Financial Instruments of Environmentally Friendly Solutions for

Voluntary Carbon Offsetting

Magomed Tashtamirov

Kadyrov Chechen State University, Grozny, Russia

Keywords: Nature based solutions, sustainable development, financial instruments, credit offset, decarbonization,

ecosystems, carbon neutrality.

Abstract: It is now recognized that social problems, including climate change and rapid urbanization, growing demand

for food and water, as well as increased risk of natural disasters, can lead to abrupt and in some cases

irreversible environmental changes that negatively affect human development. The traditional approach is to

use engineering solutions that are designed and managed in such a way that they are easy to implement, easy

to reproduce and provide predictable results, for example, large-scale physico-chemical biofiltration processes

used to purify air and water. An alternative approach is to use nature based solutions (NBS) that use

ecosystems and the services they provide to solve society's problems in sustainable ways. This work is devoted

to the tools and methods of financing projects based on nature based solutions. Credit methods of financing

projects for the decarbonization of society are considered, their features and specifics are revealed, types of

standards for the implementation of credit offsets are determined. Corporate steps are proposed in order to

achieve carbon neutrality based on the use of credit offsets.

1 INTRODUCTION

Nature based solutions (NBS) can mitigate 15

gigatons of carbon dioxide equivalent, or about 30%

of the mitigation needed to achieve the goals of Paris

Agreement. Despite the fact that public policy is

necessary to support the use of nature to mitigate the

effects of climate change, there is an investment gap

between the amount of funds currently allocated for

environmental protection and restoration and what is

needed. For example, over the next decade, USD 65

billion is not enough just for forest conservation and

restoration (Streck, 2021). Thus, a significant amount

of investment can be attracted through voluntary

carbon offsetting projects. The paper considers the

concept of carbon sequestration and NBS to mitigate

the effects of climate change, and also discusses the

concept of voluntary carbon markets. Various

existing standards of voluntary carbon offset are

considered, and several types of offset projects are

discussed. Finally, the role of carbon offset credits in

achieving corporate carbon neutrality is considered.

https://orcid.org/0000-0002-6777-3863

2 MATERIALS AND METHODS

The paper considers the concept of carbon

sequestration and NBS to mitigate the effects of

climate change, and also discusses the concept of

voluntary carbon markets. Various existing standards

of voluntary carbon offset are considered, and several

types of offset projects are discussed. Finally, the role

of carbon offset credits in achieving corporate carbon

neutrality is considered.

3 RESULTS AND DISCUSSION

3.1 Sequestration of Carbon Dioxide

Actions to mitigate the effects of climate change

include not only reducing greenhouse gas (GHG)

emissions in the energy sector through renewable

energy sources or energy efficiency, but also

biological mitigation of greenhouse gases, which can

occur by preserving existing carbon pools and

sequestration by increasing the size of carbon pools.

Tashtamirov, M.

Financial Instruments of Environmentally Friendly Solutions for Voluntary Carbon Offsetting.

DOI: 10.5220/0011571300003524

In Proceedings of the 1st International Conference on Methods, Models, Technologies for Sustainable Development (MMTGE 2022) - Agroclimatic Projects and Carbon Neutrality, pages

327-331

ISBN: 978-989-758-608-8

 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

327

Carbon sequestration is defined as the extraction of

carbon dioxide from the atmosphere by soils and

plants - both on land and in the aquatic environment,

for example, in wetlands - and/or the prevention of

carbon dioxide emissions from terrestrial ecosystems

into the atmosphere (Zaitseva, 2018).

3.1.1 Ecosystem-based Mitigation of Climate

Change

In the context of climate change mitigation, NBS is

referred to as ecosystem-based climate change

mitigation (EbM). EbM includes a variety of

mitigation approaches, including sustainable forest

management, the use of local communities of forest

species in reforestation, conservation and restoration

of peatlands and wetlands, protection of the ocean

carbon sink, improved pasture management and

environmentally sound farming practices. In addition

to reducing GHG emissions, EbM provides a number

of co-benefits, including:

- Reduction of health damage from air pollution

- Increased labor productivity due to reduced

exposure to air pollution

- Increased satisfaction of the population from

the improvement of the environment in

connection with the reduction of emissions of

pollutants

- Increased provision of ecosystem services by

preserving and increasing forest cover and

reducing emissions from deforestation and

forest degradation

- Reduction of crop damage associated with

ground-level ozone

- Increased agricultural productivity through the

conservation and accumulation of carbon in the

soil

- Less damage to coastal areas as a result of sea

level rise

- Less mortality from heat as a result of reducing

the number of heat strokes

- Less loss of biodiversity due to slower climate

change.

