Financial Instruments of Environmentally Friendly Solutions for
Voluntary Carbon Offsetting
Magomed Tashtamirov
a
Kadyrov Chechen State University, Grozny, Russia
Keywords: Nature based solutions, sustainable development, financial instruments, credit offset, decarbonization,
ecosystems, carbon neutrality.
Abstract: It is now recognized that social problems, including climate change and rapid urbanization, growing demand
for food and water, as well as increased risk of natural disasters, can lead to abrupt and in some cases
irreversible environmental changes that negatively affect human development. The traditional approach is to
use engineering solutions that are designed and managed in such a way that they are easy to implement, easy
to reproduce and provide predictable results, for example, large-scale physico-chemical biofiltration processes
used to purify air and water. An alternative approach is to use nature based solutions (NBS) that use
ecosystems and the services they provide to solve society's problems in sustainable ways. This work is devoted
to the tools and methods of financing projects based on nature based solutions. Credit methods of financing
projects for the decarbonization of society are considered, their features and specifics are revealed, types of
standards for the implementation of credit offsets are determined. Corporate steps are proposed in order to
achieve carbon neutrality based on the use of credit offsets.
1 INTRODUCTION
Nature based solutions (NBS) can mitigate 15
gigatons of carbon dioxide equivalent, or about 30%
of the mitigation needed to achieve the goals of Paris
Agreement. Despite the fact that public policy is
necessary to support the use of nature to mitigate the
effects of climate change, there is an investment gap
between the amount of funds currently allocated for
environmental protection and restoration and what is
needed. For example, over the next decade, USD 65
billion is not enough just for forest conservation and
restoration (Streck, 2021). Thus, a significant amount
of investment can be attracted through voluntary
carbon offsetting projects. The paper considers the
concept of carbon sequestration and NBS to mitigate
the effects of climate change, and also discusses the
concept of voluntary carbon markets. Various
existing standards of voluntary carbon offset are
considered, and several types of offset projects are
discussed. Finally, the role of carbon offset credits in
achieving corporate carbon neutrality is considered.
a
https://orcid.org/0000-0002-6777-3863
2 MATERIALS AND METHODS
The paper considers the concept of carbon
sequestration and NBS to mitigate the effects of
climate change, and also discusses the concept of
voluntary carbon markets. Various existing standards
of voluntary carbon offset are considered, and several
types of offset projects are discussed. Finally, the role
of carbon offset credits in achieving corporate carbon
neutrality is considered.
3 RESULTS AND DISCUSSION
3.1 Sequestration of Carbon Dioxide
Actions to mitigate the effects of climate change
include not only reducing greenhouse gas (GHG)
emissions in the energy sector through renewable
energy sources or energy efficiency, but also
biological mitigation of greenhouse gases, which can
occur by preserving existing carbon pools and
sequestration by increasing the size of carbon pools.
Tashtamirov, M.
Financial Instruments of Environmentally Friendly Solutions for Voluntary Carbon Offsetting.
DOI: 10.5220/0011571300003524
In Proceedings of the 1st International Conference on Methods, Models, Technologies for Sustainable Development (MMTGE 2022) - Agroclimatic Projects and Carbon Neutrality, pages
327-331
ISBN: 978-989-758-608-8
Copyright
c
2023 by SCITEPRESS Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)
327
Carbon sequestration is defined as the extraction of
carbon dioxide from the atmosphere by soils and
plants - both on land and in the aquatic environment,
for example, in wetlands - and/or the prevention of
carbon dioxide emissions from terrestrial ecosystems
into the atmosphere (Zaitseva, 2018).
3.1.1 Ecosystem-based Mitigation of Climate
Change
In the context of climate change mitigation, NBS is
referred to as ecosystem-based climate change
mitigation (EbM). EbM includes a variety of
mitigation approaches, including sustainable forest
management, the use of local communities of forest
species in reforestation, conservation and restoration
of peatlands and wetlands, protection of the ocean
carbon sink, improved pasture management and
environmentally sound farming practices. In addition
to reducing GHG emissions, EbM provides a number
of co-benefits, including:
- Reduction of health damage from air pollution
- Increased labor productivity due to reduced
exposure to air pollution
- Increased satisfaction of the population from
the improvement of the environment in
connection with the reduction of emissions of
pollutants
- Increased provision of ecosystem services by
preserving and increasing forest cover and
reducing emissions from deforestation and
forest degradation
- Reduction of crop damage associated with
ground-level ozone
- Increased agricultural productivity through the
conservation and accumulation of carbon in the
soil
- Less damage to coastal areas as a result of sea
level rise
- Less mortality from heat as a result of reducing
the number of heat strokes
- Less loss of biodiversity due to slower climate
change.
