I've long found carbon credits and offsets rather confusing, and never really understood what they are and how they work. They're a complex and confusing topic, so I felt it was worth diving in and researching more, to see if I could make head or tail of it. After a lot of research, I feel like I've barely scratched the surface, but I now know broadly what credits and offsets are, where they came from, and how they work, so this post is my attempt to explain this in a (hopefully) understandable manner. Brace yourself, this one is going to be a long one...

First, some definitions

A good place to start is the main terminology involved. What is a carbon credit? What is carbon offsetting? What's the difference? Where do carbon markets come in?

Credits and marketplaces

A Carbon credit generally refers to some form of well-recognised token or certificate, equivalent to an amount of emissions (usually measured in tonnes of CO2 equivalent - CO2-e). Usually, holding one of these permits the bearer to emit a quantity of pollution equivalent to the amount on the token. This will make more sense in a moment.

Carbon markets are where carbon credits are generated and spent. They are usually (but not always) government-organised schemes designed to use market forces to reduce emissions across a sector, industry or geographical area. One common type is a 'cap-and-trade' system, where an overall 'cap' on emissions is set, meaning that overall emissions across the covered sector/industry cannot exceed that amount. The market then generates a currency - credits - equivalent to the size of the cap. So if the limit is 1 million tons CO2-e for the current year, and each credit is for 1 ton CO2-e, then 1 million credits will be generated. Those credits are then allocated to the various entities in the sector (sometimes this means companies, sometimes it is done per installation e.g. per power plant or per factory). Allocation methods vary - sometimes credits will be allocated freely, perhaps based upon the previous years' emissions, and sometimes they are auctioned off to the highest bidder.

Each of those entities in the market must measure and report their emissions, and they are responsible for acquiring enough credits to cover their emissions for that year. If they emit more than their allocation of credits, they must purchase more, or face steep penalties. Those who emit less than their allocation of credits can sell the unused credits on the carbon market, to those who've emitted too much. In this way the overall cap is generally not breached, but market forces can determine where is the best place to reduce emissions (versus, say, a blanket x-percentage reduction on all facilities, regardless of the expense and difficulty of said reductions). Most carbon markets will lower their overall cap year on year, forcing the entire sector to gradually reduce emissions.

Offsets

Offsets are a name for offsetting emissions made in one place with reductions made elsewhere. The theory is that the climate and atmosphere is a shared resource, so if reductions are made in Germany or in Jakarta, it still helps the planet by the same amount. Offsets can take a wide variety of forms, from clean energy installations (wind, solar, hydroelectric, etc), forestry, destroying global warming-inducing compounds such as HFCs, and a plethora of other types. Quantifying offset schemes is often tricky, as benefits can be hard to measure, and the results of such schemes are often not as readily apparent or positive as they first appear. I'll cover this more however when I get into certification and some of the criticisms of offsetting.

And that's that - that's carbon credits! Well, in a nutshell, it is, but of course, there's a lot more to it than that. Next, let's dive into the history of climate change matters to understand where these measures came from.

A little bit of history

Scientists have theorised that humans could cause some form global warming since the early 1890s (Svante Arrhenius is widely credited as the first person to calculate how rises in atmospheric CO2 would increase the Earth's surface temperature). This early work led to more systematic measurements of CO2 in the atmosphere, including the work of David Keeling, whose work at the Mauna Loa Observatory gave the first conclusive suggestions that humans were contributing to the greenhouse effect and to global warming. The Keeling Curve, a well known graph of CO2 concentrations in the atmosphere, was named after Dr Keeling, and is still updated today.

By the 1980s, scientific consensus was building that humans were responsible for significant changes in the climate. James Hansen, then the head of the NASA Goddard Institute for Space Studies, famously testified before the US Congress in 1988, raising broader awareness of climate change. In the same year, the Intergovernmental Panel on Climate Change (IPCC - the first of many acronyms in this post) was formed, initially by the World Meterological Organization (WMO) and United Nations Environment Programme (UNEP) to provide the world with an objective, scientific view of climate change. It wasn't designed to perform research itself, but rather to collate both peer- and non-peer-reviewed published research, and to stimulate research. In its own words, its role is 'to assess on a comprehensive, objective, open and transparent basis the scientific, technical and socio-economic information relevant to understanding the scientific basis of risk of human-induced climate change, its potential impacts and options for adaptation and mitigation'.

It produces regular assessment reports, summarising its findings in climate change. The first of these reports, the dryly-named First Assessment Report (FAR), was published in 1990, and concluded that human activities are substantially increasing the concentration of atmospheric greenhouse gases, which is leading to warming of the Earth's surface. This warming is on the order of 0.3-0.6°C over the past 100 years. They say with strong confidence that CO2 is responsible for over half of this greenhouse effect. In addition, they ran calculations of a Business As Usual (BAU) scenario, and warn that global temperature will likely rise by 0.3°C per decade through the 21st Century. Despite these strong findings, they note that unequivocal detection of the enhanced greenhouse effect is not likely to happen for a decade or more.

