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By: Madeleine Whitestone

The enormity of the 2022 United Nations Climate Change Conference, more commonly referred to as COP27, reflected the increasing political appetite for carbon neutrality. As of today, 196 countries have signed on to the 2016 Paris Agreement, committing to some form of reduction in carbon emissions. Under the agreement, participating countries committed to successive nationally determined contributions (NDC’s) towards domestic mitigation efforts, which get submitted to the UNFCCC every five years. As a result, many Western countries in the Global North have turned to economic instruments such as carbon offsetting and carbon taxation. While carbon markets hold promise in sustainably reducing emissions, the way they are currently utilized can perpetuate inequity in the Global South.

Issues in the Practices of Carbon Offset Systems 

The application of environmental economics, such as carbon offsetting, offers a way to internalize the negative externalities of carbon emissions. Carbon offsetting is a quota-based tool which aims to reduce carbon emissions by allowing individuals or businesses to offset their own emissions, by funding projects that reduce or remove greenhouse gases from the atmosphere. There are two types of carbon offsetting markets: voluntary markets, which are independent formal exchange platforms that operate without government oversight, and compliance markets, which are run with direct government oversight. The majority of offset projects are built in low-income nations but are financed by entities in high-income nations to allow for the offset of their domestic emissions. Offset markets have been highly criticized for lacking adequate verification of carbon reductions, and for social justice issues concerning the equitable distribution of benefits and land sovereignty. 

Under the current model of offset markets, there is little incentive for local economic development as financial benefits stemming from offset projects do not always trickle down to local communities. There is often minimal job creation and development of local capacity, and little exchange in terms of technology and intellectual property transfer between the North and the South. Additionally, the creation of offset projects can result in reduced land sovereignty for local and Indigenous communities. Furthermore, poorly implemented projects can damage local biodiversity and displace vulnerable communities. Corporations headquartered in the Global North often claim the most profitable, high-value locations  for renewable energy projects, leaving little room for developing countries to establish their own offset projects. In a 2011 case study by Finley-Brook and Thomas, two hydro power projects on Indigenous land in Panama illustrated processes of green authoritarianism, spatial control, and social restructuring. This case study shows how developers often fail to follow international standards for free, prior, and informed consent, and state agencies have even used physical violence to reinforce private rights. 

Furthermore, questions surrounding the legitimacy and effectiveness of carbon offset projects point to some crucial areas for improvement. Offsets on both the voluntary and compliance markets face governance challenges and have historically enabled a high degree of fraud. In order for carbon to be offset, a project has to prove that it is reducing emissions relative to a baseline level of emissions. Additionality relies on a counterfactual of a future scenario of emissions that would have been produced without said project. This leaves room for exaggerated baselines and in turn exaggerated claims of carbon reductions.

Challenges in Implementing an Equitable International Carbon Taxation Scheme

Carbon taxation is a price-based economic tool that involves placing a tax on carbon-based fuels in order to incentivize the reduction of their use. If carbon taxation is only applied domestically, global emissions are not likely to be reduced due to carbon leakage. This spill-over effect is produced when carbon emitting firms situated in nations with stringent carbon policies, move production over to nations with lower standards. As such, carbon taxation schemes often involve border carbon adjustments, which impose tariffs on imported goods based on their carbon intensity in order to level the playing field between countries with different levels of carbon pricing. While border carbon adjustments may be necessary in order to effectively reduce carbon emissions, they can also penalize those least responsible for the climate crisis. Developing economies that still heavily depend on oil exports may be burdened by such taxes, effectively limiting their exports, and constraining their budgets for climate action. Carbon Taxation schemes are one of the more powerful economic tools at our disposal in decarbonization efforts, as such, finding a way to prevent carbon leakage, while not further damaging low-income economies is crucial. 

Changes to the governance of these markets have been made in recent years. The approval of Article 6 of the Paris agreement was one of the key outcomes of the COP26 Summit. It recognizes the non-market approach to both mitigation and adaptation projects. This should support the introduction of methods of cooperation that permit technology transfer and capacity building where no emissions reductions are involved. Further reforms should focus on prioritizing locally led offset projects, or at least strive to increase local involvement and representation in decision making activities. This would offer the benefits of localized oversight and accountability, as well as the maintenance of the geographic link between environmental harm and remediation. Carbon pricing should take a ‘carrot-and-stick’ approach and involve a gradual introduction of emissions reduction targets on imports from developing countries, along with access to finance to support decarbonization. In sum, while economic instruments such as carbon offsetting and carbon taxation hold promise in reducing carbon emissions, they must be structured in a way that does not perpetuate inequity in the Global South and cause harm to racialized and Indigenous communities. Concepts of a just transition need to underpin the transition to a low-carbon economy in order to create a truly sustainable and equitable low carbon future. This includes not only designing carbon taxation schemes and carbon offset programs with equity in mind, but also ensuring that the benefits of the transition are shared by all, including disadvantaged and marginalized communities, and that the costs are not disproportionately borne by them.

Madeleine Whitestone is a Master of Global Affairs candidate at the University of Toronto’s Munk School of Global Affairs and Public Policy. Her interests include climate change, energy policy and Indigenous issues. After working in climate policy, Madeleine joined the Munk School to hone her policy analysis skills and develop her understanding of global systems in order to expand the means by which she can make a positive impact in the world. Madeleine holds a Bachelor of Engineering in Chemical Engineering from McGill University.