Corporate Climate Solutions

Purchasing from Compliance Carbon Markets

This report was lightly updated in May 2023 to better align with our overall research methodology, but core findings and facts were not changed. This report may no longer be accurate, both with respect to the evidence it presents and our assessment of the evidence. We may revise this report in the future, depending on our research capacity and research priorities. Questions and comments are welcome.

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Cap-and-trade compliance markets have been around for thirty years and represent a market-based approach to limiting greenhouse gas (GHG) emissions from industries under their regulation (e.g. power generation, transportation). Recently, brokers have emerged that can buy and retire pollution allowances on these markets on behalf of customers looking to “offset” their GHG emissions. Giving Green evaluated these brokers, the markets they participate in, and the underlying industries regulated, and determined that we were not ready to recommend buying and retiring allowances from compliance markets at this time. It was difficult to determine the degree of credit the specific cap-and-trade programs deserve for emissions reductions given potential design weaknesses in these markets related to offsets and leakage. And while some brokers were taking more innovative approaches to engaging in these markets on behalf of customers, their model was too new to determine real world efficacy.

How it Works

Two main categories of carbon offset markets exist – voluntary and compliance markets. Voluntary markets allow for businesses and individuals with voluntary intentions to meet a carbon neutral or net zero claim to purchase carbon offsets from project developers. The compliance market is for offsets associated with regional or international pacts such as the Kyoto accords and national or regional cap-and-trade systems. In the United States, examples include the California Air Resources Board’s (CARB) cap-and-trade system and the Regional Greenhouse Gas Initiative (RGGI). In these kinds of market-based cap-and-trade systems, polluters must purchase an allowance for each ton of CO₂ they emit annually.

Offset projects assessed by Giving Green are necessarily part of the voluntary market. However, compliance market brokers have recently emerged to make it possible for those normally limited to buying offsets in voluntary carbon markets to participate in compliance markets. Individuals or businesses can pay a broker to purchase and retire allowances traded on compliance markets to “offset” their greenhouse gas (GHG) emissions. A climate benefit is created by reducing the number of allowances available for polluters to buy (and increasing the price of remaining allowances) and effectively reducing GHG emissions. This section will cover the benefits and risks of intervening in compliance markets in this way. While there may be some immediate climate benefits by restricting allowances to emit GHGs in a sector under a cap-and-trade system, there are features of compliance markets – particularly the fact that compliance markets are not truly capped – that can dilute the impact of these initiatives.

Compliance Market Brokers

The brokers that have emerged with the ability to participate in compliance markets mostly function the same way. Individuals or businesses can pay these brokers to purchase and retire allowances from compliance markets equal to the volume of GHG emissions they wish to offset. We briefly reviewed the work of four such brokers as examples of those operating in this space:

The Adirondack Council retires allowances equal to 1 ton of GHG emissions from the RGGI market for every $25 carbon reduction certificate they sell on their website.
Carbon Lighthouse, an NGO, offers a similar service and has retired 90,000 tons of GHGs through the RGGI and California cap-and-trade program.
Air to Earth purchases and retires allowances from the RGGI market and then applies a portion of the sales revenue to finance an inhouse direct air capture (DAC) project and to support advocacy organizations working on carbon removal.
Climate Vault purchases allowances on RGGI and California’s cap-and-trade market, then “vaults” these allowances, or temporarily retires them, with the intention of eventually selling the allowances back into the relevant compliance market. Climate Vault uses the proceeds from selling allowances back into the market at a later date to buy carbon removal credits from companies that have been vetted by their expert team.

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Causality is difficult to determine, as the actual GHG reductions caused by these brokers depends on the actions of the bodies that govern these carbon markets and of the individual polluters regulated under them. Compliance markets are not truly capped. Carbon markets can theoretically release more allowances into the market if prices get too high, or they can withhold or eliminate allowances they consider to be surplus after a period of time.

These actions can significantly disrupt the impact claims made by compliance market brokers. For example, if a broker purchases and retires a large quantity of allowances on behalf of their clients, restricting available allowances and increasing prices, markets may simply release more allowances. Some compliance markets, as in Europe’s case, have begun to withhold or eliminate allowances they consider to be surplus. The active participation of brokers buying and retiring credits may result in markets withholding or eliminating surplus allowances more slowly, meaning the cap on emissions from polluters is higher than it would have been without brokers’ purchases. Both of these responses to broker purchases and retirements by compliance markets could significantly dilute the impact claimed by brokers.

However, North American markets, like California’s cap-and-trade program and the RGGI, are more insulated from these changes because decisions around the allowance cap are made years in advance, and price triggers that would result in releasing more allowances are higher than current prices. RGGI’s price trigger to release more allowances is $13 per allowance (increasing by 7% per year) which is approximately 40% higher than RGGI’s current price at $9.30. It is worth noting that prices have increased substantially over the past several auctions, making it possible for the price trigger to be reached. California’s cap-and-trade program’s cap is set to decline by an average of 4% per year until 2030 and by approximately 3% of the 2020 cap per year under RGGI. For this reason, the brokers we reviewed engaged exclusively in North American compliance markets.

The track record of the compliance markets themselves is difficult to ascertain. In California, where the cap-and-trade program covers 85% of the state’s emissions, statewide GHG emissions declined 5.3% between 2013, when the program was formed, and 2017. Under RGGI, power plant emissions reductions in participating states are down 47%, exceeding reductions of power plants in the rest of the United States by 90%. However, it is difficult to establish causality between emissions reductions and specific programs and policies. In the same time these cap-and-trade programs have existed, energy efficiency technologies have improved, renewable energy costs have come down, and other climate policies have come into effect. Critics point out that California’s program has made too many concessions to the oil and gas industry, does not hold individual polluters responsible, and potentially weakens other climate regulations. Polluters have the ability to use carbon offsets towards meeting a small portion of their compliance obligation, which risks diluting the impact of cap-and-trade programs given the challenges seen with forestry offsets in particular. Polluters may also choose to move their polluting activities to non-regulated states to bring their internal costs down, meaning that despite regional decreases in emissions, overall emissions remain the same. For example, under RGGI, electricity imported from outside the participating states has significantly increased in the last 10 years. This is a form of leakage, where carbon pollution just shifts from one jurisdiction to another. Research is being done to understand the impact of overlapping climate policies and other unintended consequences of cap-and-trade systems. Establishing a causal link between cap-and-trade programs and actual emissions reductions – especially in an environment of overlapping climate policies, industry loopholes, and lower costs for green technology – can be difficult. As a result, we rate purchasing from compliance carbon markets as low on our causality metric.

Purchasing from Compliance Carbon Markets

Purchasing Offsets from Compliance Carbon Markets

Mechanism

Causality

Project-Level Additionality

Marginal Additionality

Permanence

Cost

Co-Benefits

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