The Path to Kyoto

At this point, cogs started started to turn, and governments started to discuss climate change as a real possibility. At the UN Conference on the Environment and Development in 1992, in Rio de Janeiro, the UN Framework Convention on Climate Change (UNFCCC) is agreed upon, which lays the groundwork for future discussions. In 1995, those party to the UNFCCC meet in Berlin (at a so-called Conference of Parties (COP) to the UNFCCC - a regular get-together for everyone involved in the framework), and specific targets are suggested for emissions.

Finally, in 1997, the same parties meet in Kyoto, Japan, and agree upon the Kyoto Protocol, which lays a lot of framework for reducing emissions. That sounds quite vague, but the Kyoto Protocol was one of the widest-reaching and firmest agreements there has ever been on climate change. There's a reason it's a well known name - it lays the groundwork and legal outlines for much of the carbon market system we have today.

The Kyoto Protocol

The Kyoto Protocol was focused around controlling emissions of major greenhouses into the atmosphere, through the use of national caps on emissions for developed countries. One of the key complexities when designing the Kyoto Protocol (and indeed other similar frameworks afterwards), is that not all parties have contributed equally to the emissions problem, nor are they equally equipped to tackle it. The Kyoto Protocol approaches this by dividing the signing parties into developed and developing countries. Developed countries have a cap on emissions, and must reduce their emissions that cap. Developing countries were encouraged to reduce emissions, but given that they have less resources, and have contributed less to the problem, they had no such cap. Also, in order to develop further, such developing nations might necessarily need to increase emissions in order to progress, and enforcing a cap might hinder their economic development.

Mechanism

There are a lot of complexities and subtleties to the Kyoto Protocol, but the broad framework it laid out created the concept of carbon credits, offsets, and carbon market. Each Annex 1 party (read: developed country) which ratified the protocol was assigned a target emissions level, which generally took the form of reducing emissions to the level of some baseline year, or some amount above or below that baseline year. For example, New Zealand's target was to keep emissions at or below 1990 levels, whereas the EU aimed to keep emissions at or below 6.7% below 1990 levels. These targets are set out in terms of Assigned Amount Units (AAUs), also known as allowances. Each AAU represents an allowance to emit greenhouse gases equivalent to one metric ton of CO2 (other gases are converted using their Global Warming Potential - a measure designed to capture fact that some gases have a much more potent greenhouse effect than others). In addition to these AAUs, the Kyoto Protocol also introduces International Emissions Trading (IET) - a framework allowing Annex 1 parties to trade their AAUs between one another, so that nations with a surplus can sell to those with a deficit.

Flexibility Mechanisms

The IET was one of three 'Flexibility Mechanisms' designed into the Protocol. These were designed to allow for the fact that costs of reducing emissions vary between countries and between industries. We've already covered the basics of trading credits, so let's look at the other two mechanisms: the Clean Development Mechanism (CDM); and the Joint Implementation (JI). These two mechanisms generate reductions in emissions from specific projects - they 'produce' reductions in emissions, versus restricting existing emissions. Essentially, they are the basis of what I introduced earlier as carbon offsetting. CDM projects are designed to encourage sustainable development and emissions reductions in non-Annex 1 countries - developing countries. Annex 1 countries can invest in CDM projects in non-Annex 1 countries, and in doing so, they earn Certified Emissions Reductions (CERs - don't worry, plenty more acronyms to come!), which they can use against their own emissions. Joint Implementation projects are a variation on this theme, this time between Annex 1 countries - an Annex 1 country can help develop an emissions-reducing project in another Annex 1 country, and receive Emission Reduction Units (ERUs), which again can be used against their cap. This is designed to account for projects in certain countries being cheaper to produce, but ultimately still benefiting the climate as a whole.

There's one last unit type: the Removal Unit (RMU). These are generated from certified carbon sink activities, such as reforestation (often referred to by the catchy acronym LULUCF - land use, land-use change, and forestry). These can also be traded and used against emissions caps.

There's a lot more to the Kyoto Protocol, and a lot of detail around how all these measures are defined, implemented and measured. However, that starts to diverge into politics and other topics beyond the scope of this article.

Ratification

The US signed the Kyoto Protocol in 1998, during the Clinton presidency. However, to become binding the US, it needed to be ratified by the Senate, who'd already expressed disapproval at such agreements by passing the Byrd-Hagel Resolution the year before, which basically said that the Senate felt the US should not sign the Kyoto Protocol. The crux of their disagreement was that developing countries wouldn't have to make emissions reductions, and that the Protocol would seriously harm the economy of the US. When President George W Bush was elected in 2000, he concurred that whilst climate change was serious, he wouldn't sign an agreement that harmed the US economy, and that exempted developing countries. This lack of ratification left the US as the only signatory by 2016 that had not ratified the Kyoto Protocol.

The terms of the ratification process required at least 55 parties to the Protocol, including Annex 1 countries amounting to at least 55% of the total CO2 emissions for 1990. The US (which was 36% of emissions in 1990) refusing to ratify meant that there was a significant delay whilst other parties were found to make up that 55% of emissions. Eventually, in 2004, once Russia ratified, that target was met, and the Protocol went into effect 90 days later.

