Carbon Offset Due Diligence

This page assumes that you have decided to purchase carbon offsets in order to reduce your net greenhouse gas emissions, as opposed to exploring the new alternative of carbon contribution claims (for one example see:

Why Offset Due Diligence?

It would be great if offset due diligence only required verification that any given offset had been approved by one or another of the major offset standards organizations. For two primary reasons, however, that is not the case.

  • First, quite a few offset projects are being pitched today without having gone through or completed review by one of the major standards organizations.

  • Second, a substantial number of the offsets that have been approved by standards organizations in the past have later been found to be deficient as offsets. This is largely attributable to the fact that there is no way to reliably “test” for offset quality, and the subjectivity of the decision leads to a lot of inappropriate offset determinations. Offset qualification processes, for example, involve a “yes/no” determination that ignores the reality that offset quality exists across a continuum, as illustrated below, with no obvious point at which a “yes/no” threshold should be placed.

Given the market incentives facing project developers as well as standards organizations, including market demand for low-cost offsets, that “yes/no” threshold often gets placed well down the continuum, but offset purchasers have no way of knowing that.

The confidence continuum reflects uncertainties associated with all three of the primary carbon offset qualification criteria:

  • Additionality - are the GHG reductions or sequestration being claimed as offsets causally attributable to the existence of the offset market? Since many variables go into a given project’s viability, additionality is difficult to reliably assess.

  • Permanence - with so many offsets today involving nature-based solutions that are inherently impermanent, or at constant risk of reversal, permanence cannot be taken for granted.

  • Leakage - there are many circumstances under which market or behavioral feedbacks might undermine some, most, or all of the GHG reductions or sequestration being claimed as offsets.

The best analytical solution to the confidence continuum illustrated above, and the approach that would give offset buyers a lot of information with which to make robust offset purchase decisions, would be an offset scoring system. That way a purchaser would know whether they are being offered a “200” or an “800” score project (on a 0-1000 continuum). Such a scoring system was first proposed more than a decade ago, but has never been implemented due to how badly it would disrupt voluntary carbon markets.

A Pragmatic Due Diligence Process

It is probably unrealistic to expect most offset purchasers to do a due diligence deep dive into the environmental integrity of offset markets and projects. For anyone interested in that, a dedicated course on Evaluating Carbon Offset Integrity is available.

And in some cases due diligence can be pretty straightforward. If you're willing to pay hundreds of dollars/ton for offsets associated with an innovative Direct Air Capture technology, for example, little additional due diligence may be required.

Similarly, if someone tries to sell you voluntary U.S. Renewable Energy Certificates (RECs) generated by a windfarm somewhere in the U.S., walk away. RECs aren't actually offsets at all since they don’t involve an additionality determination, but they are widely promoted as such and have routinely been used to "create" green energy. Unfortunately, the evidence-based literature is clear that REC proponents' claims of climate change mitigation are misleading, and such energy is “green” in name only.

To carry out a slightly more in-depth due diligence review, posing the following questions to a potential offset provider can help:

  • Do the offsets result from a specific project(s)? It’s very difficult to even think about offset due diligence across pooled offsets.

  • Have the offsets been scored, and against which scoring standard? Even though the answer will be no, it’s a question that offset providers should be routinely getting until they start scoring their offsets.

  • What fraction of offset revenue goes to the offset project itself? If you’re going through a market-maker, the fraction of revenue still going to the offset project can be very high, e.g. 90%, and all things being equal that’s a good thing.

  • Are your offsets certified by a credible third-party standard like the Gold Standard? While such certification does not guarantee the integrity of offsets, offsets that have NOT been certified by a credible third-party standard generally pose a bigger challenge for due diligence.

  • Have the offsets been verified by a credible third-party verifier? If not, it poses a bigger challenge for due diligence.

  • Does the offset provider explicitly communicate information regarding offset additionality, permanence, and leakage? Some providers today argue that additionality is an outdated concept that can be replaced by better offset quantification. Walk away.

  • How was the “additionality” of the offsets determined? Offset buyers should be able to assess from provided documentation what “additionality case” was made, and how intuitively robust it is in demonstrating that the offsets can be traced back to the existence of the offset market?

  • How was the “permanence” of the offsets assessed? Offsets that are clearly non-permanent in terms of the time frame being discussed, which can be as little as 10 years, or offsets that use ton-year accounting methodologies to “create” permanent offsets from non-permanent interventions, pose a big challenge for due diligence.

  • How was potential “leakage” assessed? Offset buyers should be able to assess from provided documentation how leakage was considered, and how robust the analysis seems.

  • Have the reductions or sequestration already happened, or are you selling future reductions and sequestration? There can be perfectly legitimate reasons to buy a future stream of offsets, in fact it can be desirable from an additionality perspective, but it does raise additional “transaction risk” and due diligence challenges.

  • How do I know that the offsets are not being sold to multiple buyers? Through registries or new tools like blockchain, it should be clear that efforts have been made to protect the ownership integrity of offsets.

  • What are you doing to educate your buyers about global warming and the need for climate change policy? Very few offset providers have such information on their website, even though the opportunity to communicate such information during an offset transaction is arguably just as if not more environmentally important than the offset itself.

Our goal here is to lay out a pragmatic level of due diligence that arguably anyone can engage in. If you are putting a lot of money on the table, or have a brand that you are particularly concerned about, a more in-depth level of due diligence may be called for. If so, the Climatographers’ dedicated course on Evaluating Carbon Offset Integrity is available, as are the Climatographers through the “Contact Us” link at right.