By Sheldon Zakreski
The price of carbon offsets can be quite perplexing. After all, a ton of carbon reduced is of benefit to the climate, regardless of where that reduction occurs or how it happens. If the benefit is the same, then why do carbon prices range from less than $1 to more than $15 per ton?
There are some striking, and perhaps surprising, similarities between purchasing offsets and purchasing automobiles. In practice, most models will get you from point A to point B, but there is a question of quality in how you want to get there. The following is a “blue book” guide to the inventory that can be found in the carbon market and why it’s priced the way it is.
Make: Credible offsets are certified using a third-party standard that guides how the project is designed and how its performance is measured. The standards most common in the U.S. are the American Carbon Registry, the Climate Action Reserve, and the Verified Carbon Standard.
Model: Just like automobile owners express clear preferences for trucks, sedans, or hybrids, different types of offsets resonate more strongly than others with particular buyers. One deciding factor may include the sector from which the emission reduction originates—examples include: forests, renewable energy, or farms.
Year: The vintage of a carbon offset matters, and offsets with that new car smell are often more attractive to buyers who place a premium on funding future offsets, rather than those that have already occurred. Logically, that means the older the age of an offset, the lower the price associated with it will be.
Origin: The “made in Detroit” factor also applies to offsets. A close proximity between the buyer and the project’s location can greatly increase a project’s desirability. Both individual and corporate buyers of offsets value projects that occur in their own backyard—streamlining the connection between their business operations and the emissions reductions.
When both the economy and cap-and-trade legislation faltered, the result was a generation of large volume offsets flooding the market. The presence of so many of these offsets — dating back to before 2010 — is why they can be purchased for less than $1 per reduction.
The Toyota Priuses: This car is all about the type of energy it uses, just like offsets from renewable energy projects. Because of their long-standing popularity, price points for clean energy, wind, and biogas projects range from $3 to $8 per reduction depending on vintage and location.
The Volkswagon Buses: This ride has a lot of charisma and usually evokes a journey to a beautiful natural setting. Additionally, unlike most cars, their value appreciates with age and is often tied to features that go well beyond its core function. Forestry offset projects carry many of the same traits as VW buses. Their value holds well as they age, and is determined not just by their ability to reduce emissions, but by the many co-benefits they offer—recreation, clean water, and biodiversity. A driving factor that can suppress forestry offset prices, is the large volume that such projects can generate. That is, very large projects can drive the unit price down substantially because there are often in excess of hundreds of thousands of offsets available for sale following verification. This is why forestry prices range from $5 to $10 per reduction depending on their scale and co-benefits.
The Tesla Model S: Produced, sold, and operated differently than most other cars, Tesla Model S stands out as exceptional in the marketplace. This is the type of car you don't see every day. For the offset market, this is comparable to agricultural offset projects, or a unique project with exceptional social value, such as directly alleviating poverty. You won't find these projects often, but when you do, they'll range in price from $8-12 per reduction, as buyers are willing to pay top dollar for something that is distinctive and aligns with their values.
There are a variety of factors involved in making the decision about what type of carbon offset to purchase and for what price. With such a variance in cost, buyers may be tempted to go with the least expensive option, however, as demonstrated by the comparison with the automobile market, offsets on the lower end of the spectrum will not satisfy the needs of all buyers. Nonetheless, buyers will always consider price as one of the primary decision-making points. As the old adage goes, you get what you pay for—in cars and in offsets. If buyers are looking for the perfect fit of personality and performance in offsets, they may have to adjust their expectations.
Image credit:Flickr/Nam-ho Park
Sheldon Zakreski is the Director of Carbon Compliance for The Climate Trust.