Policy Studies Energy and Environment

Importance of Well-Functioning Markets in Unlocking Carbon Offset Opportunities


Philip Rossetti
Resident Senior Fellow, Energy

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Key Points

1. There are a lot of potential climate benefits in agriculture that farmers could be adopting, but the fact that the market is flooded with potentially fraudulent carbon credits stifles the function of the markets in bringing this behavior out.

2. The market is a preferable tool for bringing about emission mitigation in the agriculture industry because there are many private investors that are willing to cover the cost of emission abatement, so improving market structure can be a big benefit here.

3. We’ve seen historically a lot of innovation in U.S. agriculture, and if customers of U.S. agriculture products value environmental outcomes then we’re poised to be a leader in fulfilling those consumer demands because of how efficient U.S. agriculture is.

Executive Summary

Voluntary carbon markets harbor significant opportunities to further incentivize emission abatement in the agricultural and forestry sectors of the U.S. economy. Prior analysis of these opportunities from The Breakthrough Institute and the Environmental Defense Fund highlights that the potential for future emission abatement by 2030 is between 535 million metric tons of carbon dioxide equivalent (CO2e) and 1.1 billion metric tons of CO2e. These values are near to or exceed U.S. annual agriculture emissions, which are 589 million metric tons CO2e. However, we note that existing carbon markets are unlikely to achieve these outcomes on their own, as farmers report not being offered enough funds to incentivize changes in behavior.

We hypothesize that a significant factor in the low cost of carbon offsets available in markets today, and consequently the low level of payments offered to farmers for altering farming practices, is due in part to the complexity and opacity of existing carbon markets. Lack of clarity as to the quality and additionality of carbon offsets that are widely heterogeneous creates a fundamental information deficiency problem, and the costs of remedying such deficiencies may exceed the potential value to the consumer purchasing the offset. As a result, low-quality offsets flood the market and depress prices, which directs capital away from more certain emission abatement opportunities. We note that one estimate of the effect of tighter requirements on carbon offsets would increase prices by up to 3,000 percent, indicating that low-quality offsets may have a substantial negative effect on the proper operation of carbon markets, despite a high willingness among consumers to undertake voluntary actions to achieve carbon neutrality.

Opportunities to address these challenges in carbon markets arise through new programs, such as the Carbon Offsetting Reduction Scheme for International Aviation (CORSIA) and the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM). This paper notes that proper implementation of these programs in valuing life-cycle emissions may also show the benefit of U.S. products that are comparatively lower-emissions than competitors. As an example, we show that U.S. beef is only a third of the emissions per kilogram of meat compared to Brazilian beef, which is the next largest global producer of cattle meat.

For policy recommendations, we note three key opportunities:

  1. Utilize the new authorizations of the Growing Climate Solutions Act to improve the transparency and credibility of U.S. agriculturally-related offsets. This could alleviate information deficiencies, improve consumer confidence in offset quality and put pressure on providers of competing low-quality offsets to also improve certainty in their offset benefit.
  2. Engage with United Nations (U.N.) organizations and the EU in their implementation of programs that value international emission outcomes through offsetting or emission intensity in order to develop standards of accounting that emphasize certainty of quality, additionality and accuracy of emission accounting. This will likely show that U.S. products have substantial advantages over foreign competitors, and incentivize that environmentally-focused capital be directed toward genuine emission-abating activities.
  3. Avoid heavy-handed regulations on firms participating in voluntary carbon markets, which could ironically raise the costs of climate action and reduce investment in emission-mitigating activities.

Read the policy study, “Importance of Well-Functioning Markets in Unlocking Carbon Offset Opportunities.”

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