3.2 Voluntary Carbon Markets

Carbon markets are institutions or systems in which

parties exchange shares of carbon for compliance or

voluntary use. Interests in carbon are either emission

permits or credits. Emission permits are used in

regulatory schemes that limit greenhouse gas

emissions from certain facilities or sources. The

emission of greenhouse gases from established

sources is prohibited without a permit. The permit

entitles the holder to emit a set amount of greenhouse

gases, usually measured in tons of carbon dioxide

equivalent (tCO2e), which is defined as "the amount

of reduction in carbon dioxide emissions and carbon

dioxide equivalent of other greenhouse gases and/or

sequestration of additional carbon to compensate for

emissions produced elsewhere" (Sapkota and White,

2020).

Voluntary carbon markets generate credits (or

offset credits) that allow businesses, governments,

non-profit organizations, universities, municipalities

and individuals to offset emissions outside the

regulatory regime. The offset is the emission of one

metric ton of carbon dioxide or an equivalent amount

of GHG. The buyer of an offset loan can "retire" him

to claim emission reductions as part of his own GHG

reduction goals. Credits are measurable, quantifiable

and traceable units of GHG emissions. Currently, it is

more cost-effective to use nature to absorb carbon

from the atmosphere than to rely on artificial carbon

sequestration plants or non-stationary GHG emission

reduction technologies for industry.

3.2.1 Carbon Dioxide Emission

Compensation Projects

Offset loans are mainly generated as a result of carbon

offsetting projects in forestry, agriculture and "blue

carbon" (IUCN, 2021). Known as biological binding,

trees, plants and soil bind carbon, reducing its amount

in the atmosphere. Biological sequestration projects

usually include activities aimed at increasing

sequestration or preserving existing sequestration

capabilities that are under threat. In addition,

compensatory loans can be obtained as a result of

renewable energy projects, including the use of

biomass fuels, and energy efficiency projects,

including compensatory projects to modernize more

efficient equipment and support more energy-

efficient buildings. To qualify as a carbon offset

project, it must reduce greenhouse gas emissions

compared to what would otherwise happen.

Equivalence between received (compensation) and

lost (compensated emission) should also be ensured.

The most important aspect of carbon compensation is

the environmental integrity of the carbon

compensation system. There are four main criteria

that carbon offsetting projects must meet in order to

ensure their environmental reliability and credibility:

1. Additionality: Compensation schemes typically

use one or more of the following additionality tests:

- Checking for the additionality of emissions (or

environmental additionality): It is assessed

whether the project will lead to a reduction in

MMTGE 2022 - I International Conference "Methods, models, technologies for sustainable development: agroclimatic projects and carbon

neutrality", Kadyrov Chechen State University Chechen Republic, Grozny, st. Sher

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emissions compared to what would happen

under normal business conduct.

- Regulatory additionality test: assesses whether

the project is legally binding for its

implementation by the author or another

relevant party.

- Verification of financial (or investment)

additionality: it is estimated whether the project

will be carried out without the income received

from carbon credits.

- Technological additionality: assesses whether

the project leads to accelerated technology

adoption, which would have occurred

otherwise.

- Barrier testing: assesses whether any non-

financial barriers may hinder the

implementation of the project, for example,

technological barriers or barriers in the capital

market.

- Testing of common practice: assesses whether

project activities are common practice in the

region and/or industry.

2. Accurate measurement: The scheme accurately

accounts for emissions and/or sinks occurring within

the project boundaries as a result of project

implementation, ensuring that there is no over-

crediting (Lee and Kim, 2018; Miroshnichenko,

2021).

