Who's Counting Up Carbon Offsets, and How?

Earlier this month, world leaders descended in Glasgow in order to work together to limit the extent and impact of rising global temperatures caused by emissions of greenhouse gases. At this twenty-sixth meeting of the Conference of the Parties (“COP 26”) to the United Nations Framework Convention on Climate Change (“UNFCCC”), a central goal was finding ways to keep to the original target, limiting temperature increases to 1.5° C above pre-industrial levels, a complex goal since temperatures have already risen by 1.1° C.

Forests, “cathedrals of nature,”[i] are key to the tasks of climate mitigation and adaptation, as are forest products including engineered wood. For example, EPA’s annual greenhouse gas inventory reports a total annual flux from “forestland remaining forestland” of -691.8 MMT CO₂ Eq. in 2019 (691.8 million metric tonnes of CO₂ equivalent sequestered).[ii] That includes -108.5 MMT CO₂ Eq. sequestered in harvested wood.[iii] By comparison, total 2019 U.S. emissions exceeded 6.5 billion MT CO₂ Eq.[iv] Both the UN Food & Agriculture Organization (FAO) and the World Council on Sustainable Business Development have issued reports emphasizing the need for sustainable forest management including sequestration in harvested wood.[v]

In Glasgow, over 100 countries pledged to reverse forest loss and land degradation by 2030. The pledge’s signatories account for ninety percent of the word’s forestland, over 14 million square miles, and include significant players, such as Brazil, Canada, Russia, Indonesia, and the U.S..[vi] Leaders in government and the private sector also committed large sums to financing this objective.[vii]

Ultimately, what happens in Glasgow, should not stay in Glasgow if COP 26 is to produce results. How, then, can forest discussions in the United Kingdom bring about change in the forests of, say, the Pacific Northwest? Among various mechanisms, forestry investments through carbon emission markets emerge as a promising avenue. Putting a price on carbon and enabling trading allows for more efficient emissions reductions. By some estimates, global carbon emissions trading could reduce mitigation costs to achieve the 1.5 goal by fifty to seventy nine percent.[viii] The Parties, however, arrived at COP 26 under a “deficit of credibility and a surplus of confusion” when it comes to their emissions math.[ix] Who’s keeping track?

As a lack of clarity persists at the international sphere, we examine how a local government (the state of Washington) and a private stakeholder (Microsoft) forged a path ahead using carbon markets as one more tool to reduce or remove emissions while combating deforestation.

The Forests and the Trees: Article 6 of the Paris Agreement 

The concept of carbon markets to address climate change is not new – initiatives date back to the Kyoto Protocol and its Clean Development Mechanism (“CDM”).[x] There are two types of emissions markets: voluntary and regulatory compliance. In a compliance market, governments set emission limits, allocating tradeable emissions allowances among the regulated entities in “cap and trade” schemes. Regulatory design may also permit emission offsets: an emitter purchases credits from a party who agrees to reduce or remove emissions at a different location. In voluntary markets, emissions trading is, well, voluntary. The private sector, for example, purchases carbon credits (called verified emission reductions, “VER”) for corporate environmental, social, and governance (“ESG”) policies or reputational reasons.

Under a global carbon trading regime, CO₂ emissions in one country could be offset by payments made to another for emissions reductions or removals done elsewhere. Countries could also trade credits. Efforts at creating such market have thus far failed. The CDM regime collapsed without achieving its goals, in part because of questions about the environmental integrity of its projects, including accounting, human rights, and environmental records.

Article 6 of the Paris Agreement[xi] is a second bite at the apple. Article 6 establishes a voluntary mechanism, under the supervision of a body designated by the Parties, to promote mitigation efforts, facilitate and incentivize public and private participation, and deliver overall mitigation of global emissions.[xii] Article 6 also requests that Parties engaged in various cooperative transactions to develop robust guidance for accounting, ensuring transparency, environmental integrity, and the promotion of sustainable development.[xiii] Article 6 recognizes the importance of non-market mechanisms in achieving NDC’s goals.[xiv] Elaborating the rule book for these provisions is central to ongoing climate negotiations, especially after COP 25’s failure to do so over widespread disagreement about accounting and the carrying over of CDM’s credits.

