Understanding Carbon Offsets

How to Acquire Carbon Offset Credits

Although there are some trading exchanges that facilitate offset credit transactions, most transactions occur “off-exchange”, making price discovery difficult. The price of an offset credit can range from under US$1 to well over US$35. Prices tend to vary mostly by project type, generally with small differences between offset credit labels.[1]

Although offset credit buyers do not need to be familiar with every carbon offset program rule and procedure, they should have a basic understanding of how carbon offset credits are generated, transferred, and used. Purchasing options can depend on where in this “lifecycle” a buyer gets involved. In general, the earlier in the lifecycle, the better the nominal price and terms will be – but the greater the delivery risk and the longer it may take to actually receive offset credits.

The basic lifecycle for carbon offset credits looks like the following:

  1. Methodology development. Before any GHG reductions can be certified for use as carbon offsets, they must be shown to meet carbon offset quality criteria. This process requires a methodology or protocol that is specific to the type of offset project generating the reductions. Most carbon offset programs have a library of approved methodologies covering a wide range of project types. However, project developers may also propose new methodologies for program approval and adoption.

Purchasing options: In rare cases, a prospective offset credit buyer may sponsor the development of a methodology for a new project type that is not already eligible in existing offset programs. This effort can be resource-intensive – and risky – but could make sense for organizations with a strong interest in a new type of project activity.

  1. Project development, validation, and registration. An offset project is designed by project developers, financed by investors, validated by an independent verifier, and registered with a carbon offset program. Official “registration” indicates that the project has been approved by the program and is eligible to start generating carbon offset credits after it begins operation (next step).

Purchasing options: Some offset credit buyers directly invest in an offset project in return for rights to (some portion of) the credits the project is able to generate. This approach can allow for deeper engagement and a fuller understanding of a project’s strengths and weaknesses.

Alternatively, a commonly used purchasing option is to contract directly with a project developer for delivery of carbon offset credits as they are issued. Such contracts generally take the form of “Emission Reduction Purchase Agreements” (ERPAs). An ERPA provides project developers with confidence that they will be able to sell a reliable volume of offset credits. For buyers, the advantage is being able to lock in a price for offset credits that is typically lower than market prices (in exchange for some delivery risk). ERPAs can be structured in numerous ways, including as option contracts.

  1. Project implementation, verification, and offset credit issuance: An offset project is implemented, then monitored and periodically verified to determine the quantity of emission reductions it has generated. The length of time between verifications can vary, but is typically one year. A carbon offset program approves verification reports, and then issues a number of carbon offset credits equal to the quantity of verified CO2-equivalent GHG reductions. Offset credits are generally deposited into the project developer’s account in a registry system administered by the offset program.

Purchasing options: In some cases, project developers may have unsold offset credits for which they are seeking buyers. Purchasing directly from a project developer can avoid some transaction costs. However, projects with unsold credits (e.g., not contracted through an ERPA) may sometimes raise quality concerns (see Questions for Buyers to Ask About Additionality).

  1. Offset credit transfer: After they are issued, carbon offset credits can be transferred into different accounts in an offset program’s registry. Transfers are usually undertaken as a result of a purchase or trade (so, after a purchase, the offset credits will be transferred from the project developer’s account into an account owned by the purchasers). Offset credit buyers may then use the offset credits by retiring them (see next step), hold them, or transfer them to other accounts. Offset credits may change hands multiple times (getting transferred among multiple accounts) before they are ultimately retired and used.

Purchasing options: As with other commodities, numerous firms act as brokers for carbon offset credits. Brokers procure offset credits and then transfer (or retire) them on clients’ behalf. Brokers can make it easier to identify a mix of offset credits from different project types, and facilitate large or small transactions. Some brokers sell offset credits from projects they have invested in, in addition to projects developed by others. This practice may provide efficiencies in pricing, but it can affect the ability of the broker to be impartial about the credits they sell.

Another option is to purchase offset credits on an exchange. There are a number of environmental commodity exchanges – mostly in North America and Europe – that list carbon offset credits for sale and work with registries to enable transfers. Purchasing offset credits on an exchange can be relatively quick and easy, but it can be harder to obtain the information needed to evaluate the quality of these credits.

  1. Offset credit retirement: Offset credit holders must “retire” carbon offset credits in order to use them and claim their associated GHG reductions towards a GHG reduction goal. Retirement occurs according to a process specified by each carbon offset program’s registry. Once an offset credit is retired, it cannot be transferred or used (meaning it is effectively taken out of circulation).