Withdrawal

Canada, Russia and Japan decided not to take on any more Kyoto targets after 2011, and indeed Canada withdrew entirely in 2011. Although they gave suggestions of trying to find an alternative scheme or approach, nothing has since materialised, and Canada's then Environment Minister, Peter Kent, cited the huge penalties Canada would've had to pay under the Protocol due to their rapidly increasing emissions.

Beyond Kyoto

Since around 2007, UN Climate Change gatherings have been focused on deciding upon a follow-up agreement to the Kyoto Protocol. Eventually, at the 2009 UN Climate Change Conference in Copenhagen (the 15th UNFCCC COP), there was broad agreement amongst the G-8 leaders (including the US) about the need to half carbon emissions by 2050, but no binding settlements were reached. However, a Copenhagen Accord was agreed upon, which whilst non-binding, did lay important groundwork. It recognised the case for keeping global temperature rises below 2°C, and pledged US$30 billion to the developing world over the next three years, rising to US$100 billion/year by 2020, to help developing countries adapt to climate change. UNFCCC party countries (both developed and developing) were encouraged to submit ambitious emissions reduction targets to be achieved by 2020, and countries representing over 80% of the world's emissions eventually submitted pledges.

At the 2012 UN Climate Change Conference, the attendees agreed to extend the Kyoto agreement to 2020, and to develop a successor by 2015, to be implemented by 2020. The details of this successor were not discussed, however.

The Paris Agreement

After many suggestions of a new agreement, at the 2015 UNFCCC Conference of Parties (COP-21) in Le Bourget, near Paris, a new settlement was finally created - what is now known as the Paris Agreement. As of 2019, 195 UNFCCC members have signed the agreement, and 185 are party to it.

The agreement aims to keep long-term global temperature rises to within 2°C of pre-industrial levels, and ideally below 1.5°C, as this would limit the severity of the risks posed by climate change. Signing the Paris Agreement means that each country must make plans to mitigate global warming, and regularly report on their contributions to this. There are no fixed deadlines by which they must do this, but each new target must go above and beyond previously set targets.

So far, this has produced many dramatic pledges - France has pledged to ban petrol and diesel cars by 2040, Norway by 2025 - but less concrete action. This is in part by design - the Paris Agreement is meant to be a political agreement rather than a legal framework. This difference incidentally means that the Paris Agreement doesn't need to be legislated by US Congress to take effect.

The Paris Agreement also blurs the difference between Annex 1 and non-Annex 1 countries. Whereas the Kyoto Protocol drew strict dividing lines between the two, the Paris Agreement deliberately makes things more fuzzy, as this strict division drew much criticism. It still aims to balance the differing needs and abilities of developing and developed countries, but in a more fluid fashion. However, the details of this have not yet been clarified, so will need to be finalised at some later date.

Carbon Markets

The most relevant part of the Agreement to this post are the provisions for carbon markets. There are, similar to Kyoto, nationally determined contributions (NDCs) for each country (read: emissions caps). These can be satisfied through trading of emissions credits. The Agreement establishes a framework to handle these transfers - the International Transfer of Mitigation Outcomes (ITMOs), and discusses the linking of various existing carbon markets - something that would be essential to avoid emissions credits being 'double counted' - counted in multiple markets against different emissions.

The agreement also refers to a new mechanism to support sustainable development and reduce emissions - something now being referred to as the Sustainable Development Mechanism (SDM). This is touted as a successor to the Kyoto Protocol's CDM, and aims to tackle some of the issues raised with this mechanism.

US withdrawal

sighs...

This is becoming a theme. The US signed the Paris Agreement whilst under the Obama Presidency, but when President Trump came to office, he announced the withdrawal of the US from the Agreement. There is a three year wait to withdraw once the agreement comes into effect in the relevant country, so the withdrawal cannot take place until November 2019, unless the US withdraws from the UNFCCC as well. This withdrawal leaves the US as the only UNFCCC member state that does not intend to be a party to the Paris Agreement.

There's plenty more in the Paris Agreement, but I'm already heavily side-tracking from the main topic, so I'll leave it there for now. I may follow up with a dedicated post about the Agreement, but in the mean time, there are plenty of excellent resources around the web for learning more about both the Agreement and the consequences.

Carbon markets

Now, let's talk about some of the actual implementations of the measures described so far. The Kyoto Protocol (and, to a lesser degree, the Paris Agreement) set out frameworks for implementing carbon markets and carbon trading, but left many of the implementation details to the countries themselves. I'll run through the main carbon markets running in various countries around the world - how each scheme works, and some of the benefits/drawbacks where relevant.

EU

The EU established one of the first major carbon markets in the world. The EU Emission Trading Scheme (EU ETS) is the largest emissions trading system in the world. It was established independently of the Kyoto Protocol, but was designed to work alongside it - the 'Linking Directive' allows the use of Kyoto credits from JI or CDM projects, or those bought via IET to cover some emissions.

