Why are carbon offsets priced differently?
There are four elements that impact the cost of carbon offsets including additionality and permanence
This year, you have decided to make the word a better place! You want to do your bit to bring society to carbon neutrality. You have measured your company’s carbon footprint, changed the way you operate your business to reduce emissions, and you have reached the last stage: Offsetting these remaining emissions that are so hard to get rid of. This is exciting to have come so far!
But now that you are looking at carbon offsets, you see prices all over the place. It ranges from less than a dollar to several hundred dollars. And you wonder: “Why are carbon offsets not all sold at the same price?”. Every carbon offset represents a reduction of one tonnes of carbon from the atmosphere after all…
Well, the reality is that not all carbon offsets are the same, because they are backed by different projects, with different specificities. For example, a carbon offset could be generated through a reforestation project, a waste to energy project, a direct air capture project etc. These different projects all have features that will appeal more or less to different buyers. Here are four elements that will impact the price of a carbon offset: Additionality, permanence, leakage and co-benefits.
Carbon offset projects are additional if they would not have occurred without carbon finance. In the case of direct air capture technology, it is pretty obvious that carbon removal wouldn’t have occurred without these man-made machines. However, in the case of reforestation, developers must measure the removals claimed against a baseline. The level of this baseline is debatable, which is why some buyers prefer to pay a higher price for clearcut carbon removal projects (e.g. direct air capture).
Permanence refers to how long the carbon is stored for. Carbon stored in a tree will be released once the tree dies; and this is likely to happen sooner with a tree than when carbon is stored in rocks, hundreds of meters under the ground. That is why, carbon offset buyers tend to prefer projects where the storage of the carbon is guaranteed for longer.
Carbon offset projects are nicely planned for the years to come, but what happens when there is an accident? This is the concept of leakage, which refers to carbon being released into the atmosphere as a result of an accident - a wildfire for instance. That is why projects with lower likelihood of leakage tend to sell at a higher price.
Beyond simply reducing the amount of carbon in the atmosphere, ideal projects will be the ones that pursue co-benefits by advancing sustainable livelihoods, building climate resilience and protecting biodiversity. Carbon offset buyers tend to be willing to pay more for projects with co-benefits.
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