Purchasing options: For buyers looking to acquire only a small number of offset credits (such as small companies or individuals), the most feasible option is to go through a retailer. Retailers can provide access to offset credits from a range of different projects, and will provide at least basic information about those projects. In most cases, the retailer will maintain accounts on carbon offset program registries, and will retire offset credits directly on a buyer’s behalf.

For an example of these offset retailers you can find a list on the Climate Action Reserve’s website.

Regardless of which market you are in, there are usually multiple ways to acquire carbon offset credits, ranging from hands-on direct engagement in offset projects to purchasing offset credits on an exchange. The way in which you acquire offset credits may influence your strategy for ensuring that they are high-quality. For example, if you find you need to acquire offset credits quickly and at low cost, and you lack the capacity to contract with offset projects directly, then you are probably better off restricting purchases to project types with a low risk for any quality concerns.

Carbon offset credit lifecycle and buyer purchase options at each stage:

The right approach for you as a buyer will depend on:

  • Your required timing (e.g., how quickly you need to acquire offset credits, and when you need them delivered);
  • How many offset credits you need to acquire;
  • The price level you can afford; and
  • The amount of time and effort you can put into the acquisition (e.g., whether you have the capacity to contract directly with individual projects, or need to pursue more hands-off approaches).

The table below presents some common options for purchasing and using offset credits. Different options will have different pros and cons in terms of price, volume, timing, and ability to influence or evaluate quality.

 

Engage in new methodology development

The vast majority of offset credit buyers do not get involved in methodology development. Occasionally, however, a buyer may identify a new project type that is particularly attractive (e.g., because it is related to their line of business or involves communities in which they engage), and support development of a new methodology in order to be able to both invest in these projects and generate offset credits. This approach can be a risky and time-intensive strategy, however, and should only be pursued by the most sophisticated buyers.

 

Pros:

  • Can create an opportunity to invest in projects that are particularly important to you as a buyer
  • Can allow “at cost” access to offset credits
  • In principle, allows significant control over quality (to the extent you can be involved in methodology development)

 

 

Cons:

  • Likely to be a high cost approach overall
  • Long lead time (e.g., 3-5 years, variable by project type) before offset credits are finally issued. (Methodology must be developed, project must be developed and implemented)
  • Risky, since it can be difficult to get new methodologies approved
  • Offset credits are delivered over time rather than in a single year
  • Requires time, resources, and expertise to develop relationships and identify good projects for investment
  • Likely commits buyer to long-term purchase agreement
 

Direct investment in an offset project

One option for buyers is to invest in an offset project in return for rights to (some portion of) the carbon offset credits the project is able to generate. Getting involved during project development and registration allows for deep project engagement and a fuller understanding of a project’s strengths and weaknesses. It can also give buyers access to offset credits at a lower cost than purchasing them through third parties.

 

Pros:

  • Allows “at cost” access to offset credits, hedging against future price increases
  • Allows deep engagement with project and understanding of / influence over quality characteristics
 

Cons:

  • Long lead time (e.g., 3-5 years, variable by project type) before offset credits are delivered (project must be developed and implemented)
  • Offset credits are delivered over time rather than in a single year
  • Requires time, resources, and expertise to develop relationships and identify good projects for investment
  • Commits buyer to long-term purchase agreement
 

Contract for delivery with an offset project developer

A commonly used purchasing option is to contract directly with a project developer for delivery of carbon offset credits as they are issued. Such contracts generally take the form of “Emission Reduction Purchase Agreements” (or ERPAs). An ERPA provides project developers with upfront assurance that they will be able to sell a reliable volume of offset credits. For buyers, the advantage is being able to lock in a price for offset credits that is typically lower than market prices. ERPAs can be structured in numerous ways, including as option contracts. 

 

Pros:

  • Allows low cost access to offset credits, hedging against future price increases
  • Generally lower search / transaction costs than direct project investment
  • The process of identifying and engaging with project developers can allow a deeper understanding of offset project quality characteristics

 

 

Cons:

  • May have a long lead time before offset credits are delivered (e.g., 2-3 years; variable by project)
  • Commits buyer to long-term purchase agreement
  • Offset credits are delivered over time rather than in a single year
  • Requires time, resources, and expertise to identify offset projects
 

Purchase in a one-off transaction from a project developer

In some cases, project developers may have unsold offset credits for which they are seeking buyers. Purchasing directly from a project developer can avoid some transaction costs, and still affords good access to a project to understand its quality characteristics. Project developers are motivated to sell their project’s credits, so performing your own due diligence is valuable to confirm project claims.