3.2 Voluntary Carbon Markets
Carbon markets are institutions or systems in which
parties exchange shares of carbon for compliance or
voluntary use. Interests in carbon are either emission
permits or credits. Emission permits are used in
regulatory schemes that limit greenhouse gas
emissions from certain facilities or sources. The
emission of greenhouse gases from established
sources is prohibited without a permit. The permit
entitles the holder to emit a set amount of greenhouse
gases, usually measured in tons of carbon dioxide
equivalent (tCO2e), which is defined as "the amount
of reduction in carbon dioxide emissions and carbon
dioxide equivalent of other greenhouse gases and/or
sequestration of additional carbon to compensate for
emissions produced elsewhere" (Sapkota and White,
2020).
Voluntary carbon markets generate credits (or
offset credits) that allow businesses, governments,
non-profit organizations, universities, municipalities
and individuals to offset emissions outside the
regulatory regime. The offset is the emission of one
metric ton of carbon dioxide or an equivalent amount
of GHG. The buyer of an offset loan can "retire" him
to claim emission reductions as part of his own GHG
reduction goals. Credits are measurable, quantifiable
and traceable units of GHG emissions. Currently, it is
more cost-effective to use nature to absorb carbon
from the atmosphere than to rely on artificial carbon
sequestration plants or non-stationary GHG emission
reduction technologies for industry.
3.2.1 Carbon Dioxide Emission
Compensation Projects
Offset loans are mainly generated as a result of carbon
offsetting projects in forestry, agriculture and "blue
carbon" (IUCN, 2021). Known as biological binding,
trees, plants and soil bind carbon, reducing its amount
in the atmosphere. Biological sequestration projects
usually include activities aimed at increasing
sequestration or preserving existing sequestration
capabilities that are under threat. In addition,
compensatory loans can be obtained as a result of
renewable energy projects, including the use of
biomass fuels, and energy efficiency projects,
including compensatory projects to modernize more
efficient equipment and support more energy-
efficient buildings. To qualify as a carbon offset
project, it must reduce greenhouse gas emissions
compared to what would otherwise happen.
Equivalence between received (compensation) and
lost (compensated emission) should also be ensured.
The most important aspect of carbon compensation is
the environmental integrity of the carbon
compensation system. There are four main criteria
that carbon offsetting projects must meet in order to
ensure their environmental reliability and credibility:
1. Additionality: Compensation schemes typically
use one or more of the following additionality tests:
- Checking for the additionality of emissions (or
environmental additionality): It is assessed
whether the project will lead to a reduction in
MMTGE 2022 - I International Conference "Methods, models, technologies for sustainable development: agroclimatic projects and carbon
neutrality", Kadyrov Chechen State University Chechen Republic, Grozny, st. Sher
328
emissions compared to what would happen
under normal business conduct.
- Regulatory additionality test: assesses whether
the project is legally binding for its
implementation by the author or another
relevant party.
- Verification of financial (or investment)
additionality: it is estimated whether the project
will be carried out without the income received
from carbon credits.
- Technological additionality: assesses whether
the project leads to accelerated technology
adoption, which would have occurred
otherwise.
- Barrier testing: assesses whether any non-
financial barriers may hinder the
implementation of the project, for example,
technological barriers or barriers in the capital
market.
- Testing of common practice: assesses whether
project activities are common practice in the
region and/or industry.
2. Accurate measurement: The scheme accurately
accounts for emissions and/or sinks occurring within
the project boundaries as a result of project
implementation, ensuring that there is no over-
crediting (Lee and Kim, 2018; Miroshnichenko,
2021).