The ETS is a cap-and-trade system, with caps per country, and each installation either being allocated or acquiring credits at auction. It covers some 11000 energy-using installations and airlines flying within Europe (more on aviation later). It covers all 28 EU member countries, as well as Norway, Iceland and Liechtenstein. The scheme covers CO2 emissions from power and heat generation, and various energy-intensive industry sectors, as well as commercial intra-Europe aviation. It also covers Nitrous Oxide (N2O) production from industry, as well as Perfluorocarbons (PFCs) from aluminium production.

Phases

The EU ETS first came into operation in 2005, and runs in phases, allowing adjustment of rules and procedures between each phase. Phase I was described as 'learning by doing', and ran from 2005 to 2007. Phase II ran from 2008 to 2012, and added the 'Linking Directive' (integration with Kyoto), as well as three non-EU countries - Iceland, Norway and Liechtenstein. Phase III runs from 2013 to 2020, and clamped down on the use of offsets, as well as limiting how many offsets could be 'banked' from Phase II and brought forward. It also includes more sectors, and greenhouse gases, as well as a New Entrants Reserve (NER) - a fund designed to promote the development of new renewable technologies and low carbon energy projects.

Allocation of Permits

The number of permits available to each country is determined by its allocation, equal to the amount set under the UNFCCC. Permits are either allocated freely (given away) to industries, sometimes based upon previous years' emissions, or put up for auction. In Phase I, most of the allowances were given away, which led to criticisms of being inefficient, allowing windfall profits, and not incentivising new competition. As a result, the amount being auctioned has gradually increased as the phases have progressed, although there is still a proportion allocated freely, mostly to prevent 'carbon leakage' - when the application of an emissions scheme causes an industry to simply move out of the area covered by the scheme to avoid incurring penalties.

Permits have been considerably cheaper than originally intended, in part because of the 2007 economic recession, which caused economic output to fall, meaning there was an excess of permits. This has been addressed by initially postponing the auctioning of 900 million permits from 2012-13, and then creating a market stability reserve, to which these 900 million allowances were added.

UK

The UK ran an emissions trading scheme from 2002 to 2009. At the time it was launched it was the first multi-industry carbon trading system in the world. It was voluntary, and eventually encompassed some 54 sectors of the UK economy. In many ways it was a pilot program to the EU ETS, which it was succeeded by.

It was concluded that it did produce emissions reductions, although the targets weren't demanding enough. It also allowed the establishment of a number of new firms specialising in carbon trading and exchange, who then had a head-start when the EU ETS came into effect.

Switzerland

Switzerland has had an Emissions Trading Scheme (ETS) in place since 2008. It was initially voluntary, and proposed as an alternative to their levy on CO2 - a tax affecting combustible fossil fuels.

Currently it covers a wide range of sectors, similar to those covered by the EU ETS, and some other industries can opt in if desired. It's a cap and trade system, and works very similarly to the EU system. Indeed, as of 2017, there have been extensive discussions about integrating the two systems.

US

The US has had various attempts at forms of emissions markets and credit systems over the past 30 years, with varying degrees of coverage and success. The first system was the Acid Rain Program, introduced as part of the Clean Air Act in 1990, which created a cap-and-trade system for sulfur dioxide emissions, with the intent of reducing the incidence of acid rain. By 2007, the scheme had reduced SO2 emissions by 50% from 1980 levels, and according to the Pacific Research Institute, acid rain levels dropped by 65% since 1976. However, the reductions in SO2 emissions were not as great as those in the EU, which reduced by 70% through the use of conventional regulation (regulation was also used in the US, making it hard to determine the impact of the market-based approach). The scheme was challenged in 2004, and replaced in 2011 by the Cross-State Air Pollution Rule (CSAPR), which replaced the national SO2 system with four separate trading groups for SO2 and NOx (Nitrogen Oxides).

NOx Budget Trading Program

Due to issues with smog in the eastern US, the Environmental Protection Agency (EPA) put together a program called the NOx Budget Trading Program (NBP). This was a cap-and-trade market-based system that aimed to reduce NOx emissions from power plants and other sources, to try and reduce the formation of smog (ground-level ozone). In particular, it was designed to reduce these emissions during the summer, known as 'ozone season', when the levels of ground-level ozone are highest. Between 2003 and 2008, NOx emissions during ozone season decreased by 43% under the program, even with flat energy demands.

Greenhouse gases

There is no national scheme for tracking and reducing greenhouse gas emissions in the US. There have been attempts to push a scheme through the EPA, but subsequent presidencies have challenged this. In the absence of a national scheme, several regional schemes have sprung up between groups of states.

The Regional Greenhouse Gas Initiative (RGGI, or 'Reggie'), is a mandatory program between 10 north-eastern US states to reduce emissions. It's a market-based cap-and-trade system, with an annual decrease in the yearly cap. So far, power sector carbon emissions have dropped by over 40% since 2005, with no apparent impact on state economies. In August 2017, the RGGI agreed to lower power plant emissions by another 30% between 2020 and 2030.

