How companies can lessen legal risk in carbon markets
The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.
Offset integrity problems have led to a crisis of confidence in the voluntary carbon market and legal woes for companies in recent years. In the U.S., for example, Apple and Delta Airlines have faced lawsuits under state consumer-protection laws related to the integrity of offsets used to support their emissions-offsetting claims. Other large companies have lost similar cases in other countries. Some U.S. federal agencies may also have authority to bring enforcement actions to address certain types of misleading claims by corporate buyers, as discussed in a recent Institute for Policy Integrity report.
Overall, there seem to be unbridgeable gaps between skeptics of offsets and those who see them as an effective climate mitigation tool. To move the debate forward, stakeholders need to address a critical but often overlooked aspect of the problem: The emissions removals or reductions that underlie carbon credits are inherently uncertain and their risks cannot be completely eliminated. Acknowledging and incorporating these risks and uncertainties would enhance transparency and clarify the role of imperfect removals or reductions in carbon markets and climate mitigation.
A misalignment in definitions
Let’s start with the fundamental concern of permanence: Removed or reduced emissions can be re-emitted (for instance, if a wildfire incinerates a forest grown for an afforestation project). For certain projects, crediting programs maintain buffer pools to compensate for such reversals, and market participants can also purchase insurance to address this risk.
Crediting programs typically only require project developers to make “permanence commitments” of a few decades to a century. Seeking to provide guidance to market participants, the Integrity Council for the Voluntary Carbon Market calls for permanence commitments of 40 years for projects with a “material risk” of reversal. At least in practice, the voluntary carbon market has thus defined permanence to mean “lasting a few decades or a century.”
Yet the market’s definition of permanence doesn’t align with the science. Carbon dioxide can remain in the atmosphere for hundreds if not thousands of years, contributing to climate change throughout that timeframe. From a scientific standpoint, the duration of an emissions removal or reduction should roughly match the lifespan of the emission it’s meant to offset. An emissions removal or reduction that lasts for 40 or 100 years cannot cancel out an emission that lasts for hundreds or thousands of years. Yet it would be unreasonable and unrealistic to expect project developers or crediting programs to guarantee emissions removals or reductions on so long a timescale.
So here’s the problem: The market must either:
- Use an unscientific definition of permanence and permit offsetting claims with math that doesn’t add up in the long run (and with inaccuracy that might expose participants to greater legal and reputational risk).
- Admit that it can’t guarantee permanence on a timescale that would justify using carbon credits to offset emissions.
Moving past the current impasse
Honesty about these risks and uncertainties may be the best way to move past the current impasse between proponents and skeptics of this market.
One option that some market participants seem interested in is adopting an “equivalence framework” to compare and value emissions removals or reductions of different durations by calculating how many “imperfect” (risky or temporary) credits equal a “perfect” one. Unlike the market’s current approach, an equivalence framework can embrace imperfect yet beneficial credits that don’t meet the market’s current standards without overvaluing or misrepresenting the imperfect credits that do.
How best to measure equivalence requires careful consideration. At least one crediting program uses ton-year accounting for certain project types, comparing emissions removals or reductions of varying durations in terms of physical climate impacts (such as global warming potential) over a selected timeframe. But ton-year accounting creates a similar bind to the market’s current approach: It can distinguish between short-lived removals or reductions only if one picks a timescale that cannot truly support offsetting claims.
As discussed further in another recent Institute for Policy Integrity report, a more recently developed approach is the “social-welfare equivalence” framework. Under this framework, a perfect offset is valued at the social cost of carbon, an estimate of the damage (in present value) caused by emitting one ton of carbon dioxide. This equivalence compares imperfect removals or reductions in terms of the monetary present value of avoided damages — a measure of social welfare rather than physical climate impacts.
As future impacts are discounted and therefore worth less than present impacts, even temporary removals with no long-term physical climate impact have social value, and removals or reductions of different durations will be valued differently even if their long-term physical impacts are the same. Unlike current market approaches, social-welfare equivalence can incorporate reversal (and other) risks across the scientifically correct timescale of hundreds or thousands of years.
Adopting social-welfare equivalence would necessitate changes to claims that buyers of carbon credits commonly make. Instead of claiming to have offset their emissions, they may tout that they’ve counteracted the social damages of their emissions. Although admittedly less catchy, these modified claims could be more accurate, and potentially less legally (and reputationally) risky, than the claims of today’s voluntary carbon market.
Equivalence and legal risk
In the United States, the Federal Trade Commission (FTC) Act prohibits “deceptive acts or practices in or affecting commerce.” Relying on low-integrity offsets to make net-zero, carbon-neutral or other claims could potentially expose corporate buyers to this liability. The act empowers the FTC to bring enforcement actions against companies it views as having potentially violated this law. Meanwhile, many states have “Little FTC Acts” that also allow private parties to file lawsuits, as in the Apple and Delta cases.
In light of these legal risks, corporate offset buyers need to be careful about the claims they make. A company that adequately qualifies its claims or that has a reasonable basis for them doesn’t violate the FTC Act. But to the extent that the government or a private party could still argue that offset integrity problems make a corporate buyer’s claims deceptive, a framework that more fully and honestly accounts for the risks and uncertainties affecting the underlying removals or reductions could provide an extra line of defense.
To be sure, equivalence may not be the best or only way forward. Even if the market adopted an equivalence framework, participants may still have incentives to misrepresent projects’ risks and uncertainties. Nonetheless, reimagining how the voluntary carbon market deals with risks and uncertainties could move the conversation forward and clarify the role of private efforts in advancing much-needed global climate change mitigation goals. Just like we shouldn’t let the perfect be the enemy of the good, we also shouldn’t pretend the imperfect is perfect.
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