The inception of carbon credits and offsets in the Climate Action agenda of

the United Nation

Shadrack Chai

University of Nairobi, school of law, Nairobi, Kenya

[email protected]

Abstract
Carbon credits and offsets can be traced back to the earliest efforts to mitigate the impacts of
human activities on the environment. Ronald Couse proposed assigning property rights to
pollution in the 1960s. The concept of carbon credit and offsets came into place in the 1980s.The
Paris Agreement effectively replaced the Kyoto Protocol, whose binding targets were set to
expire in December 2020..The Paris Agreement’s central aim was to strengthen the global
response to the threat of climate change by keeping a global temperature rise this century well
below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature
increase even further to 1.5 degrees Celsius..Additionally, the agreement aimed to strengthen the
ability of countries to deal with the impacts of climate change..To reach these ambitious goals,
appropriate financial flows, a new technology framework and an enhanced capacity building
framework was to be put in place, thus supporting action by developing countries and the most
vulnerable countries, in line with their own national objectives..The Agreement also provides for
enhanced transparency of action and support through a more robust transparency framework.

Keywords : carbon, credits, offsets, GHG emissions, chlorofluorocarbons, protocols,

trading scheme

Introduction

We are constantly on the lookout for innovative solutions to the issues that plague our
environment. One of the solutions that has gained significant traction in past few years is the
implementation of carbon credits and offsets. The concept of carbon credit and offsets is
increasingly becoming momentous as the world faces the ever-growing threat of climate change.

But how did we get here?

It is very important to understand that the origins of these ideas of climate change date back
several decades. The history of carbon credit and offsets can be traced in their roots to the
earliest efforts to mitigate the impacts of human activities on the environment. But the chequered
history of carbon offsets, carbon credits ideas, experiments and policies that informed them is
much longer, spanning more than six decades.i In 1960 a renowned environmental writer Ronald
Couse proposed assigning of property rights to pollution and he further argued that arbitrage
between actors in a market with low transaction costs could result in efficient environmental
solutions.ii However, thirty years later Coase rued that his work had been widely misunderstood,
stating that its influence on economic analysis had been less beneficial than he had hoped it to
be.

In 1975, the United States faced a backlash from industries and economists for its “command and
control” clean-air regulations during oil-price shocks, the US Environmental Protection Agency
(EPA) investigated the option of sulphur dioxide and nitrogen oxide emissions offsets for oil, gas
and steel industries, in response to many states being unable to meet the deadline for national air
quality standards. It introduced an emissions trading system in 1977 that allowed emissions from
new sources to be offset by being reduced from existing sources and later allowed for states to
bank excess emissions reductions. The amendments, according to EPA administrator Douglas M
Costle, would permit expanded use of coal while maintaining protection of the public health in
general and it was to provide an acceptable schedule for continued future reduction in emissions
from automobiles.3

The year 1977 Freeman Dyson, a Physicist and viewed by many as a climate sceptic published
that it would be possible in the case of a world-wide emergency to plant enough trees and
fastgrowing plants to halt annual increase in emissions. He suggested that this as a stopgap and
not a permanent solution.iii His reasoning is actually the mind map to modern day natural carbon
offsets which are perceived to be efficient compared to the use of harmful chemicals which
directly absorb carbon.

The period between 1982 to 1988, the US EPA rolled out lead credits. These trading and banking
programmes aimed to ease the transition for refineries as part of its leaded gasoline phasedown
that began in 1973, even though the oil and automotive industry knew of lead’s toxicity half a
century earlier. If a refiner produced gasoline with a lower total lead content than is allowed, it
could earn lead credits that it is then allowed to sell. Lead credits were then discontinued in 1988
and the US lead phase-out ended in 1996.iv The Montreal Protocol in 1987 allowed for limited
emissions trading. The US, Europe, Canada, New Zealand and Singapore set up markets in
tradable permits and production quotas for chlorofluorocarbons (CFCs) and other ozone
depleting substances. In 1988, Applied Energy Services approached World Resources Institute
(WRI) for advice on how they were to delve into the mitigation of the climate impacts of its coal
plants. WRI recommended that AES should fund an agroforestry project to plant 52m trees, slow
local deforestation in Guatemala and offset the emissions of its first coal plant in Thames,
Connecticut. This was the first-ever land-based carbon-offset project which was implemented in
1989. Prof David, the director of the London Environmental Economics Centre, in the same year
suggested how different forms of pollution could be priced and how governments could construct
a taxation systems and market instruments to fund the cleanup of environmental damage.v His
report served as a launchpad for an influential white paper that was even considered the
Conservative party’s first serious engagement with a green agenda.