The Western Climate Initiative (WCI) was started in 2007 by the governors of five western US states to set up a market-based system across multiple economic sectors to reduce greenhouse gas emissions. In 2007, British Columbia and Manitoba both joined the scheme, making it an international partnership. Membership has fluctuated in the intervening years, with various US and Canadian states joining and leaving. As of October 2018, the members are California, British Columbia, Manitoba, Ontario and Quebec. Several of the states that withdrew went on to develop oil shale, gas fracking and coal mining, activities which under the scheme would have cost them dearly.

In 2006, California passed the California Global Warming Solutions Act, introducing a market-based system for monitoring and reducing systems in the state. The aim was to reduce emissions to 1990 levels by the year 2020. As of 2013, this scheme is linked with Quebec, and California intends to link to other states through the WCI.

China

China has been considering various forms of national emissions trading scheme since the early 2000s. In 2002, they ran a pilot scheme across four provinces, three municipalities and one business entity (known as the 4+3+1 project), trading emissions in sulfur dioxide. By 2014, there were over 20 local pollution permit trading platforms in various regions across the country.

In 2011, China approved pilot programs in seven provinces and cities to pave the way for a national carbon trading scheme. These were designed to test different pricing structures and iron out any teething troubles with such a system. Initially, carbon trading was expected to start nationally in 2017, covering some 1700 facilities emitting 3.5 billion tons of carbon dioxide, but there were significant problems and delays, believed to be related to monitoring and collection of emissions data to form a baseline metric. By the end of 2017, emissions quotas had been rolled out, but only to the power sector, and the market side of the system had yet to start up.

China has made a voluntary pledge to the UNFCCC to lower CO2 per unit of GDP by 40% by 2020 (compared to 2005 levels), however they have not agreed to an overall cap. This is concerning mostly due to China's immense growth over the past 20 years - even if they reduce intensity of emissions, their overall emissions will likely still increase. Even now, China is the largest carbon emitter in the world, producing around 30% of global emissions, and its emissions are still rising rapidly year on year, despite heavy investment in nuclear energy and renewables. Having said that, the level of control that the government has in China means that once they do start taking emissions seriously, change will likely happen extremely fast.

India

India currently does not have an ETS, but does have a related scheme, known as Perform, Achieve and Trade (PAT). This does not set absolute limits on emissions, but rather aims to reduce energy intensity. This scheme is mandatory for 478 facilities, which compromise around 60% of India's greenhouse gas emissions (as of 2007). India has also introduced a Renewable Energy Certificate (REC) trading system as another vehicle to help combat climate change.

India has largely been opposed to a cap-and-trade system, on the grounds that emissions issues were caused by developed countries. However, India is the third largest emitter of greenhouse gases in the world, which raises concerns about the lack of any capped system.

South Korea

South Korea launched an ETS in 2015, which is the second largest in the world after the EU. Similar to other schemes, it is a cap and trade system, running in phases, and encompasses 525 companies from 23 different sectors of the economy. These companies comprise around 68% of the country's greenhouse gas output. Currently, credits are mostly freely allocated, but more and more in each successive phase will be auctioned off instead.

Currently, companies enrolled in the scheme are allowed to use CERs from CDM projects, but only projects based in Korea, until at least 2021.

Australia

Australia has had a chequered history with emissions trading schemes. In 2003, New South Wales rolled out the New South Wales Greenhouse Gas Abatement Scheme, where electricity generators and large consumers had to purchase New South Wales Greenhouse Abatement Certificates. At the time, it was criticised for lack of transparency, effectiveness, and a lack of additionality (i.e. it was hard to prove that for offset schemes, the intended effects wouldn't have happened anyway, without the scheme's incentives). The scheme closed in 2012.

There have been various attempts at proposing a nationwide ETS, but a lot of changes in governments has meant that the necessary legislation has never been passed.

NZ

New Zealand has had an ETS since 2008. It initially covered forestry, energy, waste and industry, but not pastoral agriculture, which was 47% of emissions as of 2010. All allocation of credits is free, and the system was designed to be highly internationally linked, with the ability to trade a 'New Zealand Unit' (NZU) for a Kyoto unit (AAU) on international carbon markets. The NZ ETS does not restrict the amount of imported international credits used to meet domestic obligations (many other schemes, such as the EU ETS, do so), and in 2013, some 99.5% of the units used to meet obligations were imported international credits. Of those, many were cheap units from former Soviet bloc countries that were not permitted under the EU ETS.

Despite repeated criticism, New Zealand still has not committed to including agricultural emissions under their ETS, despite their large presence in New Zealand's carbon emissions.

Russia

Russia currently has no form of emissions regulation scheme, but is currently considering creating such a scheme - a welcome move from what is currently the world's fifth largest emitter.

Japan

Japan has had a voluntary emissions scheme since 1997, but this was largely ineffective. In 2010, Tokyo Metropolitan Government launched a cap and trade system covering the 1400 largest emitters in Tokyo, with yearly reductions, and emitters required to buy allowances, offset credits or renewable energy certificates to match their emissions. The overall goal is to cut Tokyo's emissions by 25% relative to the year 2000 by 2020.

