Voluntary Offsetting: Credits and Allowances

The impacts of climate change are increasingly visible all over the world. In recent years, the public has become aware of the threats it poses, as well as the gap between the climate ambition required for reaching the Paris Agreement targets and the pledges embedded in the existing set of Nationally Determined Contributions. This awareness has driven stronger voluntary action. The voluntary carbon market allows state and non-state actors such as private firms, non-governmental organisations and citizens to purchase and cancel carbon units to offset their emissions. To date, the supply of units in these markets has been almost exclusively in the form of credits generated by projects under programs such as the Gold Standard, the Verified Carbon Standard, and the Clean Development Mechanism. These programs and activities can help reduce emissions and provide incentives that underpin sustainable development in the global South. However, questions have been raised as to the quality of mitigation delivered by some of them.

More recently, actors wanting to offset their emissions voluntarily have also looked into the possibility of purchasing and cancelling allowances from emissions trading systems (ETS). By removing an allowance from the market that could otherwise be used to emit a tonne of CO2, the cancellation can reduce the total quantity of emissions allowed under the ETS by the same amount. The environmental effectiveness of such a cancellation will depend, however, on the design of market stability instruments (MSIs) which are integral elements of all existing ETS. So far, scarce attention has been paid to the interaction between voluntary offsetting via allowance cancellation and MSIs.

In this project, commissioned by the German Environment Agency (UBA), adelphi and the Öko Institut partnered to research the merits and challenges of credits and allowances as units for voluntary offsetting. The project team created a framework to elucidate the relevant dimensions along which credits and allowances can be compared when assessing their suitability for voluntary offsetting purposes. In addition, adelphi experts have drawn on their vast experience with carbon markets around the world and deep understanding of these systems’ MSIs to deliver crucial insights into the complex interactions between MSIs and voluntary offsetting. To do so, our experts developed a detailed case study of the Market Stability Reserve of the EU ETS as well as an overview of the MSIs implemented in ETS around the world.

To address the challenges from MSIs in the specific context of the EU ETS, we find that voluntary buyers aiming to purchase allowances could adopt a ‘buy-and-hold’ approach, for example where a service provider purchases an allowance and holds it until the MSR no longer effects invalidations.

Ultimately, the differing interests and priorities of actors in the voluntary carbon market provide space for both credits and allowances. On the one hand, offset purchasers with a strong focus on international cooperation, the generation of co-benefits in developing countries, communicability with a clearer narrative, and a preference for the promotion of certain technologies may find credits more attractive. Credits often have lower prices but may carry integrity risks due to uncertainty in the establishment of additionality and crediting baselines, which may in turn also create reputational risks. On the other hand, actors in the voluntary market who prefer a higher certainty of the direct emission impact may favour allowances. Allowances may also be preferred by buyers keen to promote innovation or drive emissions reductions ‘at home’, as most buyers stem from developed countries. The main challenges of using allowances for voluntary cancellation are that emission reductions hinge on the stringency of the aggregated ETS cap over time, and that MSIs need to be appropriately considered.