3. Leakage: The scheme should ensure that there

will be no increase in emissions or reduction in

uptakes beyond the project boundary as a result of the

project (Gillenwater et al., 2017).

4. Consistency: Carbon accumulated and credited

under the scheme will not be fully or partially

released as a result of future events. The most

common way to ensure consistency is:

- issuing only time-limited loans for

sequestration projects when the loans expire

after a certain period and they must be replaced

upon expiration.

- the requirement to preserve carbon stocks for a

fixed period of permanence, for example, 100

years (FAO, 2010).

3.2.2 Purchase and Sale of Offset Loans

In the carbon market, sellers and buyers exchange

both permits and offset loans. In voluntary carbon

markets, sellers of offset loans voluntarily reduce

emissions or increase carbon sequestration, usually

due to a financial incentive associated with the

possibility of selling loans. Buyers who are not

legally obligated to reduce emissions or increase

carbon sequestration mainly purchase offset loans to

reduce their environmental footprint, demonstrate

corporate social responsibility and improve their

public image. There are two main types of

transactions in voluntary carbon markets:

- Forward sales: This type of sales corresponds

to the sale of ex-ante emissions reductions (not

released) before they occur or ex-post

emissions reductions (released) that must be

delivered after their release and the conclusion

of the contract. Forward sales require

agreement on a number of conditions,

including the quantity to be bought/sold, the

prices to be paid, payment terms, delivery of

assets, which registry will be used, cancellation

policy, etc.

- Spot sales: In this case, the seller delivers

carbon compensation credits to the buyer's

delivered carbon credits. Alternatively, the

buyer can pay first and then the seller can make

the delivery. Spot sales require the conclusion

of contracts that address a number of issues,

including the number of quotas to be

bought/sold, the prices at which they will be

paid, payment terms, termination terms,

included and excluded taxes, etc.

3.2.3 Pricing of Carbon Offsetting Credits

In a functioning market with strict and transparent

standards, the prices of carbon offset credits are set

by supply and demand. The most successful will be

those offset service providers whose projects are

effective and can generate offsets at below-market

prices. The carbon offset unit prices must offset the

costs incurred at various stages of the project before

the emission reduction can be sold as compensation.

The main cost factors are:

- Costs associated with the project cycle: These

costs include investments in technology,

financing of investment capital, costs of

technical operation of the project, maintenance

and administration, etc.

- Costs associated with the delivery process:

These costs include project management,

quality control, legal and other costs.

3.3 Voluntary Carbon Offset

Standards

Carbon offset credits sold on the voluntary carbon

market can be certified according to a number of

certification standards, the main of which are listed

below. These standards ensure that carbon offsetting

projects and the resulting credits are trustworthy.

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Although each standard uses its own approach to

measuring GHG reductions and absorptions, they all

include criteria:

- definition of project categories and compliance

with criteria

- additionality

- establishment of reference or baseline levels by

which the reduction and absorption of

emissions will be assessed

- monitoring of emissions and movements

- Risk management of the return of emissions

into the atmosphere.

- Verification and certification

- Co-benefits for sustainable development -

participation and consultation with

stakeholders (Lovell, 2010).

3.3.1 Verified Carbon Standard

The Verra program or VCS certifies the reduction of

carbon emissions. About 1,700 VCS projects have

been certified under the VCS Program, which

together have reduced or removed more than 630

million tons of carbon and other GHG emissions from

the atmosphere. After projects are certified for

compliance with the rules and requirements of the

VCS Program, project developers can receive credits

for greenhouse gas emissions, known as Verified

Carbon Units (VCUs). These VCUs can be sold on

the open market and used by individuals and

companies to offset their own emissions. Projects can

be developed in 15 sectoral areas of the VCS,

including agriculture, forestry and other land uses

(AFOLU). AFOLU project types include

afforestation, reforestation and vegetation restoration,

agricultural land management, improved forest

management, reduction of emissions from

deforestation and degradation, prevention of

conversion of pastures and shrubs, and restoration

and conservation of wetlands. The category of

wetland restoration and conservation projects

provides a framework for accounting for emission

reductions in projects on mangroves, tidal and coastal

wetlands, swamps, seagrasses, floodplains, deltas and

peat bogs, etc.

