The carbon market requires both international and national-level regulation, as the link between payments and climate benefits is often weak. Currently, every European carbon sink considered a carbon offset is included in compensation calculationsat least twice.

According to information (1) from the Financial Times, in August 2021, forests reserved for carbon offsetting by Microsoft and British Petroleum (BP) in the US states of Washington and Oregon were damaged by fire. As mentioned, the fire was significant enough to threaten the entire carbon offset system.

For example, BP has purchased carbon offsets for 100 million US dollars in the Colville Colville Indian Reservation in Washington State. (British Petroleum is the largest shareholder in the developer of the carbon offset system. (2)) At least some of the BP offset forests have been seriously damaged or even completely burnt down in forest fires. Such news is a very unpleasant but vivid example of the uncertainty associated with mitigating the consequences of climate change using carbon offsets.

“This system is widely used in the US. A significant proportion of the forests designated as offsets have burned down,” notes Tatu Torniainen, a policy advisor to the Finnish Minister of Agriculture and Forestry (Tatu Torniainen), emphasising that problems related to the stability of forests as carbon sinks are not unknown in Finland either. “Forest fires are not a major problem in Finland, but we may face damage caused by storms, insects or fungal diseases,” explains T. Torniainen.

Little activity continues in Europe

Carbon offsetting refers to the actions of a greenhouse gas emitter to combat climate change by creating carbon sinks. Companies often view this as an alternative to reducing the emissions they produce.

The carbon offset market has many different participants. The newest of these are carbon offset developers (carbon offset developer), such as Finite Carbon, whose shares were purchased a year ago by BP (2). The overall goal of the market is to bring together those who offer or possess sinks and those who wish to pay for them. There are no generally accepted rules in this market, but their feasibility (necessity) is being intensively discussed, and certain principles are beginning to emerge.

To date, carbon offsetting has been based primarily on nature-based solutions, such as carbon sinks in agriculture and forestry. There are also other methods; for example, wood construction element manufacturer LapWall was recently approved as a carbon sequestration provider on the Puro.earth market.

The carbon offset market in Europe is currently small, but it is important to note that it could experience rapid growth, which may significantly affect the economies of European countries. Many large companies want to purchase carbon sinks but cannot find a reliable service provider.

If, for example, the European automotive industry starts to take an interest in carbon sinks and offers forest owners sums large enough for them to lose interest in forestry, such transactions could result in a rapid and widespread withdrawal of forests from commercial circulation.

Company reputation as a driving force

“This possibility exists for Finland with its large forest resources,” acknowledges T. Torniainen, emphasising that carbon offsetting activities are not useful for companies unless they are at a high level. Criteria are currently being developed.

The main benefit for companies from carbon offsetting is the transition to low-carbon production processes, which is important for their reputation. Carbon offsetting can be highlighted in a company's communications, but the benefits (for the climate, for the buyer) must be clearly verifiable. Also important: compensation must not cause harm to third parties.

First emission reductions, then offsets

A private carbon register is the first Finnish carbon offset system with partial ISO certification. (ISO is the most widely recognised and officially approved international certification system.) The register allows anyone to offset their annual carbon emissions. For example, companies can offset emissions created in the production of any product. As Kimmo Piippo (Kimmo Piippo), CEO of Rakeistus, the company responsible for the register, pointed out, the goal is to offset only those emissions that cannot be prevented through other measures. Good carbon offsetting is always a last resort. “First, carbon emissions must be avoided so that compensation is not necessary. If they cannot be avoided, emissions must be reduced. Only the portion of emissions that cannot be avoided should be offset, by securing a sink,” T. Torniainen is convinced.

Carbon storage must be permanent

By fertilising with ash and naturally stimulating forest growth, it is possible to qualitatively “improve” a carbon sink (in this case, a forest), but fertilisation should be an additional activity. In short, without the offset project, the fertilisation would not take place. It is, however, the most financially advantageous method of forest improvement. If the forest area for ash fertilisation is chosen correctly, wood growth will increase by 20–50%. It must be remembered that a carbon sink must be permanent. T. Torniainen points out that one of the criteria for a permanent carbon sink in international projects is at least 100 years. Rakeistus promises a 15- to 20-year period, after which the forest owner is free to begin logging.