Aviation

Aviation is a tricky area, as by its nature it tends to cross jurisdictions, and has largely escaped any form of emissions caps or quotas. Even now, airlines are not charged fuel duty and pay no VAT. There has been pressure on the main international industry body, the International Civil Aviation Organization (ICAO), to regulate emissions since the late 1990s, but little has been done until recently.

EU

The EU planned to integrate aviation into their existing ETS from 2012. The initial proposal was to count emissions from all flights within the EU, as well as flights into and out of the EU, and ensure that all airlines flying such routes were included within the EU emissions caps. This produced a massive backlash from the industry and from a number of countries. The US Airline lobby group A4A sued in UK Courts in 2009, stating that the ETS was illegal under international law. In 2011, the US Congress passed a bill prohibiting US airlines from complying with the EU ETS when operating in Europe (incidentally, this law still stands, but hasn't been activated by the Federal Transport Secretary). China Southern Airlines threatened to cancel an enormous order of Airbus airliners over the proposed fees.

After this intense pressure, the EU decided to pass a 'stop the clock' measure, that would pause the emissions regulations on flights into/out of the EU (leaving those within the EU still covered). This measure was then extended repeatedly, finally becoming open-ended (it runs now until the EU decide to cancel it). Even with this reduced scope, China, India, Saudi Arabia and Russia all prohibited their airlines from complying with the emissions regulations. However, the EU pushed ahead.

The aviation industry claimed it would incur costs of EUR 3.5bn in the first year alone. A study by Transport and Environment showed that the costs for the industry between 2013 and 2015 were EUR 150-180 million per year, and the industry generally passed these on to passengers (but even so, ticket prices were barely affected - the cost was estimated at between EUR 0.26 and 0.76 on a short and medium haul ticket respectively).

Criticisms

Although the EU system is basically the only system taxing aviation emissions anywhere in the world, it has come under criticism for being too lenient. Airlines are allocated their allowances free of charge, and if they exceed their emissions caps, there is no limit to the extra credits that they can buy, from any other sector. This was particularly an issue in the first few years after introduction, as the 2007 recession left an excess of credits, meaning that the airlines had no problem sourcing large volumes of cheap carbon credits. The cap on aviation allowances is also static, at 5% below 2004-2006 levels, versus other sectors, which have decreasing caps.

Carbon dioxide is the only greenhouse gas considered as part of the scheme, despite aircraft emitting a host of other greenhouse gases, such as nitrogen oxides, sulfur oxides, and carbon monoxide into the upper atmosphere. Airlines are also allowed to omit emissions for flights powered by biofuels, as these are deemed carbon neutral/green fuels, despite strong evidence that biofuels increase emissions over and above conventional fossil fuels.

CORSIA

As mentioned previously, the UN had tasked the ICAO with coming up with a scheme to tackle civil aviation emissions. In 2016, they announced their plan to introduce a global emissions marketplace for aviation, known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA for short). The scheme will cover international flights only, with domestic flights deemed out of scope, potentially to be covered by individual nations' own carbon markets (if they exist).

This is a multi-phase scheme designed to gradually trial offsetting aviation emissions. The initial 'pilot' phase runs from 2021 to 2023, and is voluntary - states can opt in if they desire. The actual 'first' phase runs from 2024 to 2026, and is also voluntary. The second phase, running from 2027-2035 will be mandatory. For the two phases, only flights between states that have opted in will be monitored and included in the scheme. Despite the voluntary nature of these phases, 76 states have officially registered to participate, who represent approximately 76% of international aviation activity (as measured in Revenue Tonne Kilometres (RTKs)).

Although the second phase is mandatory, there are a number of exemptions - states with less than 0.5% of global activity (in RTKs); Least Developed Countries; Small Island Developing States; Landlocked Developing Countries; and finally states that fall in the bottom 10% of aviation activity, when states are ordered by activity, greatest to smallest. These exempt countries and states can volunteer to participate if they desire.

Goals

All states running international flights, that produce annual CO2 emissions greater than 10000 tonnes, will be required to record, verify and report their emissions to the ICAO from 2019. The sum of all these emissions, for the year 2020, will form the baseline, and participating states will have to offset all emissions above that amount.

Whilst the ICAO have listed criteria for valid offset credits to meet, at the moment they lack specifics, so it remains to see how strict the ICAO will be on the types of projects and offsets they will accept against aviation emissions.

Criticisms

CORSIA has been criticised as too little, too late. There is no overall cap on aviation emissions, meaning that the measure will not stop aviation emissions growth as the industry grows, and there is no forcing function to encourage reduction in emissions. Participation is also limited - Russia and India, two of the world's largest emitters, are not participating. Neither is Brazil. The scheme also only covers international flights, around 60% of aviation emissions. Whilst this is not a problem in the EU, which covers intra-European flights under its ETS, no other countries currently cover aviation, so these flights are simply not captured. The original resolution from UN, from which CORSIA was created, asked the aviation industry to assess how much of the global carbon budget (for holding temperature rises to 1.5-2°C) it would consume. The ICAO deleted this from the final text, quietly ignoring the question.