In addition, the Climate, Communities and

Biodiversity (CCB) Standards define projects that

simultaneously address climate change, support local

communities and small farmers, and preserve

biodiversity. CCB standards are used in conjunction

with AFOLU projects to certify the benefits of

climate change, community and biodiversity. CCB

standards ensure that projects:

- identify all interested parties and ensure their

full participation

- recognize and respect ordinary and statutory

rights

- take into account and control direct and indirect

costs, benefits and risks

- identify and maintain high environmental value

- demonstrate net positive benefits for climate,

community and biodiversity.

3.3.2 The Gold Standard

The Gold Standard (GS) company started its activity

in 2003 with the aim of providing carbon credits and

bringing them in line with the Millennium

Development Goals. The company has developed

more than 20 proprietary methodologies and is the

Table 1: Projects eligible for registration under the gold standard.

Pro

ect t

e Descri

tion

Community

service

projects

These projects provide or improve access to services/resources at the household, community or

institutional level, including:

- Renewable energy sources connected to mini-grids or autonomous grids: Including solar,

tidal/wave, wind energy, waste energy and renewable biomass.

- End-use energy efficiency: Projects that reduce energy requirements compared to baseline

scenarios without affecting the level and quality of services or products.

- Waste management and treatment: All types of waste disposal activities that provide energy or

useful products with benefits for sustainable development, for example, biogas.

- Water, sanitation and hygiene (WSH): Activities in the field of WSH that contribute to climate

chan

e miti

ation and/or ada

tation.

Renewable

energy

roducts

GS projects must supply energy to the national or regional grid from renewable energy sources

such as renewable biomass

Afforestation

and

reforestation

rojects

- These projects include plantings or project areas that are not defined as a forest and have not

been a forest for at least ten years prior to the start of the project.

- Projects may include planting trees (as well as shrubs, palm trees and bamboo), single-species

lantations, all forestry systems, for example, conservation forests, and agriculture (agroforestry).

MMTGE 2022 - I International Conference "Methods, models, technologies for sustainable development: agroclimatic projects and carbon

neutrality", Kadyrov Chechen State University Chechen Republic, Grozny, st. Sher

330

preferred standard for community-oriented projects.

It maintains partnerships with Fairtrade International

and the Forest Stewardship Council. In 2017, its rules

and principles were brought into line with the

Sustainable Development Goals. GS projects are

aimed at accelerating the transition to climate security

and sustainable development. The types of projects

that can be registered with GS are listed in Table 1.

4 CONCLUSIONS

One of the main ways to combat climate change and

environmental degradation for organizations is

carbon neutrality. Carbon offset credits are a

convenient and cost-effective way for organizations

to reduce GHG emissions. Offsets are usually used to

offset an organization's greenhouse gas emissions

instead of directly reducing those emissions.

Sometimes offsets are used to achieve carbon

neutrality, that is, when the entire organization

reaches zero net carbon footprint. The practice of

voluntary compensation of emissions by

organizations can lead to a number of advantages. To

achieve carbon neutrality, an organization can take

the following steps:

1. Reduce internal emissions: An organization

can implement internal strategies to reduce

emissions, such as investing in low-carbon

capital projects, choosing low-emission

alternatives when purchasing equipment,

materials and fuels, as well as investing in

energy efficiency measures and renewable

energy sources on site.

2. Reduce emissions in the supply chain and

products: An organization can estimate

emissions in the supply chain and emissions

from the use of products. It can then implement

emission reduction strategies, including

selecting suppliers with lower GHG supply

chains, developing programs and incentives to

help suppliers reduce emissions, and

redesigning products with a lower emissions

footprint.

3. Purchase of carbon compensators: An

organization can purchase carbon offsetting

quotas to offset any remaining direct GHG

emissions and major sources of emissions from

the supply chain and product use. In addition,

organizations can enable interested consumers

to purchase carbon quotas to compensate for a

certain amount of carbon emissions.

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