The Carbon Border Adjustment Mechanism (CBAM)
11 min
Level
In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
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The benefits and limits of carbon offsetting
Level
Carbon credits have generated an increasing amount of controversies during the beginning of the 2020’s - culminating in the turmoil generated by SBti’s declaration to integrate them in scope 3 reduction targets. These controversies resulted in the market shrinking significantly in 2023, loosing up to 60% for its initial value. It went from a booming market to being a disregarded option in corporate climate strategies. Yet, as stated by the IPCC, the increase of natural or industrial carbon sinks is necessary to uphold the Paris agreements and limit the impacts of climate change.
In line with science, Greenly thus decided to edit recommendations so that companies are able to navigate the risks associated with carbon offsetting and contribute to reaching Global Net Zero.
Definitions
Carbon offsetting is a mechanism by which companies or individuals finance projects that benefit the environment. Essentially, it's an investment in initiatives that reduce or capture an equivalent amount of carbon dioxide or other greenhouse gases from the atmosphere. When offsetting, companies get offsetting certificates that they can leverage to prove they have a financed a project. Each of these certificates represent a ton of CO2e, allowing companies to compare the benefits they finance to their yearly emissions.
“ So far, offsetting is completely voluntary for companies. It occurs on the voluntary carbon markets, where companies typically go to a broker to buy offset certificates. A broker aggregates a selection of offsetting project based on different quality and availability criteria. ”
Projects are typically led by NGOs and must prove that they comply with a list of quality criteria imposed by the broker. They also compute the total offset certificates their project is going to generate by comparing the emissions in a scenario where the project is carried through and a scenario without it.
Companies choose the amount they offset based on their GHG Assessment or LCA results, and typically pick projects based on price, geography and activity sector. Companies that heavily rely on offset typically choose a portfolio of project to limit risks.
Offsetting certificates are traded on voluntary carbon markets (VCM). The voluntary carbon markets (VCM) currently represents a very small portion of the reductions needed to achieve the 1.5°C Paris temperature goal pathway in 2030, but are growing significantly. According to South Pole, a climate consulting company, between 2017 and 2021 both the issuance and retirement of VCM carbon offsets more than tripled, and some predictions call for global VCM demand to increase 15-fold between 2021 and 2030, and 100 times by 2050.
The case for offsetting
Carbon capture and storage is necessary according to the Paris Agreement
The Paris Agreement states that the signatory countries agree on the objective to keep the average global warming to 1.5°C or well below 2°C. In order to comply with this promise, the IPCC estimates that yearly world emissions must follow a strict reduction ranging from 4 to 7% per year compared to a baseline. By 2030, emissions should thus have been reduced by 30 to 50%, and by 2050, the world must reach global Net Zero: a state where yearly emissions are offset by the yearly capture.
The IPCC estimates in their average scenarios that 5 to 10% of global emissions in 2020 will be hard to abate and are unlikely to be avoided by then. We would thus need to capture and store 5 to 10% of global emissions yearly by then. This implicates raising significantly our carbon capture and storage capacity - multiplying it nearly by 20 compared to what it is today.
“ Offsetting certificates might help us to achieve this by funnelling private investment into such projects. ”
Historical emissions and mitigation financing
Further, since historical emissions are permanently stored in the atmosphere, all countries do not have the same responsibility in the current global warming, with Europe and the US representing more than half the total cumulative emissions.
This situation sparked discussion about possible retributions to developing countries, as they need considerable investment in both mitigation and adaptation and have not fully benefited from the economic boost brought by fossil fuel yet. While these discussions have been unsuccessful so far, they will constitute key topics of future COPs.
In line with these issues, offsetting can contribute to a form of retribution, particularly through community support projects.
Limitations
Potential to Slow Down Reduction Efforts
“ Offsetting has the potential to slow down reduction efforts: offsetting is currently perceived as cheaper than constructing and implementing a GHG reduction plan, and some corporations seem to be under the impression that it is sufficient to guarantee meeting the objectives of the Paris Agreements. ”
Even if we meet capture and storage targets by 2050, emissions still need to be reduced by 90-95% by then. Offsetting can thus not be used to discard emissions from GHG Assessments (so-called "compensation").
For further information on why offsetting slows reduction efforts, we recommend you read the corresponding article by carbone 4.
Technical Limitations of Carbon Capture and Storage (CCS)
Emissions still need to be reduced because we will not be able to bring carbon capture and storage capacity to a state where all our current emissions are absorbed yearly. This is because of two main technical limitations to consider:
- Limited Capacity: The capacity for industrial CCS and nature-based solutions is limited. There are constraints on land use for nature-based solutions, and industrial CCS is not a mature technology yet, as discussed by this financial times video.
- Temperature Stabilization: The capacity for carbon capture depends on the stabilization of temperatures. Rising temperatures can affect biomass and reduce storage potential, as well as the economy's ability to finance industrial carbon capture and storage. Thus, offsetting without reducing further limits our capacity to meet Net Zero. For further information on climate change related feedback loops, take a look at the corresponding wikipedia page.
Accounting Issues
Finally, although there are quality criteria to check for the reality of avoided or captured emissions, offsetting still faces accounting issues. Here are the key concerns:
- Overcounting: Some offset projects, such as rainforest projects, have been claimed to be worthless. The Forest Carbon Program has also been found to systematically overcount carbon credits, as reported by Carbon Brief.
