Carbon Offsets: The Origin Story
Introduction
In 1856, Eunice Foote first demonstrated the insulation properties of carbon dioxide. A century later, scientists at the world's largest oil and gas companies began to realize the significance of this discovery and how fossil fuel use was imperiling the earth's natural balance. Yet, over 150 years after this initial discovery, we find ourselves with 1 trillion excess tons of CO2 in the atmosphere and no unified plan to address the imbalance.
Carbon offsets have developed as one mechanism to facilitate the reduction and removal of emissions from the atmosphere. These offsets, and the markets that structure their sale and exchange, stand to play a major role in translating growing public sentiment on climate action into tangible projects and technological advancements. These market and offset structures are also important proof points for the development of effective and scalable regulatory frameworks as governments play catchup after years of footdragging. This piece will give context on the events that have shaped carbon offsets as we know them today.
Growing body of knowledge
The seeds of understanding human-caused climate change were sown in the mid-19th century with the work of Eunice Foote and John Tyndall. However, it wasn't until 1896 that Svante Arrhenius made a breakthrough. Through extensive manual calculation, he demonstrated that changes in atmospheric CO2 could significantly impact global temperatures. While initially focused on the risks of Ice ages posed by reduced atmospheric CO2, his work, informed by Arvid Högbom's findings about the magnitude of human-driven CO2 emissions, led him to estimate a potential 6°C warming from doubling CO2 levels. This marked the first scientific warning about industrial activity's impact on global temperatures.
Despite these early findings, Carbon Dioxide and greenhouse gases garnered little attention until 1938, when Guy Stewart Callendar correlated a 10% rise in atmospheric CO2 with observed global warming. While initially met with skepticism, Callendar’s efforts saw growing acceptance and a surge of interest in the post-World War II era as military funding for atmospheric research, driven by Cold War concerns, exploded. This new wave of attention brought significant advances in the field, with scientists like Gilbert Plass, Hans Suess, Bert Bolin, Erik Eriksson, and Roger Revelle contributing to the growing body of evidence.
Roger Revelle, appointed Director of the Scripps Institution of Oceanography in 1950, recruited Hans Suess and later Charles David Keeling to further develop their research. Keeling's groundbreaking use of infrared technology at the Mauna Loa Observatory in Hawaii led to the creation of the Keeling Curve in 1958. The graph showed the continuous accumulation of CO2 in the atmosphere, an unambiguous evidence-backed visualization tying human use of fossil fuels to atmospheric changes. The Keeling Curve cemented scientific consensus and opened a new chapter in which scientists began the Sisyphean task of convincing governments, corporations, and the general public of our collective need to address climate change.
Forming the foundation
By the 1960s, evidence of human-driven climate change was both clear and compelling. Yet, warming was seen as a much smaller risk compared to smog, acid rain, and other localized threats. Highlighting the shifting perspectives, in a 1965 speech, Frank Ikard, the president of the American Petroleum Institute (API), acknowledged the seriousness of climate research, warning that it would raise fears and demands for action. Developing mechanisms to manage and regulate these risks became an area of keen focus for economists and policymakers.
Ronald Coase's 1960 paper, "The Problem of Social Cost," offered a potential solution. It explored the use of market mechanisms, like emissions trading, to address environmental issues. While Coase’s paper examined the utility of these mechanisms in situations with clear property ownership, concrete risks, and clear regulation, the reality was far more complex. The Environmental Protection Agency(EPA) was launched in 1970 and quickly developed a stone “command and control” approach to regulation, an approach that industry strongly opposed. The EPA's exploration of emissions offsets for sulfur dioxide and nitrogen oxides, culminating in a 1977 trading system, marked an early step towards market-based solutions.
As scientific evidence of climate change mounted, the need for more robust frameworks became apparent. However, despite the urgency, strong opposition from the fossil fuel industry, concerned about profit margins and regulatory burdens, coupled with a political landscape influenced by campaign finance, made it difficult to translate scientific consensus into effective policy. The establishment of the Intergovernmental Panel on Climate Change (IPCC) in 1988 was a critical milestone, providing authoritative assessments of climate science and underscoring the urgency of addressing greenhouse gas emissions.
The same year, the World Resources Institute (WRI) commissioned Dr. Mark Trexler to develop the first land-based carbon offset project. This pioneering effort, funded by Applied Energy Services (AES), involved creating an agriforest in Guatemala to offset emissions from a new coal-fired power plant in Connecticut. Although primarily philanthropic, it demonstrated the potential for carbon offsets to mitigate environmental impacts, laying the groundwork for future projects.
The early days
The pioneering agroforestry offset project developed by the World Resources Institute (WRI) and Applied Energy Services (AES) in 1988 marked a pivotal moment, demonstrating the practical potential of carbon offsets. As Sheryl Sturges of AES articulated, the project represented "a global warming insurance policy," reflecting the growing recognition of the need for innovative solutions to address climate change.