3. Leakage: The scheme should ensure that there
will be no increase in emissions or reduction in
uptakes beyond the project boundary as a result of the
project (Gillenwater et al., 2017).
4. Consistency: Carbon accumulated and credited
under the scheme will not be fully or partially
released as a result of future events. The most
common way to ensure consistency is:
- issuing only time-limited loans for
sequestration projects when the loans expire
after a certain period and they must be replaced
upon expiration.
- the requirement to preserve carbon stocks for a
fixed period of permanence, for example, 100
years (FAO, 2010).
3.2.2 Purchase and Sale of Offset Loans
In the carbon market, sellers and buyers exchange
both permits and offset loans. In voluntary carbon
markets, sellers of offset loans voluntarily reduce
emissions or increase carbon sequestration, usually
due to a financial incentive associated with the
possibility of selling loans. Buyers who are not
legally obligated to reduce emissions or increase
carbon sequestration mainly purchase offset loans to
reduce their environmental footprint, demonstrate
corporate social responsibility and improve their
public image. There are two main types of
transactions in voluntary carbon markets:
- Forward sales: This type of sales corresponds
to the sale of ex-ante emissions reductions (not
released) before they occur or ex-post
emissions reductions (released) that must be
delivered after their release and the conclusion
of the contract. Forward sales require
agreement on a number of conditions,
including the quantity to be bought/sold, the
prices to be paid, payment terms, delivery of
assets, which registry will be used, cancellation
policy, etc.
- Spot sales: In this case, the seller delivers
carbon compensation credits to the buyer's
register, and then the buyer pays for the
delivered carbon credits. Alternatively, the
buyer can pay first and then the seller can make
the delivery. Spot sales require the conclusion
of contracts that address a number of issues,
including the number of quotas to be
bought/sold, the prices at which they will be
paid, payment terms, termination terms,
included and excluded taxes, etc.
3.2.3 Pricing of Carbon Offsetting Credits
In a functioning market with strict and transparent
standards, the prices of carbon offset credits are set
by supply and demand. The most successful will be
those offset service providers whose projects are
effective and can generate offsets at below-market
prices. The carbon offset unit prices must offset the
costs incurred at various stages of the project before
the emission reduction can be sold as compensation.
The main cost factors are:
- Costs associated with the project cycle: These
costs include investments in technology,
financing of investment capital, costs of
technical operation of the project, maintenance
and administration, etc.
- Costs associated with the delivery process:
These costs include project management,
quality control, legal and other costs.
3.3 Voluntary Carbon Offset
Standards
Carbon offset credits sold on the voluntary carbon
market can be certified according to a number of
certification standards, the main of which are listed
below. These standards ensure that carbon offsetting
projects and the resulting credits are trustworthy.
Financial Instruments of Environmentally Friendly Solutions for Voluntary Carbon Offsetting
329
Although each standard uses its own approach to
measuring GHG reductions and absorptions, they all
include criteria:
- definition of project categories and compliance
with criteria
- additionality
- establishment of reference or baseline levels by
which the reduction and absorption of
emissions will be assessed
- monitoring of emissions and movements
- Risk management of the return of emissions
into the atmosphere.
- Verification and certification
- Co-benefits for sustainable development -
participation and consultation with
stakeholders (Lovell, 2010).
3.3.1 Verified Carbon Standard
The Verra program or VCS certifies the reduction of
carbon emissions. About 1,700 VCS projects have
been certified under the VCS Program, which
together have reduced or removed more than 630
million tons of carbon and other GHG emissions from
the atmosphere. After projects are certified for
compliance with the rules and requirements of the
VCS Program, project developers can receive credits
for greenhouse gas emissions, known as Verified
Carbon Units (VCUs). These VCUs can be sold on
the open market and used by individuals and
companies to offset their own emissions. Projects can
be developed in 15 sectoral areas of the VCS,
including agriculture, forestry and other land uses
(AFOLU). AFOLU project types include
afforestation, reforestation and vegetation restoration,
agricultural land management, improved forest
management, reduction of emissions from
deforestation and degradation, prevention of
conversion of pastures and shrubs, and restoration
and conservation of wetlands. The category of
wetland restoration and conservation projects
provides a framework for accounting for emission
reductions in projects on mangroves, tidal and coastal
wetlands, swamps, seagrasses, floodplains, deltas and
peat bogs, etc.