- Durability: The durability of offset credits is a concern. What happens when there is no more funding? In the case of nature based solutions, emissions might be released back into the atmosphere by deforestation.
- Additionality: A significant portion of projects are likely to be not additional. This has been shown for clean development mechanism projects (the equivalent of offsetting at the country levels in the context of the Kyoto protocol). This raises core questions about the effectiveness of offsetting.
Externalities
Lastly, some offset projects lead to the alienation of indigenous people from their lands and human rights abuses, as land was privatized for ecosystem protection.
These side social, environmental or economic impacts are called externalities and are not taken into account in project price, leading to unfair situations. Read more about an example of what can happen here.
Greenly’s conclusions and recommendations
Given the scientific evidence, Greenly decided to take action and transform its offsetting offer and recommendations to be better aligned with the latest conclusions.
Excluding project types
First, Greenly removed a set of offsetting projects from its platform as a measure of precaution, as their credibility is seriously doubted.
Forest protection projects
Forest protection projects aims to protect forest parcels, typically in the rainforest, against deforestation.
These projects thus rely on the threat of the parcel being deforested to claim they avoid emissions. Research from the University of Cambridge has shown that in most of these project, the threat is actually strongly overstated, calling into question the value of the credits: are carbon emissions really avoided if it was unlikely that they would be emitted in the first place?
This conclusion has been further supported by peer-reviewed articles.
Second, projects have been criticized to only move deforestation to other parcels (so-called carbon leakage). While the standards certifying projects claim to handle this issues, it seems unlikely to go be solved until government action replace punctual, voluntary frameworks.
Third, the durability of these projects have been called into question. While carbon is effectively stored while credits are sold, what happens if the projects receive insufficient funding? What happens if an accident occurs (a fire, for instance), and the carbon gets release? So far, research shows these projects do not offer protection against these eventualities.
Lastly, these project have had bad press because they are linked to Human rights issues, with local people being forcibly removed from their land or deprived of their work.
To conclude, Yadvinder Singh Malhi, a professor of ecosystem science at the University of Oxford, stated to the Guardian in 2023 “Many of these projects may have brought lots of benefits in terms of biodiversity conservation capacity and local communities, but the impacts on climate change on which they are premised are regrettably much weaker than hoped.”
Reforestation/afforestation projects
Reforestation projects aims at replanting an area with trees where there recently was a forest, while afforestation projects aim at planting trees on a previously barren land.
On top of the second, third and last issues above, that are also applicable to reforestation and afforestation projects, these projects have been plagued by seedling growth small success rates, effectively releasing carbon stored in the atmosphere.
Further, human reforestation/afforestation initiative are typically less efficient at storing carbon than just letting forest regrow without intervention: letting forest regrow without human intervention has further potential to store CO2. This is emphasized by the fact that most reforestation or deforestation projects are actually part of forest exploitation systems that rely on monoculture and/or culture of non-native species (that can become invasive!). This call into question the efficiency of funding such projects, when better success would have been achieved by simply protecting the land.
Renewable energy projects
Finally, while renewable energy projects are typically quite reliable and often benefit the local populations, renewable energy development is well underway and typically economically viable. We can thus seriously call into doubt the additionality of these offsetting credits: credits are worthless if the plants had been build without the financial support of companies. Research estimates that roughly 50% of projects would have been put in place regardless of corporate funding.
In conclusion, in the state of the voluntary carbon market, Greenly recommends the use of forest protection projects should thus be used with the intent of biodiversity conservation, the avoidance of reforestation and afforestation projects, especially those relying on monoculture and forest exploitation, and avoiding renewable energy projects altogether.
Greenly will thus exclude these projects from their offer as a measure of precaution and seek to find partners that answers the issues aforementioned.
Gradually move towards carbon capture and long term storage
Currently, 95% of the voluntary market is currently constituted of emission avoidance projects. While both capture and avoidance are necessary and legitimate actions to contribute to Net Zero, in line with the Oxford science based offsetting principles.
“ Greenly recommends financing should gradually move away from avoided emissions towards long term capture storage to ensure meeting the capture levels in 2050. At scale, carbon capture and storage is necessary to capture hard to abate emissions by 2050, and funding is more and more necessary to bring these projects to scale. ”
Amounts and prices
Lastly, to be consistent with the polluter pays principle, Greenly recommends your offsetting levels should be computed based on your scope 1, 2 and 3 GHG Assessments. In line with the necessary capture levels by 2050 (5-10% of current emissions) we recommend you aim for yearly offsetting certifications reaching up to 10% of your total yearly emissions. If you decide to go above this line, Greenly recommends specifying that the purchase of offsets don’t limit the ambition to reduce these emissions.
“ Unfortunately, even when following the recommendations, there is no zero risk when it comes to offsetting: the voluntary carbon market is unregulated and projects can be opaque. Greenly thus recommends the 10% offsetting goal be reached through a variety of projects to mitigate the global risk. ”
Finally, Greenly suggests setting a floor price for choosing projects. This aims to redirect funding towards reduction actions, and to avoid the cheapest projects that might not be additional or overestimate the emissions reduced or captured. The value of the threshold is debatable, but we suggest starting by setting it at 25 euros per tCO2e, in line with discussions held at COP28.
To go further, France Stratégie estimates that to uphold the Paris Agreements, every action costing less than 250 euros per ton of CO2e removed must be implemented by 2030. In this context, Greenly might progressively raise its floor price recommendations to make sure the necessary reduction actions are always prioritized by clients!
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