Last week, the Biden administration announced a framework for carbon offsets that could significantly help mitigate climate change around the world– if it can deliver the system as promised.

The voluntary carbon offset market in the United States is at a pivotal juncture, and the new guidelines announced this week are aimed at bolstering confidence and integrity in a relatively controversial climate solution. Here’s what you need to know about the latest carbon offset parameters announced this week, and the controversy around the issue.

Carbon Offset Controversy

Carbon offsets are tradable credits that companies or individuals can purchase to compensate (or “offset”) their greenhouse gas emissions by funding projects that reduce or remove emissions elsewhere. As a consumer, you may have seen these while booking flights, though many airlines have canceled these programs because they haven’t lived up to expectations.

Essentially, as this story at the New York Times pointed out in 2022, “A carbon offset needs to fund reductions that wouldn’t have happened otherwise. If you pay someone to preserve a grove, but they were never actually planning to cut it down, then you’re not offsetting your emissions. And it’s difficult to establish the facts in these cases with the level of confidence required for offset programs to work.”

When it comes to carbon offsets at the company level, many companies have long used carbon offsets as a way to claim "net zero" emissions or environmental responsibility without actually substantially reducing their own emissions.

Several studies and reports have shown that many offset projects fail to deliver real, additional emissions reductions, with some funding activities that would have occurred anyway or facing challenges in accurately measuring their impact. For example, the 2023 collapse of a major carbon offset project in Zimbabwe roiled the voluntary carbon offset market and underlined just how sketchy the market has been. Companies like Volkswagen AG, Nestle, and Loreal SG had invested in the project run by South Pole, only to discover later that most of the project offset funds had gone to just two partners, instead of the people fighting deforestation in the area.

This and a number of other high-profile failures have led (understandably) to mistrust of the system and widespread accusations of greenwashing, a practice where companies misleadingly advertise offset programs for public relations buzz rather than genuine decarbonization.

One of the key controversies around carbon offsets is that they essentially give major corporations a “license to pollute.” Carbon offsets can allow companies to continue emitting greenhouse gasses by paying others to reduce emissions elsewhere instead of addressing, challenging, and changing the root causes of their own pollution. Critics argue that this undermines incentives for direct emissions reductions and perpetuates a system where affluent nations and corporations "offload" their climate responsibilities onto poorer regions through offset projects.

In its current state, the voluntary carbon market lacks transparency, standardization, and robust verification mechanisms, allowing companies to double-count offsets and sell low-quality credits that fail to actually neutralize emissions as they claim.

The Administration's Rationale

While the idea behind the carbon offset system is solid, the current implementation is deeply flawed, which is one of the reasons that the Biden administration has decided to establish new guidelines.

The White House views voluntary carbon markets as a crucial tool in the fight against climate change, a central focus of the current administration. The new parameters announced last week provide more stringent regulations to ensure offsets deliver verifiable, additional, and permanent emissions reductions.

The administration's guidelines, while largely commonsense, aim to draw a line between "high-integrity" offsets that represent real decarbonization and avoid environmental or social harm and those that truly fall into the greenwashing category. While the current offset market is clearly deeply flawed, the administration decided not to throw the baby out with the bathwater.

There are two central ideas that underpin the new plan: Carbon trading and voluntary carbon markets, and a focus on reducing carbon emissions at the source. The Administration released a 12-page document detailing the specifics, but essentially, they’ve put their weight behind carbon trading as a vital channel for directing private finance from major corporations to climate-impacted communities in developing countries. The U.S. currently lags behind its peers in public climate finance contributions. Voluntary carbon markets are another key feature of the announcement, and the administration argues that they can act as a stepping stone towards the long-held goal of mandatory, economy-wide carbon pricing favored by climate economists.

It’s important to note that the new federal guidelines are neither enforceable nor binding, and while proponents say that these could help build a larger market for legitimate carbon markets, detractors say that because these are largely toothless and don't offer transparency or verification, the government is continuing to enable greenwashing.

The Takeaway

Carbon offsets are imperfect, but the Biden administration believes that they are one of a multitude of tools that can be used to help stem the tide of climate change. While the current announcement doesn’t amount to much more than signaling that companies large and small need to consider their climate impact, it may help everyone feel more comfortable leveraging these tools.

As Semafor points out, this is one way for the administration to signal its priorities ahead of COP25, which will take place in the fall. It doesn’t, however, fix the problems of greenwashing that have been so prevalent in the market, which was worth $1.7 billion last year. The credits won't eliminate the bad market practices because they have no actual teeth. They may, however, boost the confidence of those looking to use the market to offset their carbon footprint and let businesses know that they do need to start getting serious about reducing their Scope 1, 2, and 3 emissions. We’ll have to wait and see how things go before rendering a final verdict, but overall the announcement last week is a solid step forward in the fight against climate change.

SURVEY: What did you think of this edition? Let us know in our feedback survey here!