In 1993,Sheryl Sturges of US utility and power company AES summed up the company’s foray
into forest offsets by suggesting that CO2 emission offsets could be one way to preserve coal and
gas as fuel options while mitigating any adverse global climate change effects they may have. vi

In berlin 1995, the UNFCCC’s first Conference of Parties (COP1) launched a pilot phase of
“activities implemented jointly” (AIJ), allowing countries to voluntarily implement reduction or
removal projects in other countries, but without accruing credits. Avoided deforestation was
hotly discussed, but was, ultimately, left off the table for financing. This drives projects to the
voluntary market.vii

International participation in carbon markets started to become a more common place. This is
after policy makers regarded the trends and effects of climate change as a malaise that was
threatening the extinction of living flora and fauna. Governments and multilateral organizations
led the way by creating avenues for countries to participate in carbon reduction efforts through
the use of carbon credits and carbon offsets. This resulted to the adoption of Kyoto Protocol on
11 December 1997. However, the Kyoto Protocol came into effect in 2005, setting legally
binding targets for 37 industrialized countries to limit or reduce their overall greenhouse gas
emissions (“GHG Emissions”) by an average of at least 5% below their respective 1990 levels
during the period of 2008-2012.viii
The mechanisms introduced by the Kyoto Protocol led to the creation of global and regional
compulsory compliance regimes requiring both countries and corporate entities to limit their
carbon emissions. The creation of these market-based mechanisms introduced and established
what ultimately became known as the international carbon market.

The Convention itself only asks those countries to adopt policies and measures on mitigation and
to report periodically.

The Kyoto Protocol is based on the principles and provisions of the Convention and follows its
annex-based structure. It only binds developed countries, and places a heavier burden on them
under the principle of “common but differentiated responsibility and respective capabilities”,
because it recognizes that they are largely responsible for the current high levels of GHG
emissions in the atmosphere.

In 2005 EU Emissions Trading Scheme (EU ETS) was formulated and it was a key policy tool
developed by the European Union (EU) to address climate change and reduce greenhouse gas
emissions. The EU ETS is the largest emissions trading system in the world. The system works
by putting a limit on overall emissions from covered installations which is reduced each year.
Within this limit, companies can buy and sell emission allowances as needed. This 'cap-andtrade'
approach gives companies the flexibility they need to cut their emissions in the most
costeffective way, covering approximately 11,000 power stations and manufacturing plants in the
28 EU Member States plus Iceland, Liechtenstein and Norway, as well as aviation activities in
these countries. In total, around 45% of total EU greenhouse gas emissions are regulated by the
EU ETS. It remains the world's biggest emissions trading market, accounting for over three-
quarters of international carbon trading. It continues to inspire the development of other national
or regional systems. Europe is looking to link the EU ETS with compatible schemes in other
countries

Copenhagen summit
The United Nations Climate Change Conference, Copenhagen 2009, was hosted by the
Government of Denmark. It was comprised of the following sessions:

 Fifteenth session of the Conference of the Parties (COP 15)

  Fifth session of the Conference of the Parties serving as the meeting of the Parties to the
Kyoto Protocol (CMP 5)

 Thirty-first session of the Subsidiary Body for Implementation (SBI 31)

 Thirty-first session of the Subsidiary Body for Scientific and Technological Advice
(SBSTA 31)

 Tenth session of the Ad Hoc Working Group on Further Commitments for Annex I
Parties under the Kyoto Protocol (AWG-KP 10)
 Eighth session of the Ad Hoc Working Group on Long-term Cooperative Action under
the Convention (AWG-LCA 8)

The Conference was an exceptional event that attracted unprecedented participation and resulted
in: Attendance by 120 Heads of State and Government, a raising climate discussions to a new
level. More record numbers of participants including 10,500 delegates, 13,500 observers, and
coverage by more than 3,000 media representatives. Intensive negotiations characterized by over
1,000 official, informal and group meetings among parties. Observers discussed climate change
in more than 400 meetings and media attended over 300 press conferences.