Certification schemes

One of the tricky elements when looking at carbon offsets in particular is whether the offset is actually worthwhile. If you’re purchasing an offset for one ton of CO2, ideally that offset definitely equates to one ton of CO2 being removed from the atmosphere. But what does that even mean? And how do you quantify that? That’s where certification comes in.

There are a wide variety of voluntary standards for certifying offset schemes, which involve collaboration between emitters, regulators, environmentalists and the project developers themselves. Well known standards include: Voluntary Carbon Standard Verified Carbon Standard (now known as Verro) Gold Standard Biodiversity Standard And many more

This makes choosing offset schemes really hard, as you need to figure out what each standard looks for in a project - are these two certification standards more or less the same, but geographically distinct, or are they looking at entirely different factors when assessing a project?

Additionality

Carbon offset projects come in many forms, including projects such as reforestation, protection of wild spaces, destruction of greenhouse gases, and many more. I’ll cover some of the criticisms of some of these specific classes of offset elsewhere, but one important factor to all offset projects is additionality. What this means is: if the project didn’t exist (capturing revenue from selling carbon offset credits), would the benefits of the project still happen anyway? For example, if the project involved reforesting an area, but the project developers would have received money to reforest the area already, then potentially the project hasn’t added any additional benefit - the carbon credits aren’t paying for extra emissions removal capability.

There also must be consideration of the local community. There are cases recorded of authorities evicting local families and destroying their homes in order to use the land for a carbon offset project. Large hydroelectric power projects are also not considered eligible in some schemes due to their large-scale negative effects on ecosystems.

Lifespan of carbon reductions

Many carbon offset projects involve forestry. This is a bone of contention for some as trees are rarely a permanent carbon sink. Trees can be cut down, burned, and the carbon re-released into the atmosphere. Especially in the long term, beyond the lifespan of the offset project, there’s no guarantee that trees planted will remain that way, or that forest replanted or protected will stay that way. In the case of trees, there are a number of other factors at play as well. Mature trees tend to absorb carbon less quickly than growing trees, meaning that the rate of carbon being absorbed will decrease. Tree planting projects may also sell the credits for their sunk carbon before the trees have been planted, meaning that the offsets may be for reductions that have not yet taken place (and should something happen to the project, those reductions might never take place).

Who accepts what?

Another factor to consider is what projects are accepted where. I mentioned that South Korea’s carbon market only currently accepts offsets generated within the country. The EU also has strict criteria for what types of offset project are allowed. For example, CERs and ERUs generated from nuclear projects cannot be used, nor credits from land-use, land-use change and forestry (LULUCF) projects. In 2011, the EU also stopped accepting credits from projects involving the destruction of HFC-23 (I’ll talk more about this in a bit).

Criticisms

Despite their increasing adoption across the globe as a mechanism for monitoring and reducing emissions, carbon markets, offsets and credits are not without criticisms. Many of the criticisms target offsetting as a mechanism, but there are also arguments levelled at markets and caps as a whole that are worth covering.

Carbon Markets and Credits

Many of the arguments against carbon markets that don't dismiss the value of tackling emissions often focus on the value of a cap-based credit scheme versus a carbon tax. A carbon tax works in a similar manner in some ways - emissions are monitored and reported, then some central body, likely government, sets a price per unit of emissions, and charges that to every polluting entity. Taxes essentially fix the price of carbon, but allow the amount to vary, whereas a cap-and-trade system will cap the total amount of emissions, but allow the price to vary.

Credits versus Taxes

Taxes are, in theory, easier to implement and enforce than a cap-and-trade program, as there are less moving parts - having to not only track emissions but issue permits, set up a secure trading system is a significant extra overhead. In a taxation system, prices are fixed, which makes it easier for investors to make economic decisions - there's less variability to account for.

Also, if emissions are cheaper than expected, then a carbon tax provides a continuing price signal to push emissions still lower, whereas a cap-and-trade system will not incentivise further cuts once the cap has been met. An example of this would be economic downturn - the economic recession in the late 2000s left the EU ETS with vast numbers of excess carbon credits, which caused issues in the system in following years. Carbon taxes arguably also incentivise the development of new technologies over cap-and-trade systems, as the former taxes all carbon equally, whereas the latter will encourage 'quick gains' - reducing emissions in the cheapest way possible - potentially leaving crucial (but expensive) systematic changes for further down the line.

On the other hand, cap-and-trade systems introduce a certainty that a given emissions target will be met, as with a yearly reducing cap, there is a clear roadmap from the current state to the desired target emissions level. They also reduce some pricing friction, as the price is set by the market rather than by some central body.

Ultimately, there's no right answer - both are valid tools in reducing emissions, and have different advantages and disadvantages. A number of countries have implemented carbon taxes, some as an alternative and some in addition to carbon trading schemes. As with all schemes at a governmental/global level, the decision is immensely political, and there are a huge number of factors to trade off when deciding strategy.

