In our current post-Paris world, the only thing we know for sure about offsetting post-2020 is that it will likely look very different from today. This large-scale shift and the optimism surrounding offsetting going forward were the topics of last week’s panel discussion at the Carbon Expo conference moderated by Jonathan Shopley, Managing Director at Natural Capital Partners.

Some fundamental questions were under discussion: Will most countries insist on keeping emission reductions achieved domestically for their own use to help meet their Nationally Determined Contributions (NDCs), regardless of where the financing originates? Or rather will they welcome international project development in their uncapped sectors along with the sustainable development impacts typically associated with high quality offset projects? Expert panelists from various areas of the carbon market including the United Nations Framework Convention on Climate Change (UNFCCC), Gold Standard, Verified Carbon Standard (VCS), Climate Resources Exchange (CRX), and South Pole Group, debated the issues.   

Details are needed

As usual, the devil is in the details, specifically related to Article 6 of the Paris Agreement. Article 6 clearly states that Parties are allowed to cooperate on the implementation of their NDCs, and one aspect of this cooperation can be the use of internationally transferred mitigation outcomes (ITMOs).  Most believe that the parties to the agreement will seek to use market-based mechanisms alongside other forms of financing to create their intended mitigation outcomes.

The agreement goes on to be very specific regarding the avoidance of double counting, to ensure that where co-operative approaches are used between governments, mitigation outcomes are not reported twice. However, there is still work to be done on how these rules work as programs are implemented and to ensure that private finance continues to flow with confidence. The panel noted that whatever system is designed must be robust, flexible, and durable.  There must be a clear plan for accounting when governments place targets on specific sectors and the mitigation outcomes are also likely to be transferred to non-state actors both domestically and internationally.  

The need for private sector finance remains as clear as ever

The need for private sector finance and market-based mechanisms remains as clear as ever, particularly given the backdrop of lack of public finance and the slow pace at which public sector commitments have materialized. The Green Climate Fund, whose aim is to mobilize $100Bn per year, is still only at $9.9Bn, of which only a fraction has actually been deployed. However market-based mechanisms are designed and implemented post-Paris, based on the timeline alone it’s fairly clear that current offsetting activities (and the need for) in the voluntary market will continue for years to come. The Paris agreement will not enter in to force until 2020, three and a half years from now, and it will take time post-2020 for rules to be clarified and for markets to further develop. What is certain is that while there will be evolution in how some regions may engage with the voluntary market, the role of voluntary offsetting will continue to be required and will continue to set precedent and highlight paths for others to follow. Panelists are also seeing increased interest in the associated co-benefits or sustainable impacts related to current offsetting activities. As compliance markets seek to commoditize emission reductions, corporates interested in the voluntary space place a high value on these additional benefits being delivered to households, communities and biodiversity. There are several initiatives under way to assess health impacts and ecosystem services along with other sustainable development outcomes, which will add greater value to corporates’ offset programs.

Offsetting will play a role

Another takeaway from the panel session is that whether it’s called “offsetting” or not, market-based mechanisms have been shown to be effective and will continue to be available post-2020 for a variety of reasons. Even though most countries will cap portions of their economies, certain sectors of most economies are inherently difficult to regulate with top down approaches like cap-and-trade or carbon taxing (e.g. land use, transportation, forestry, etc.). This difficulty provides opportunities for innovative companies within the sectors to identify and execute emission reductions projects that are additional, verifiable, and robust.

Panelists noted that we’ve witnessed the emergence of companies who strive to go above and beyond what is required of them, and this trend is likely to continue, as demonstrated by the ever-increasing voluntary offset transactions and retirements in the latest report from Ecosystem Marketplace. The upward trend continues despite the continual development of new climate change regulations in countries around the world. 

While there was unmistakable agreement in the session that the rules will be changing post-2020 and further clarification is needed, the success of market-based mechanisms to-date and the continual evolution of market-based solutions make them critical to addressing the climate issue in a post-Paris world.