A vibrant programme of over 200 side events. Over 220 exhibits from Parties, UN, IGOs and
civil society. A total of 23 decisions adopted by the COP and the CMP.

Governments engaged at the highest political level, and the outcome of that engagement was
reflected in the Copenhagen Accord. While much attention has focused on the Accord, Â the
Conference in Copenhagen also made good progress in a number of areas including
improvements to the clean development mechanism, amending Annex I to the Convention to add
Malta, guidance on REDD+, and draft decisions on adaptation, technology, and
capacitybuilding.ix

In 2012, the UN conference on Sustainable Development Goals took place in Rio de Janeiro,
Brazil from June 20–22, 2012. The goals of the Sustainable Development Goals (SDGs) were
created at this conference to address the world's environmental, political, and economic
challenges. Goal number 13 was agreed to be climate action. They recognized the importance of
the three Rio conventions for advancing sustainable development, and in this regard they urged
all parties to fully implement their commitments under the United Nations Framework
Convention on Climate Change,x the Convention on Biological Diversityxi and the United
Nations Convention to combat desertification in those countries experiencing serious drought or
desertification, particularly in Africa,xii in accordance with their respective principles and
provisions, as well as to take effective and concrete actions and measures at all levels and
enhance international cooperation.

The second phase of carbon trading kicked off in 2015 when 114 countries ratified the Paris
Agreement. The Paris Agreement effectively replaced the Kyoto Protocol, whose binding targets
were set to expire in December 2020.14

The Paris Agreement’s central aim was to strengthen the global response to the threat of climate
change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-
industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees
Celsius. Additionally, the agreement aimed to strengthen the ability of countries to deal with the
impacts of climate change. To reach these ambitious goals, appropriate financial flows, a new
technology framework and an enhanced capacity building framework was to be put in place, thus
supporting action by developing countries and the most vulnerable countries, in line with their
own national objectives. The Agreement also provides for enhanced transparency of action and
support through a more robust transparency framework.xiii
i
Chandrasekhar Aruna, “The 60-year history of carbon offsets”, (2023) https://interactive.carbonbrief.org/carbonoffsets-
2023/timeline.html accessed 5 March, 2024.
ii
Ronald H Coase, "The Problem of Social Cost" (1960) Vol III LE 23, 25 3 ibid
iii
Freeman Dyson, "Can We Control the Carbon Dioxide in the Atmosphere" (1977)
iv
”An advertisement for leaded gasoline” 1936 Times Magazine
v
David Pearce, "Blue for a Green Economy" (1989) DoE 45,53
vi
Sheryl Sturges, “Greenhouse gas emission offsets: a global warming insurance policy” (1993) EJ 2
vii
Chandrasekhar Aruna, “The 60-year history of carbon offsets”, (2023) https://interactive.carbonbrief.org/carbonoffsets-
2023/timeline.html accessed 5 March, 2024.
viii
Areta Jez, Brad Alexander and Ayaz Shaikh “Carbon credits and carbon offsets fundamentals”
ix
Report of UNFCCC“COP 15 AND CPM 5“ (2009) https://unfccc.int/process/conferences/pastconferences/copenhagen-
climate-change-conference-december accessed 5 March, 2024
x
United Nations, Treaty Series, vol. 1771, No. 30822.
xi
Ibid, vol. 1760, No. 30619.
xii
Ibid. vol. 1954, No. 33480. 14 Ibid 10
xiii
Summary based on the report of the Paris agreement (2015) http://bigpicture.unfccc.int accessed 5 March, 2024