A buffer zone is necessary

The permanence of carbon (C) sinks is also affected by natural disasters. In C-emission offset projects, these are taken into account by creating so-called buffer zones—that is, accepting only a portion of the actual sink as an offset. The smaller this portion, the larger the buffer zone and the lower the risk that the sink could be completely destroyed.

Speaking of Rakeistus, the compensation surplus buffer zone is small—the C sink approved as an offset is 80% of the full volume. This can be compared with the Compensate foundation, which acts as a broker in providing carbon offsets and uses a compensation surplus that is almost four times the size of the sink. “The main reason for using a compensation surplus is insufficient quality standards,” notes Compensate foundation representative Niklas Kaskeala (Niklas Kaskeala).

“Another reason is the desire to take into account the historical carbon emission ‘debt’ and to offset that as well. In addition, we consider the impact of the situation on biodiversity and social relations,” adds N. Kaskeala.

Certification as a safety measure

The offset sinks provided through Rakeistus are first evaluated using forest growth models. In later stages, the development of the sinks is monitored through regular assessments.

“Once every five years, we visit the forests ‘used’ as emission offsets, assessing forest growth and comparing it with a corresponding unfertilised (please see the explanation above) forest. Such information must always be at hand. The difference will show us the size of the sink created by fertilisation,” says Timo Soininen (Timo Soininen, representative of Kiwa, the company that audits ISO certificates).

Certification is a means of ensuring that carbon sinks in any offset forest are sold only once. Third-party auditing, which Rakeistus uses, for example, is expensive. T. Torniainen notes that the high cost of verification creates a clear problem. “Companies have suggested assigning this duty to state authorities, but I don't think that is possible at the moment. If it is expensive for someone now, it will be expensive for us too, and expenditure of taxpayers' money would need to be very well and clearly justified,” T. Torniainen is convinced.

Afforestation as an opportunity

Carbon offset projects related to agriculture and forestry are varied, and each has its own challenges. T. Torniainens has the highest hopes for agricultural projects designed to sequester carbon in the soil. In forestry, afforestation of areas is considered an additional activity, especially in countries where there are no state subsidies for afforestation.

Internationally, afforestation has great potential. According to data from Worldwatch, the world's forest area has decreased from 6 billion hectares to 4 billion hectares due to human activity; the lost two billion could be restored, although not always in the exact locations where they were lost.

Carbon emissions are also offset by, for example, postponing forest regeneration felling (clear-felling) by 20 years. However, it is clear that the permanence of such a sink is certainly not one hundred years. “We must consider how the postponement of felling and its use to offset emissions here and now should be perceived, given that the sink will only be created in the distant future,” asks T. Torniainen.

Forest preservation can cause carbon emission leakage

For example, California uses forest preservation (not harvesting). This does not create immediate changes in the forest; any progress will be visible in the very distant future, if at all. “Of course, one can say that preservation protected the forest from logging. That might be true, but how will you verify it?” asks T. Torniainen. Forest preservation can cause carbon emission leakage, driven by international demand for forest products.

“Many people in Finland think that by reducing logging, they will save the climate. However, if demand for wood remains at its current level, logging will ‘move’ to the forests of neighbouring countries (or other countries), providing no benefit to the climate,” says T. Torniainen.

Carbon emission leakage has been proven in studies (3). In practice, it can be concluded that, when speaking of climate impact, carbon emission leakage can turn preservation into a national-level “greenwashing”—it can improve the domestic carbon balance while simultaneously doing “nothing” for the climate.

T. Torniainen points out that carbon offset systems should not harm third parties. Forest preservation would create problems if industry were to encounter issues with obtaining timber. Generally, each harvested tree provides ten times more value-added in industry compared to what it provides in forestry. With preservation, the additional benefit would not be realised for each tree, even if the forest owner receives compensation.

“The Finnish Climate Panel has highlighted the low costs of forest preservation compared to emission reductions. That is a potential conclusion if the impact of forest preservation on the national economy is not taken into account,” explains T. Torniainen.

Double counting remains an unresolved problem

A problem that remains unresolved to this day is double counting. This means that every individual carbon sink is automatically included in the national carbon balance. If it is also calculated as an individual company's carbon offset, it is counted twice. The reaction to this problem varies. Some pretend it does not exist. Others, such as the Finnish printing house PunaMusta, have chosen not to participate in local carbon offset systems until the double-counting problem is solved.

