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Giulio Boccaletti, University Of Oxford’s Smith School Of Enterprise And The Environment

In Defence Of Nature-based Carbon Markets

Though carbon-offset schemes are riddled with complexity, there is no question that they pay for something that matters. Far from being a secondary concern, supporting the natural systems that manage the stocks and flows of carbon through the planet’s ecosystems is essential to humans’ survival

Voluntary markets for carbon offsets have recently come under fire, with critics questioning the efficacy of contracts that aim to reduce atmospheric carbon dioxide relative to what would have happened in the contract’s absence. The biggest concerns are about “nature-based” projects involving various land-use changes – such as protecting forests, planting new ones (afforestation), and so forth.

But these instruments’ imperfections are no secret. For well over two decades, ecologists and foresters have been working to develop more sophisticated methods to satisfy economists’ faith in market instruments, and they have made good progress. Though offset schemes are still riddled with complexity, there is no question that they pay for something that matters.

Imagine seeing what the atmosphere sees. The Intergovernmental Panel on Climate Change’s Sixth Assessment Report provides an outline of the planet’s carbon cycle, which makes evident the fundamental role of plants’ conversion of CO2 into cellulose and back on a massive scale. Terrestrial photosynthesis alone draws down 113 billion tons of carbon every year. By comparison, humanity added about 11 billion tons of carbon to the atmosphere last year.

The problem, of course, is that humans’ cumulative contributions go in only one direction, whereas the carbon captured by vegetation is normally balanced by an equal, opposite flow from plant respiration and degradation. By interfering with the climate system, we have thrown this balance off, adding a net flow of about 5.9 billion tons to the landscape and the ocean every year. In other words, the planet is drawing down only half of what we inject into the atmosphere.

Even a relatively small perturbation in this vast natural cycle can reach an enormous scale. That is why nature is such an attractive climate-mitigation option. Suppose we succeed in eliminating fossil-fuel combustion. Keeping global average temperatures within 1.5° or 2° Celsius of pre-industrial levels will still require substantial carbon removal. Estimates vary, but they are on the order of 200-300 billion tons removed by plants before 2100.

Nor will the story end there. The atmosphere contains about 870 billion tons of carbon in the form of CO2 (one-third of which has been added since industrialisation), and the carbon cycle connects that atmospheric stock to vast reservoirs. The largest is the ocean, which holds 900 billion tons at the surface and another 37 trillion tons deeper below. Terrestrial vegetation and soils also hold about 2.15 trillion tons, and permafrost contains another 1.2 trillion. As far as the atmosphere is concerned, losses from any of these reservoirs could easily exceed the carbon we burn (from the 930 billion tons that are sequestered in fossil fuels).

Far from being a secondary concern, managing the stocks and flows of carbon through the planet’s ecosystems is essential to keeping the entire Earth system in balance. But to carry out that task, we will need to think differently about the landscape. Landscapes and seascapes are not just the backdrop to our life. They are public infrastructure, and like all infrastructure, they must be paid for and maintained.

Since the 19th century, however, we have known that paying for infrastructure by rewarding its marginal benefit (as offsets do for nature-based interventions) almost never covers the total cost. Because public- utility infrastructure like a highway or an airport tends not to command a high enough marginal value, taxation must cover the rest. Whom to tax then becomes the most important question.

Nature-based offsets traded in voluntary carbon markets should be seen as merely a first step. In the end, we will need to do “all of the above”: end fossil-fuel combustion, maintain ecosystems, and augment nature’s capacity to draw down carbon, regardless of whether we can prove that such reductions would not have happened anyway

To illustrate the point, consider Brazil, whose ecosystems contain some 60 billion tons of carbon in above-ground biomass. One way to estimate how much this stock is worth is to assume that we value carbon at a given price, say, $50 per ton (halfway between the price in the regulated European market and nature-based offsets in voluntary markets). In this scenario, Brazil is home to ecosystems worth $10 trillion, which is over six times the country’s GDP and far greater than the value of its 13 billion barrels of oil reserves.

Now, how much should the world pay Brazil to keep that forest in trust for everyone? Assuming a 2% fee on the value of the assets (a reasonable rate for most asset managers), the country ought to receive $200 billion per year. On those terms, Brazil would almost certainly put a stop to deforestation in the Amazon.

But here we run into a sad truth. There is simply no evidence that the international community has any appetite to pay such sums. In 2022, total overseas direct assistance amounted to just $186 billion. For years, rich countries have failed to honor a 2009 pledge of mobilising $100 billion per year to help developing countries adapt to climate change.

By thinking of natural assets not as infrastructure but as service producers, we end up relying on the voluntary payments companies make at the margin in exchange for “offsetting” some other reduction that they cannot or will not carry out. But, for all this mechanism’s shortcomings, at least it directs some money – albeit a drop in the ocean – toward carbon-landscape management.

Of course, additional scrutiny of offsets is welcome for driving improvements. But it would be a fatal mistake to conclude that protecting forests or augmenting Earth’s carbon sink is any less urgent than reducing fossil-fuel emissions. Nature-based offsets traded in voluntary carbon markets should be seen as merely a first step. In the end, we will need to do “all of the above”: end fossil-fuel combustion, maintain ecosystems, and augment nature’s capacity to draw down carbon, regardless of whether we can prove that such reductions would not have happened anyway.

The atmosphere does not care about our motivations, counterfactuals, or moral hazards. All it sees is carbon flowing in and out. Ecosystems store carbon and draw it from the atmosphere at scales that matter. All of us – taxpayers, consumers, and companies – must pay for this critical public good.

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