In addition, the Climate, Communities and
Biodiversity (CCB) Standards define projects that
simultaneously address climate change, support local
communities and small farmers, and preserve
biodiversity. CCB standards are used in conjunction
with AFOLU projects to certify the benefits of
climate change, community and biodiversity. CCB
standards ensure that projects:
- identify all interested parties and ensure their
full participation
- recognize and respect ordinary and statutory
rights
- take into account and control direct and indirect
costs, benefits and risks
- identify and maintain high environmental value
- demonstrate net positive benefits for climate,
community and biodiversity.
3.3.2 The Gold Standard
The Gold Standard (GS) company started its activity
in 2003 with the aim of providing carbon credits and
bringing them in line with the Millennium
Development Goals. The company has developed
more than 20 proprietary methodologies and is the
Table 1: Projects eligible for registration under the gold standard.
Pro
j
ect t
yp
e Descri
p
tion
Community
service
projects
These projects provide or improve access to services/resources at the household, community or
institutional level, including:
- Renewable energy sources connected to mini-grids or autonomous grids: Including solar,
tidal/wave, wind energy, waste energy and renewable biomass.
- End-use energy efficiency: Projects that reduce energy requirements compared to baseline
scenarios without affecting the level and quality of services or products.
- Waste management and treatment: All types of waste disposal activities that provide energy or
useful products with benefits for sustainable development, for example, biogas.
- Water, sanitation and hygiene (WSH): Activities in the field of WSH that contribute to climate
chan
g
e miti
g
ation and/or ada
p
tation.
Renewable
energy
p
roducts
GS projects must supply energy to the national or regional grid from renewable energy sources
such as renewable biomass
Afforestation
and
reforestation
p
rojects
- These projects include plantings or project areas that are not defined as a forest and have not
been a forest for at least ten years prior to the start of the project.
- Projects may include planting trees (as well as shrubs, palm trees and bamboo), single-species
p
lantations, all forestry systems, for example, conservation forests, and agriculture (agroforestry).
MMTGE 2022 - I International Conference "Methods, models, technologies for sustainable development: agroclimatic projects and carbon
neutrality", Kadyrov Chechen State University Chechen Republic, Grozny, st. Sher
330
preferred standard for community-oriented projects.
It maintains partnerships with Fairtrade International
and the Forest Stewardship Council. In 2017, its rules
and principles were brought into line with the
Sustainable Development Goals. GS projects are
aimed at accelerating the transition to climate security
and sustainable development. The types of projects
that can be registered with GS are listed in Table 1.
4 CONCLUSIONS
One of the main ways to combat climate change and
environmental degradation for organizations is
carbon neutrality. Carbon offset credits are a
convenient and cost-effective way for organizations
to reduce GHG emissions. Offsets are usually used to
offset an organization's greenhouse gas emissions
instead of directly reducing those emissions.
Sometimes offsets are used to achieve carbon
neutrality, that is, when the entire organization
reaches zero net carbon footprint. The practice of
voluntary compensation of emissions by
organizations can lead to a number of advantages. To
achieve carbon neutrality, an organization can take
the following steps:
1. Reduce internal emissions: An organization
can implement internal strategies to reduce
emissions, such as investing in low-carbon
capital projects, choosing low-emission
alternatives when purchasing equipment,
materials and fuels, as well as investing in
energy efficiency measures and renewable
energy sources on site.
2. Reduce emissions in the supply chain and
products: An organization can estimate
emissions in the supply chain and emissions
from the use of products. It can then implement
emission reduction strategies, including
selecting suppliers with lower GHG supply
chains, developing programs and incentives to
help suppliers reduce emissions, and
redesigning products with a lower emissions
footprint.
3. Purchase of carbon compensators: An
organization can purchase carbon offsetting
quotas to offset any remaining direct GHG
emissions and major sources of emissions from
the supply chain and product use. In addition,
organizations can enable interested consumers
to purchase carbon quotas to compensate for a
certain amount of carbon emissions.
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