PunaMusta's offset areas are located in the Amazon rainforest region, which, according to the company, was threatened with destruction but is now preserved. The company's Quality and Sustainability Manager, Jari Martovaara (Jari Martovaara), explains that the amount of compensation is determined by comparing the growth of the conservation area with a comparable site, determined based on the international standards Verified Carbon Standard and Gold Standard.

The Compensate foundation has solved the problem by purchasing all carbon offsets in countries where double counting can be avoided.

In intense debates on social media, there is talk about double counting, which means that the government has more or less nationalised the carbon sinks in forest owners' forests. For example, in Ireland, forest owners and the government have an open conflict (4) over who actually owns the carbon sinks.

“The principle of ‘reporting carbon sinks in the national carbon balance’ is based on several international climate agreements. Why? An agreement on climate issues was reached between governments some time ago and, internationally, we currently have no other alternative,” notes T. Torniainens.

T. Torniainen believes the double-counting problem can be solved; it requires a political decision on the creation of an official register for private offsets. Offsets registered in this way could be removed from the national carbon balance.

“The creation of such a register was also proposed some time ago by the Finnish Ministry of the Environment. As far as is known, such a register does not yet exist in any European country. Article 6 of the Paris Agreement provides for a more detailed account of these registers, but... the final version of the text is not yet complete. As soon as that happens, the European Union may use it to develop guidelines, and member states will subsequently take appropriate action,” predicts T. Torniainen.

Governments are looking for solutions

N. Kaskeala believes that waiting for international-level decisions is a waste of time. “We have been waiting for them for four years. Finland could create such a register today,” he adds.

If we act this way, is there a risk that the register will not be compatible with later EU guidelines?

“I don't think so. In practice, the register is very simple. I rather think that the EU could base its guidelines on the Finnish experience, and Finland could be a leader here, sharing its experience,” notes N. Kaskeala.

At the same time, some countries have begun to implement appropriate actions for carbon offset trading, experimenting with cooperation in the carbon market that is compatible with the Paris Agreement,” said Hanna-Mari Ahonen (Hanna-Mari Ahonen), a senior consultant at the research and consulting company Perspectives Climate Group.

Switzerland has concluded agreements with Peru, Ghana and Senegal, and is in negotiations with a few other countries. “Japan has also been cooperating in the carbon market with nearly 20 developing countries for more than a decade within the framework of the Joint Crediting Mechanism. The Japanese are trying to update the market system to comply with the content of the Paris Agreement (including regarding double counting),” says H. M. Ahonen.

Costa Rica recently concluded an agreement with the certification system Gold Standard, which ensures the quality of voluntary carbon trading in the market.

Carbon offsetting can change climate policy

To date, European carbon offset projects have been modest. “We know that companies or, for example, cities could end up in the front ranks of future climate policy implementers. If that happens, the system will have to be changed,” explains T. Torniainen, adding: “If a significant portion of carbon sinks were to move to a private offset register, national governments would have to re-evaluate their set carbon sequestration targets.”

“Private capital would likely find the most economical projects, while the most expensive ones would have to be taken on by governments. The price of climate policy could increase significantly if these policy targets are not re-evaluated,” says T. Torniainen. On the other hand, N. Kaskeala does not consider this a problem. “If we want progress in solving climate problems, certain things must be done, which must be paid for, regardless of whether the money comes from a private pocket or tax revenue.” “Compensation is essentially a temporary action. It does not reduce emissions but can stimulate participants towards more effective action. Ultimately, the goal is to make compensation unnecessary,” points out Niklas Kaskeala.

1. https://www.ft.com/content/3f89c759-eb9a-4dfb-b768-d4af1ec5aa23
2. https://www.bp.com/en_us/united-states/home/news/press-releases/bp-acquires-majority-stake-in-largest-us-forest-carbon-offset-developer-finite-carbon.html
3. https://forest.fi/article/setting-challenging-targets-for-forest-carbon-sinks-in-western-europe-would-move-the-reductions-in-loggings-elsewhere-european-forest-industry-would-have-to-re-think-its-future/#40b4ac59
4. https://carbon-pulse.com/140099/