Robust reporting principles to improve today’s carbon-trading markets.
of human-created greenhouse gas emissions: burning fossil fuels for energy, industrial chemical processes unrelated to energy production, and agriculture. Even with advances in “clean” energy technologies, the world remains heavily dependent on fossil fuels, and we do not have a realistic path to sustaining society without using current agricultural or industrial chemical processes, which together account for over 25% of GHG emissions today.
At present, most offsets are purchased by firms to reduce their reported net emissions and to demonstrate that they are on a trajectory to net-zero status. Companies also use offsets to introduce additional supply in government-run cap-and-trade systems by claiming that the captured carbon in the offset creates a right to emit beyond the regulated cap.
First, they require that offset project managers confirm that they have the capacity to replace or refund the value of offsets should things go wrong. That mitigation device, however, has limited value. Certificate buyers have already retired their certificates and taken credit for the captured carbon immediately after purchase; they have neither an incentive to demand the replacement of any carbon lost through impairment nor a legal claim related to a retired certificate.
This principle follows directly from a frequently overlooked truth: The only emissions entering the atmosphere are direct emissions—those labeled by the Greenhouse Gas Protocol as Scope 1. The principle states that a valid offset to a given quantity of Scope 1 emissions must remove an equivalent quantity of GHG already in the atmosphere and sequester it for at least as long as the underlying emissions are expected to remain in the atmosphere. Such offsets are known as removal offsets.
Principle 2: A company may buy or sell removal offsets, but it may not similarly trade E-liabilities. We now turn to principles for timing when an offset producer may recognize and trade captured carbon as an E-asset, and when such assets may be used to net out E-liabilities. We offer a hypothetical case to explain the principles.
Principle 4: A company shall net a given quantity of E-assets against its E-liability account only when that quantity of GHG has been actually removed from the atmosphere and indefinitely sequestered. Principle 4 also states that GHG must be sequestered “indefinitely,” which addresses a particularly challenging aspect of netting due to the duration of emissions liabilities. Estimates from NASA suggest that man-made carbon emissions persist in the atmosphere for at least 300 years , an exceedingly long time horizon compared with that of virtually all other commercial contracts.
Unlike typical tangible assets, some E-assets may become more valuable than originally expected, such as when the forest grows larger and faster than anticipated, enabling it to capture and store more carbon. Thus, Principle 5 also allows for accretions in value. Full application of our five principles would require that the implicit owner of the offset recognize the E-liability from the carbon released into the atmosphere by the negligent, illegal, or unexpected activity. This accounting treatment, while seemingly unfair to the owners, provides them with an incentive to capitalize currently unrecognized offsets, monitor and manage the offsets for continued carbon sequestration, and pursue legal remedies against those causing their destruction.
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