This early success catalyzed further exploration of market-based mechanisms, with several European nations, including Norway, Finland, Sweden, and Poland, adopting variations of carbon taxes between 1990 and 1991. These initial policy implementations paved the way for broader international collaboration and more ambitious frameworks.
The establishment of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 and the subsequent annual Conference of Parties (COP) meetings provided a global platform for nations to negotiate and coordinate climate action. These forums played a crucial role in shaping the evolution of carbon markets and advancing climate science.
A major breakthrough came in 1997 at COP3 with the creation of the Kyoto Protocol, which introduced three "flexible mechanisms" for nations to engage in carbon trading: emissions trading between countries with binding targets, the Clean Development Mechanism (CDM) for developed countries to purchase credits from projects in developing countries, and Joint Implementation (JI) for projects carried out between developed nations.
These mechanisms laid the groundwork for the development of compliance carbon markets, with the European Union (EU) taking the lead in 2003 by agreeing to establish an ambitious Emissions Trading Scheme (ETS). Despite initial challenges, the EU ETS represented a significant step towards implementing a large-scale cap-and-trade system to achieve emissions reduction targets under the Kyoto Protocol.
While progress was often tempered by setbacks and growing pains, the period from the launch of the AES offset project in 1988 to the launch of the EU ETS in 2005 was a time of critical international collaboration aimed at translating the concept of carbon offsets into practical policy frameworks. These early days laid the foundation for the expansion of both voluntary and compliance carbon markets, reflecting the increasing urgency to address climate change through a combination of regulatory measures and market-based incentives.
21st century Carbon Offsets
In its early years, the EU ETS faced significant hurdles, including a lack of reliable baseline data and low carbon prices that failed to effectively incentivize emissions reductions. These growing pains highlighted the importance of robust monitoring, reporting, and verification (MRV) systems, as well as the need for appropriate price signals to drive meaningful change.
The development and launch of the EU ETS also provided crucial insight to the potential volatility of carbon markets. In 2008, amid the global financial crisis, the value of global carbon markets surged by 84% to $118 billion, with the EU's allowances accounting for 80% of the value. This "carbon rush" was followed by a "carbon panic" in 2012, as the Clean Development Mechanism (CDM) credit prices plummeted to less than $3 per tonne of CO2 due to oversupply. These price fluctuations exemplified the delicate balancing act required to establish effective cap-and-trade systems, where caps must be set at levels that drive emissions reductions without creating excessive market distortions or economic disruptions.
The efficacy of carbon pricing mechanisms, whether cap-and-trade or carbon taxes, hinges on several factors, including the price level, coverage scope, revenue allocation, and complementary policies. Experience from early adopters like the EU, California, and the Regional Greenhouse Gas Initiative (RGGI) in the United States has demonstrated the importance of coordinated, well-designed policies that provide long-term certainty and avoid market distortions.
As the global momentum towards decarbonization accelerated in the wake of the 2015 Paris Agreement and initiatives like the 2016 Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), carbon markets experienced growing volatility but few were prepared for the market explosion that came in 2020.
Meteoric rise and the challenge ahead
The official implementation of CORSIA in 2019, along with growing corporate and government commitments, drove a rapid acceleration of carbon market activity, culminating in the boom of 2020 and 2021. However, this rapid growth exposed significant limitations in the existing framework.
In 2022, intense scrutiny arose around the quality of some avoidance offsets, largely driven by investigative reports from sources like The Guardian. These articles cast a harsh light on the active management of verified methodologies and the registries' monitoring of additionality for offsets. The scrutiny questioned the legitimacy and effectiveness of many avoidance offsets, leading to a crisis of confidence and a subsequent collapse in parts of the carbon market. This scrutiny highlighted the need for more stringent oversight and accountability within the market.
As a result, there has been a shift in focus towards removal credits, where results are more measurable and concrete. Meeting ambitious emissions reduction targets requires not just slowing down emissions but actively reversing the damage already done. In response to these concerns, robust Monitoring, Reporting, and Verification (MRV) systems have become a central pillar of carbon market integrity. Reliable data is essential to ensure that offsets represent real, measurable emissions reductions or removals. Additionally, registries and regulations are being overhauled to improve transparency and accountability within the market.
The evolution of carbon markets reflects the ongoing struggle to find effective solutions to a complex global challenge. Early successes were followed by periods of volatility and market corrections. Through these experiences, the carbon market has become more sophisticated, with a growing emphasis on environmental benefits, robust accounting methodologies, and clear regulatory frameworks.
While challenges remain, the carbon market holds promise as a tool to incentivize emissions reductions and removals. As the market continues to mature, its ability to contribute to a sustainable future will depend on ongoing innovation, effective regulation, and a relentless focus on environmental impact.