Carbon Offsets

Carbon offsets are seen as a key element in carbon trading schemes, but also have extensive criticisms levelled at them. Some come down to specifics of implementation - a number of early schemes have highlighted areas where loopholes can be exploited - but some are more general.

One major criticism of offsets is that they are a form of colonialism. They allow rich countries to carry on polluting in the same manner as always, by offsetting with projects in developing countries. Meanwhile, developing countries are only allowed to develop very specific sustainable projects and so are stunted in their development. Ultimately, carbon offsetting doesn't address the root cause of emissions, allowing companies to pay off their emissions - for example the aviation industry in the EU ETS merely offsets its emissions, and otherwise carries on as usual.

Offsets can also end up providing some perverse incentives. For example, one type of offset originally identified as worthwhile was the destruction of HFCs/PFCs - dangerous greenhouse gases used as refrigerants. However, in one case in China, a company generated $500 million in carbon credits by building a $5 million incinerator to burn HFCs. Incentivised by these enormous profits, other factories sprang up to increase production of HFCs to generate more carbon credits. This not only created credits for no real benefit, but the huge number of offsets also had a knock-on effect on the carbon credit market.

In another example, a Nigerian oil company planned to generate electricity from waste gas from one of its oil plants, instead of flaring (burning) the waste gas. This would generate some 1.5 million tons of carbon credits. However, flaring of gas is actually illegal in Nigeria, so essentially the offset scheme is paying the company to not break the law. One activist described the activity as "like a criminal demanding money to stop committing crimes".

I've already mentioned indigenous people being mistreated under carbon offset schemes - with governments evicting locals to install reforestation schemes to gain the money from credits.

Many of these issues can be tackled by proper certification, but as already mentioned, there are many certification bodies, and they all look for different criteria. Whilst some will look for benefits to local communities, for additionality, for long term, measurable benefits, not all are so scrupulous. Indeed, a report by the Stockholm Environment Institute found that around 80% of UNFCCC Joint Implementation projects were of low quality. It was suggested that some of the projects may not even exist at all.

These are but a few of the arguments levelled at offsetting. For more reading in this area, I'd encourage a scan through the excellent Wikipedia page on the subject - it has many more examples and other categories of issues that are worth bearing in mind.

Energy certificates

A related system to carbon credits that is worth mentioning is energy certificates. These exist in several countries around the world, as a mechanism to try and encourage renewable energy growth and make electricity more 'green'. Usually, these consist of a certificate, equivalent to a unit of electricity (e.g. 1MWh), that are allocated to renewable energy providers in proportion to the energy they provide to the grid. Suppliers, who may be under obligation to provide a certain percentage of 'green' energy, then purchase these certificates, as they generally cannot directly ascertain the provenance of the electricity in their shared grid.

Renewable Energy Certificates (RECs) - USA

In the US, a number of states impose regulations stipulating that a certain percentage of energy provided must come from green sources. This is fulfilled by electricity providers purchasing RECs from renewable energy providers. Some companies also purchase RECs to offset their own electricity usage. A number of the larger technology firms like Microsoft, Amazon and Google do this to offset the energy that they use from the grid.

Renewables Obligation (RO) - UK

This similar scheme is an obligation on licenced electricity suppliers to source an increasing proportion of their electricity from renewable sources. This is carried out through the use of Renewable Obligation Certificates (ROCs), similarly generated by renewable energy providers and sold to suppliers. If suppliers fail to have enough ROCs, they have to pay into a buy-out fund per MWh they are short, which is adjusted based on RPI. This fund is then split up amongst those who generated the ROCs.

The ROCs allocated per MWh depends on the type of renewable. For example, offshore wind is 2ROCs/MWh, onshore wind is 0.9 ROCS/MWh, and sewage gas-fired plants are 0.5 ROCs/MWh.

Personal carbon trading

Personal Carbon Trading is another system I came across in the course of researching this post. This is a concept where every individual in a nation is assigned carbon/emissions credits, on a roughly per capita basis, within national carbon budgets. They then redeem these when using energy or buying fuel. There have been a few different versions of this concept proposed, but none have thus far reached beyond the research stage. Potentially this could be an interesting idea, as it could help with economic inequality, as rich people often use more energy/generate more emissions than poorer people, so potentially those who use less could sell their credits to the richer, higher-emitting people in society (whether it would actually work out that way would need to be tested carefully, to avoid inadvertently burdening those at the bottom of society with more costs and obligations).

The end, at last

So there you have it - carbon credits, carbon offsets, and carbon markets. There's a lot more here that I didn't dive into, but hopefully this clarified some of the ins and outs of what is a complex and murky field. There's definitely scope for simplification here, but anything that involves legislation, particularly international legislation, gets complex and messy fast, and where there are entrenched interests (industry, desires for growth, to mention but a couple), there's a lot of scope for push back and inconsistencies.

Given all this complexity, I may have made some errors or misrepresented things, despite my best efforts. If you notice anything that seems incorrect, do let me know!