should only be used to offset emissions that you can’t reasonably prevent.
Next week we will be looking at the effects of the first European energy transition crisis, and what it means for your renewable energy investments!
Until then, think green, and subscribe to get more eco-deep dives in your inbox!
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