To date, those who wish to voluntarily offset their carbon footprint have relied on credits, which are generated by emission reduction projects and traded in voluntary carbon markets. This report analyses another possible vehicle for the voluntary compensation of emissions that are difficult or impossible to abate: allowances from compliance markets.
Increases in public awareness of the threats posed by climate change, alongside a clear gap in climate ambition required to mitigate them has motivated an ever larger number of businesses, institutions, and citizens to offset their emissions voluntarily in recent years.
So far, most voluntary offsetting demand has been met by the purchase and cancellation of credits generated by emission reduction projects under baseline-and-credit programmes such as the Gold Standard, the Verified Carbon Standard, and the Clean Development Mechanism. Credit issuance under these and similar programmes continue to grow rapidly.
A lesser-known alternative is the purchase and cancellation of allowances from emissions trading systems (ETS), such as the EU ETS or the Regional Greenhouse Gas Initiative (RGGI). This option has attracted more attention recently, in part because the credit programmes face new challenges as the Paris Agreement comes into full force.
Our study assesses the pros and cons of credits and allowances in terms of their suitability for voluntary offsetting demand by different actors.
Credits or allowances?
The study finds that actors 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 the advantage of having lower prices, but may carry environmental integrity risks due to uncertainty in the establishment of additionality and crediting baselines, which may in turn also create reputational risks.
In contrast, actors who prefer the greater certainty of direct emissions impacts may favour allowances from established ETSs. Allowances may also be favoured by buyers who are mostly located in developed countries, to promote innovation or drive emissions reductions ‘at home’. The main challenge of using allowances for voluntary offsetting is that continued scarcity in the system cannot be taken for granted. Moreover, due consideration must be given to the impact of complex interactions with market stability instruments such as the Market Stability Reserve of the EU ETS. While the analysis shows that it is possible to take account of such interactions, doing so requires complicated strategies and muddles the communication of a clear narrative.
Why is an analysis of the use credits and allowances for offsetting purposes important?
There is growing interest from non-compliance actors in increasing their contribution to global decarbonisation through the purchase and cancellation of credits and allowances. More recently, financial service providers who wish to offer low emission portfolios to their clients have also been active in this space. Both groups are looking for new and innovative approaches to offsetting. Our report contributes to the analytical foundation of these approaches and facilitates the urgently needed climate action and engagement.