While internationally the Parties stumble to clarify the rules, the national, sub-national, and private spheres teem with activity. In the compliance market, California adopted an emissions trading market with the possibility of offsets launched in 2013. The California market is currently the largest forest carbon offset program, offering important lessons for, among other things, forestry-based carbon offsets.[xv] Washington state recently created its own carbon compliance market with an offset program examined below.

Measuring Forest Carbon

The voluntary market of emissions trading has seen remarkable growth in the last couple of years. Ecosystems Marketplace reported that 2021 transactions might reach a record one billion dollars in annual value until the end of the year – Forestry and Land Use project reached $544 million through August of 2021.[xvi] Corporate climate policies are driving the increase, with companies purchasing carbon credits as part of their efforts to achieve net-zero, carbon neutrality, or carbon negative goals.

Math is central to carbon market schemes of both types: ultimately, the accounting needs to add up. A plethora of standards and methodologies is available today. The goal is to guarantee real, credible, verifiable emissions reductions. Emissions must also be additional and prevent leakage to preserve the integrity of the system. Under the additionality principle, certifiable emissions must be “additional to any that would occur in the absence” of the activity.[xvii] Leakage results when a reduction in emissions in one area leads to increased emissions elsewhere. Organizations such as American Carbon Registry and Verra are leaders in the field, having amassed a broad range of expertise in standard setting, project evaluation, and certification. Methodologies, however, are still being debated and developed.[xviii]

Because carbon in standing trees is easiest to measure, as a Finnish study warned, “it is tempting to build carbon crediting systems based on living trees only.”[xix] But that easy way out produces bias in a number of directions, failing to account for rapid growth of newly-planted trees or the long-term sequestration potential of harvested wood. Any sustainable methodology will have to account for the benefits of substituting wood products for other, more carbon-intensive building materials. With the development of engineered wood products that can replace concrete and steel in high-rise buildings, a vast opportunity for construction decarbonization is about to open.[xx] Additionally, offset projects must account for fire mitigation effects, especially as multiple forest offset projects have burned in recent years.[xxi]

Despite uncertainty, public and private initiatives move ahead. Washington state adopted a cap-and-trade program earlier this year. Microsoft and Amazon, large employers in the state, also made commitments to significantly cut their emissions. Amazon pledged to achieve net-zero by 2040. Microsoft aims to be carbon negative by 2030.[xxii] Carbon markets ultimately strive to move the needle towards climate-smart forestry practices that remove and store carbon, increase resilience, support biodiversity and local communities and economies – the goal is to see the forest, and the trees.

WA Climate Commitment Act

Washington’s Climate Commitment Act[xxiii] aims to achieve net zero emissions by 2050 through a cap-and-trade program. The program, dubbed “cap-and-invest,” begins January 1, 2023. The Act imposes a declining limit on GHG emissions by major sectors of the economy enforced through emissions allowances (one allowance is needed for every ton of greenhouse gas emitted).[xxiv] The Act is attentive to the disproportionate environmental burden of certain communities in the state, intending to identify and pursue emissions reductions in the areas affected.[xxv]

The Act creates a carbon market that allows offsets and linkages to markets in different jurisdictions. Linking permits the state to accept allowances or offset credits from other jurisdictions, such as, for instance, the California market.[xxvi] The Department of Ecology, tasked with implementing the Act, must evaluate whether linkage would result in cost effective measures.[xxvii] Notably, before approving a linkage agreement, Ecology must conduct an environmental justice assessment to guarantee an improvement of conditions in these affected areas, including through the direct reduction of environmental burdens and risks.[xxviii]The Act establishes an Environmental Justice Council to provide recommendations to the legislature, agencies, and the governor.[xxix]