 

Pros:

  • Lower cost than going through brokers, exchanges, or retailers
  • Avoids any long-term commitment to purchase offset credits
  • Offset credits can be delivered immediately
  • Allows engagement with & understanding of the offset project and its quality characteristics
 

Cons:

  • May be difficult to find project developers with offset credits to sell (who are not going through brokers or exchanges)
  • Available volumes may be low
  • Offset projects with significant quantities of unsold credits may raise quality concerns
  • Project information from the developer requires additional scrutiny to evaluate
 

Purchase from an offset credit broker

As is the case for most commodities, numerous firms act as brokers for carbon offset credits. Brokers can make it easier to identify a mix of offset credits from different project types, and facilitate larger transactions. Depending on the broker, they may also be able to provide details and their own analysis about the projects from which offset credits are purchased. Many brokers also serve the retail offset credit market, facilitating low-volume purchases and (if needed) retiring credits on buyers’ behalf (see below).

Some brokers sell offset credits from projects they have developed in addition to projects developed by others. This may provide efficiencies in pricing, but it can affect the ability of the broker to be impartial about offset quality. In these cases, it is important to heed the same caveats that apply to direct purchases from project developers.

 

Pros:

  • Allows quick acquisition of varying volumes of offset credits without long-term contracts
  • Immediate access to offset credits from a variety of projects and project types
  • Better/easier access to project information than going through an exchange
  • Avoids time and effort required to engage directly with projects
 

Cons:

  • Higher (direct) cost than going through project developers or exchanges
  • May not be a viable option for low-volume transactions (either not offered, or they may charge higher fees)
  • May still be more difficult to access information, needed to perform due diligence on offset credit quality, than buying directly form project developer
 

Purchase offset credits on an exchange

There are a number of environmental commodity exchanges – mostly in North American and Europe – that list carbon offset credits for sale and work with registries to enable transactions. Purchasing offset credits on an exchange can be relatively quick and easy, but it can be harder to obtain information needed to evaluate the quality of these credits.

 

Pros:

  • Allows for quick, easy transactions
  • Immediate access to a wide range of projects and project types
  • Exchanges will often offer offset credits at low prices
  • Can access large volumes of offset credits
  • May be lower cost than going through brokers
 

Cons:

  • May not be a viable option for small-scale retail buyers
  • Can be difficult to obtain information needed to ascertain offset credit quality
  • Exchanges generally do not try to screen for offset quality, so obtaining offset credits through an exchange may be higher risk (low price will often correlate with low quality)
 

Purchase offset credits from a retailer

For buyers looking to acquire only a small number of credits (e.g., small companies or individuals), the most feasible option for purchasing offset credits is often to go through a retailer. Retailers often provide access to offset credits from a range of different projects, and will provide at least basic information about the projects from which they buy. In most cases, the retailer will maintain an account on a carbon offset project registry systems, and will retire offset credits directly on a buyer’s behalf. If you are a buyer, it may be important to ensure that the retailer is specific about the purpose for which the offset credits were retired and that you are designated as the official “user.”

As with brokers, some retailers develop their own projects to generate offset credits for sale. Buyers should carefully review the portfolio of projects that retailers have on offer, and closely scrutinize purchases from projects owned or developed by a retailer.

 

Pros:

  • Allows the purchase and use of offset credits in small volumes
  • Immediate access to offset credits from a variety of projects and project types
  • No long-term purchase commitments
 

Cons:

  • Likely to be the highest price option for purchasing offset credits
  • Generally not a good option for purchasing in high volumes
  • Retailers will generally portray their offset projects in the best light possible (especially if they developed the projects themselves); it may be difficult to obtain information needed to fully evaluate offset credit quality
  • Offers the least control, e.g., over retirement and use

Purchasing large volumes of offset credits generally requires establishing an account in the registry system of the carbon offset program that issued the credits. These accounts typically require an annual fee, which varies across offset programs but is generally around $500, in addition to small fees for credit transfers. Once the offset credits are acquired, they will be transferred to your account, where they can be retired and counted towards a GHG reduction target. For low-volume, retail offset purchases, sellers typically maintain accounts which they use to acquire and retire offset credits on your behalf (see the table above).


[1] In general, price discrepancies among programs arise only when one program serves a captive market with strong demand that other programs may not serve, such as the regulatory cap-and-trade market in California.