How much is that carbon offset in the window?
A carbon offset is a carbon offset, right? So why are some cheap and some more expensive? There are a few factors that make up the price being offered to you. One of the less obvious, but critical ones, is how much project due diligence has been done by the organisation you are dealing with.
First things first: A carbon offset represents one tonne of carbon emissions removed or prevented from entering our atmosphere. So why can you buy a carbon offset for $2.00, and then be offered another carbon offset at ten, twenty, forty times the price?
Well, I liken it to my recent trip to my local nursery where I was buying a tonne (not really that much, but work with me) of soil for my garden bed. Naturally, as the ‘conscious consumer’ I am (my family would say ‘tight’) I went straight for the cheapest. But after chatting to my friendly horticulturalist, she showed me that when it comes to soil, there’s a lot under the surface to understand.
In the same way, there are a few key factors sitting behind a quoted price on a carbon offset.
Firstly, price is a poor indicator of the quality of an offset.
Consider an offset generated from a wind farm in India where the wind turbines are spinning near on 24/7 generating carbon offsets from the coal generation it displaces. The marginal cost of each offset in this case is small. Compare this to a small-scale tree planting exercise off the coast in Australia where you have the cost of the trees, pest control, people etc. The cost per offset in this case is likely to be higher. Much higher.
So, what we learn is that the price is driven by a few different factors that are not easily discerned from the ‘label’. Things like the location, size and type of the project.
Sometimes, it’s other factors that help determine the price tag.
Governments in different countries can often set the price, or at least how low or high they can go. The set-up and ongoing cost of the project, it’s remoteness and its size are often big factors. Another key one is which certification standard the project uses to ensure the carbon offset is independently verified to make sure it stacks up to the rigorous standards in place for these commodities. Different standards come with different checks and balances and can therefore come with a larger audit cost.
All of this points to a really key lesson for any organisation looking to navigate prices of offsets: work with a team that knows the project, has done proper due diligence and holds an all-important Australian Financial Services Licence (AFSL) to trade particular offsets, especially Australian offsets.
Unpicking the details of projects is something we spend a lot of time at TEM doing. This is also part of how we can value the offsets and their portfolios for the clients we work with.
A lower costed price on a ‘similar’ sounding project can often ring alarm bells that corners have been cut around the due diligence and risk management you are getting priced into your offset portfolio. In fact, sometimes this process is completely overlooked, opening your purchase up to unwanted risk in your climate change strategies.
So, as I sit back having harvested a bucket of eggplants from my garden bed during my lunchtime COVID-induced green-thumbery, I reflected on how in every decision there can be more under the surface than meets the eye.
Carbon offsets come at different prices and there’s a lot to be considered when looking at the price tag. Getting guidance from those with deep experience, who hold an AFSL and do proper due diligence will bear fruit down the track for your organisation.