Washington’s program allows offset projects. Five percent of the regulated entities’ reductions through 2026, and four percent from 2027 to 2030, may come from offset credits. The Act also allows an additional three percent through 2026 and two percent through 2027 to 2030 of offsets from projects in tribal lands. Offsets must provide “direct environmental benefits” to the state or be in a linked jurisdiction.[xxx] Offsets must be additional to emission reductions.[xxxi] The Act further creates an assistance program for offsets on tribal lands, including through the provision of funds.[xxxii] Finally, the Act creates a small forestland owner work group to identify carbon market opportunities.[xxxiii] Prior to passage of the Act, the 2020 legislature recognized the importance of involving Washington’s working forest sector in carbon strategies.[xxxiv] State policy is “to support the contributions of all working forests and the synergistic forest products sector to the state's climate response” and “to support the participation of working forests in current and future carbon markets, strengthening the state's role as a valuable contributor to the global carbon response while supporting one of its largest manufacturing sectors.”[xxxv]

The Department of Ecology initiated rulemaking procedures in August. Its offset criteria, however, have not been released yet; only proposed reporting criteria have been released for public comment. The Act charts new course, potentially setting a path for other markets in the country and around the world.

The Microsoft Experience: Carbon Removal

Microsoft aims to be carbon negative by 2030. To this end, the company engaged in various emissions purchasing agreements. The lessons it learned in conducting is due diligence are worth absorbing, particularly because Microsoft sought to apply the principles of robust accounting, additionality, durability, and leakage to a host of projects in various locations, from Washington to Brazil.[xxxvi] In Washington, for example, Microsoft partnered with The Nature Conservancy to improve forest management on almost 23,000 acres. While Microsoft focused on the market of carbon removal, many of its challenges are faced in the market for reductions as well.

The lack of clear accounting of carbon removal was a central lesson. Carbon removal is a new market without structured protocols and verification standards.[xxxvii] If lack of clear guidance and standards is an issue in the more the established market for emissions reductions, the matter lacks even more clarity when it comes to removals. Microsoft’s forestry projects included reforestation, afforestation, agroforestry, and improved forestry management as well as REDD+[xxxviii] projects. The company sought projects with conservative baselines, clear accounting of leakage, and strong risk management provisions.

Additionality and avoidance of leakage were key components of Microsoft’s project evaluation. Once more, the lack of clarity and agreement on baseline accounting and measurements of additionality for corporate purposes presented challenges: “what counts as carbon additionality?”[xxxix] There are, as indicated, no common premises. Microsoft sought to avoid leakage by making its own deductions of credits from projects with unaccounted leakage risks and by developing scientific, peer-reviewed criteria for evaluating those risks.

Microsoft’s compilation of red flags serves as warning signals for compliance and voluntary markets alike. The company’s red flag list includes lack of criteria for verifying net-negativity claims, lack of clear accounting of emissions removal, conflicts of interest between accreditation organizations with direct financial interests in projects, and hidden environmental or social harms, particularly in relation to climate or social equity issues.[xl] Still, Microsoft looks ahead, prioritizing carbon removal and advocating for greater policy guidance on clarity, consistency, and transparency in accounting principles and standards.

Conclusion

Leaders of the public and private sector pledged in Glasgow to conserve and sustainably use forests. Whether the glass is, in fact, empty or somewhat full depends on the ability of international events to produce results at home. Carbon markets to foster climate-smart forestry have emerged as a somewhat novel and promising tool. While the math is far from ideal, the experimentations of public and private actors, such as Washington state and Microsoft, widen the door for progress. Perhaps what happened in Glasgow (or Olympia or Redmond) will, ultimately, not stay in Glasgow.

Marten Law will continue to follow and review developments in the field. COP 27 is scheduled for November 2022 in Sharm el Sheikh, Egypt, and COP 28 in the United Arab Emirates in 2023.

The author wishes to thank Brad Marten and Lawson Fite for their contributions to this article. Please contact them for further information on this subject.