The Paris Agreement brings about two fundamental changes that affect the case for carbon offsets in the transition to a low-carbon economy – high ambition and universal scope. The agreement introduces ambitious long-term targets and demands climate action and engagement from all parties to the Agreement to ultimately reach net zero targets by 2050.

So how can offsets be effectively integrated into compliance schemes in a way that upholds the principles of environmental integrity and raises climate ambition post-2020?

Rethinking the role of offsets in compliance schemes

We need to start by moving away from the zero-sum thinking of the past. These big shifts in the scope and ambition of climate goals mean that the way in which offsets are integrated into national compliance schemes will need to change fundamentally:

  • Offsets must go above and beyond: ensuring environmental integrity and addressing perverse incentives alone will not be sufficient – offsets must contribute to raising climate ambition as part of the global sustainable development agenda
  • Offsets must do more to support national climate pledges: international offsetting should take into account the long-term effects of mitigation activities and be aligned with national climate policy agendas

There are various ways in which offsets could contribute to raising ambition on emission reductions on both the supply and demand side. However, without a carefully designed offset scheme, the use of offsets risks could have the opposite effect.

How to use offsets effectively

Based on lessons learnt from the past, and principles on the use of offsets in the future, the Wuppertal Institute and South Pole have identified key factors that help ensuring the successful use of offsets. These 'success factors' can be of use especially in the design phase of the offset scheme, particularly when deciding on its scope.

1 - On the demand side, the integration of offsets into compliance schemes should be limited to sectors of the economy where:

  • the cost of mitigating emissions is high;
  • today's technical mitigation potential is limited; and
  • there is a real risk of negative economic effects of high carbon prices, such as compliance facilities shutting down or relocating (leading to carbon leakage and job losses), thereby justifying the use of cost containment measures.

2 - On the supply side, offset approaches should focus on sectors that have a considerable yet untapped mitigation potential that can only be realised:

  • at high costs that would be impossible to cover without an ambitious carbon pricing scheme; and
  • by making use of technologies that are not widely used or available in the region, thereby facilitating technology transfers.

More generally, developing offsets should also be focused on sectors where:

  • achieving emission reductions may be complicated due to a potential political backlash around stringent climate policies or lack of on-the-ground capacity to undertake emission reductions (e.g. poor communities).
  • offset activities can help achieve multiple sustainable development co-benefits.

These success factors on the demand and supply side can also inform specific design parameters of the offset approach, such as the definition of crediting baselines and the process of demonstrating additionality.

Getting offsets right post-2020 will be a balancing act

Taking these success factors into account during the design and operation of offset schemes maximises their impact. Policymakers can promote the positive contributions of offsets while hedging against adverse impacts, such as carbon leakage, or compromising the environmental integrity of offsets, or of the compliance scheme they are used in.

A soon-to-be-published UBA report by Wuppertal Institute and South Pole will provide more detail on specific design aspects, including instances where:

  • offsets could be used as an alternative to free allocation in emissions trading systems (ETS); or
  • offsets could contribute to a sectoral transformation, if a sectoral link between demand and supply side is established.

The bottom line: research indicates that offsets could play an important role in plugging the emissions gap to meet the Paris targets. The key condition for success is that policymakers design ambitious and robust schemes that balance out benefits and risks.

Do you have more thoughts or questions on the relevance and process of the actual implementation of offset approaches? Share your observations at the dedicated webinar by Innovate4Climate at the end of September –
register here

Blog series: Can offsets be a solution to global climate inaction?

This blog is part of 3 post series that highlights key findings from a research project funded by the German Environment Agency and jointly conducted by Wuppertal Institute and lSouth Pole. The reports on which these blogs are based will be published on the UBA website and the findings will be further discussed in an I4C webinar on “How to raise ambition through carbon offsetting? Lessons learned and post-2020 prospects" at the end of September 2020.

Read the other posts in this series here and join the dedicated webinar to find out more.