New SEC proposed rules mean corporations should heed latest IPCC insights on longevity of carbon sinks
By Jenna Clark & Amy Myers Jaffe
Last month, IPCC AR6 Working Group II released its latest report, which covers Impacts, Adaptation, and Vulnerability. The report reveals in stark terms that climatic impacts are interacting and multiplying across sectors and regions, creating risks that compound each other (IPCC AR6 Summary 18). One key takeaway from the report is that many natural systems have already been pushed to their adaptive breaking points, including many warm water coral reefs, coastal wetlands, rainforests, arctic, and mountain ecosystems (IPCC AR6 Summary 28). This raises concerns about the longevity of existing natural carbon sinks and has important policy implications for commonly supported climate change policy tools, including carbon offset markets and land-use-related regulations. The report, whose release was overshadowed by other geopolitical events, needs more attention from policy makers and media. It offers important scientific insights that inform how we should be approaching climate adaptation and mitigation, given that some ecosystems already face irreversible damage.
Carbon offsets are a market-based feature that facilitates efficient allocation of resources to natural solutions for carbon mitigation. If implemented properly, they often provide funding to create carbon sinks and to promote natural systems like wetlands and forests, which remove carbon and increase ecosystem and human resilience. For example: a restored wetland, funded through a carbon offset market, may help with flood and storm control, improve land use, and preserve biodiversity while also taking in carbon from the air. Natural carbon solutions have the potential to provide 37% of necessary CO2 mitigation until 2050.
But there are long standing doubts about the effectiveness of carbon offsets in their current form. Some of these concerns are discussed in this latest IPCC report. Climate activists and scientists worry that businesses will buy offsets instead of taking real steps to reduce their emissions, or double count their offsets, and there are questions about the time scale assured from activities like reforestation and afforestation. The life cycle sustainability of certain biofuels has also been challenged.
Current voluntary carbon offset markets often fund projects overseas, at times displacing local populations. In addition, often reforestation projects are heterogenous in quality. More than half of restoration projects proposed by countries are either plantations (45%) or agroforestry (21%), which remove magnitudes less carbon than natural forests. On average, natural forests store 6 times more carbon than agroforestry, and 40 times more than plantations. Additionally, most plantations are cleared every 10 to 20 years. In most cases, there is a lack of a clear, standardized, and scientific method to determine how much carbon a particular offset will sequester, and for how long. This leads to uncertainty about their value and effectiveness. The latest IPCC report warns of further dangers, including the risks of afforestation in regions where forests never were, such as grasslands, savannas, and peatlands (IPCC AR6 Summary 24). This can increase climate related risks to biodiversity, water and food security, and livelihoods, rather than mitigating them, the IPCC suggests (IPCC AR6 Summary 19). This is further complicated by the continuing warming of the world, which is shifting growing areas. Where a pine forest once existed may soon be better suited for a deciduous one.
The IPCC report suggests that at 1.5 degrees Celsius warming and above, many carbon capturing ecosystems are at risk of becoming mass carbon emitters, a risk that increases with each partial degree of warming above that point (IPCC AR6 Summary 21). Potential related impacts include major risk of forest wildfires and mass tree mortality, drying of peatlands, thawing of permafrost, and weakening of natural and carbon sinks, further amplifying warming (IPCC AR6 Summary 22). Many of the natural systems that we rely on to store carbon many not exist in a few decades, while carbon in the atmosphere lasts for thousands of years. At the same time, many natural carbon solutions take decades to mature and maximize their carbon sequestration, including forests, which can take up to a century. All this suggests that many of the offsets that businesses purchase today may fail to meet expectations.
One of the major themes in the IPCC AR6 is the risk of maladaptive responses to climate change, which can exacerbate and lock in risks, vulnerabilities, and inequalities (IPCC AR6 Summary 28). Maladaptive responses sited include a focus on risks in isolation and short-term gains without consideration of long-term adaptive responses (IPCC AR6 Summary 29). For example, seawalls, which reduce the negative impacts of sea level rise in the short term, do nothing to address its root causes (IPCC AR6 Summary 29). This type of maladaptive response erodes biodiversity and ecosystem resilience, decreasing natural processes like natural fire adaptation and flood defenses (IPCC AR6 Summary 29). If carbon offset markets are not properly implemented, overseen, and scientifically guided, and if they are not paired with adequate climate mitigatory measures, they may worsen some of the negative effects of climate change, the IPCC report argues.
The IPCC adaptation report has implications for policy makers, including the U.S. Securities and Exchange Commission, which has recently proposed new rules on climate disclosure. If implemented, the SEC rules will require all publicly traded companies to disclose their greenhouse gas emissions and climate risks to investors. The core purpose of this guideline is to increase investor awareness of financial climate related risks to business, not necessarily to reduce emissions. However, if a business pledges to reduce its emissions, it must outline its strategy to do so, including accurate reporting of the firm’s holdings of carbon offsets (SEC Proposed Climate Disclosure Rule 82). These rules are sure to apply to a large number of businesses in the United States; globally as of April 2021, 482 large companies, with total revenues of more than US $16 trillion, pledged net zero or neutrality by 2050. Many included carbon offsets in their climate mitigation plans.
The SEC’s new proposed rules do offer some degree of oversight into the quality and longevity of offsets, but they don’t solve the long-term problem: what happens if many of the carbon sinks funded by offsets disappear? If the SEC rules are enacted and publicly traded businesses in the U.S. share their plans accurately through their public filings, investors and interested parties will be better able to track corporate offsets. This is important because if an offset disappears, such as burning in a wildfire, the business will have to include this material fact in their disclosure statements, and the company would not be able to continue to write off the offset as part of its carbon footprint (SEC Proposed Climate Disclosure Rule 82). This will discourage companies from paying for lower quality offsets, for example in regions at higher risk for wildfire, insect infestation and drought, and allow the market to properly value carbon sinks that offer science-based evidence for longevity.
Better transparency on the quality of offsets held by corporations would provide investors the information they need to press companies to attain higher quality offsets for their balance sheets. Already, investors have pressed companies to utilize verification and certification services such as from the Science-based Targets Initiative. Voluntary carbon markets are already anticipating changes that will come through reporting regulations and premiums emerging for offsets that have co-benefits. Given the new SEC rules that would require companies to write down the value of carbon offsets that fail to continue as a carbon sink, meaning they would have paid for offsets that would lose their value, companies are likely to seek offsets that can be certified based on scientific processes by third parties. The new SEC offsets reporting standard, if mirrored in regulations in European and Asian countries, could substantially thereby enhance the effectiveness of the offsets market. So far, the UK has required businesses to report any expenditure on accredited offset purchases.
What does this all mean? Carbon offset markets come with risks, and reporting requirements can help prevent overvaluation of the effectiveness of carbon sinks and overestimation of their longevity. The new SEC climate disclosure rules are a good starting point to promote verification standards for voluntary carbon offset markets. The next step would be to shift from voluntary markets to regulated markets as discussed at the Glasgow climate summit last autumn and will be on the docket of the next round of climate meetings. The IPCCs latest report on Impacts, Adaptation and Vulnerability will be able to inform those deliberations. ∎
Jenna Clark is a Program Coordinator and Assistant Researcher at The Fletcher School, Tufts University.
Amy Jaffe is Managing Director of the Climate Policy Lab at The Fletcher School, Tufts University.