Emissions trading systems with different offsets provisions : implications for linking : report for the carbon market policy dialogue.
Date: 2022-04-04
Institutions: European University Institute
Subjects: climate change policy, emission allowance, emission trading, environmental policy, reduction of gas emissions

Emissions trading systems with 
different offsets provisions: 
implications for linking

Report for the Carbon Market Policy Dialogue

Authors: Giulio Galdi, Stefano F. Verde, Simone Borghesi, Jürg Füssler,  
Ted Jamieson, Martin Soini, Emily Wimberger and Li Zhou

Research Project Report 
Issue 2022/01
January 2022

© Giulio Galdi, Stefano F. Verde, Simone Borghesi, Jürg Füssler, Ted Jamieson, Martin Soini,  
Emily Wimberger and Li Zhou, 2022

This work is licensed under a Creative Commons Attribution 4.0 (CC-BY 4.0) International license.  
https://creativecommons.org/licenses/by/4.0/

Requests should be addressed to fsr@eui.eu.
Florence School of Regulation
Robert Schuman Centre for Advanced Studies

Research Project Report
RSC/Florence School of Regulation, 2022/01
January 2022

Published in January 2022 by the European University Institute.
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Views expressed in this publication reflect the opinion of individual author(s) and not those of the European 
University Institute.

This publication is available in Open Access in Cadmus, the EUI Research Repository:  
https://cadmus.eui.eu 
www.eui.eu

The present report prepared by FSR Climate and its external collaborators is a deliverable of the LIFE DICET project, which is co-fi-
nanced by the EU LIFE Programme of the European Commission. It reflects the authors’ views and the European Commission is not 
responsible for any use that may be made of the information this report contains.

ii 

Table of Content

1. Introduction 

2. Conceptual framework 

2.1 Limits on the use of offsets 

2.2 Challenges and opportunities of offsets 

2.3 Interactions with the Paris Agreement 

3. Literature review   

3.1 Missteps in carbon offsetting   

3.2 Linking-specific literature 

4. Data from the ETSs in the Carbon  

Market Policy Dialogue 

4.1 California-Quebec 

4.2 China 

4.3 European Union (EU) 

4.4  New Zealand   

4.5 Switzerland 

5. Discussion and conclusions 

Well-designed offsets to boost climate action 

The crucial pieces of Article 6 

Low-hanging fruits vs scaffolding investments 

Reference list (APA style) 

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1. Introduction

At the time of writing (June 2021), most emissions trading systems (ETSs) around the world are ex-
periencing a positive momentum: allowance prices are on the rise and carbon markets are attracting 
participation from financial operators. While high allowance prices are generally the sign of a stringent 
and, therefore, working ETS, very high prices pose at least two types of problems: one is the risk of 
crumbling political support for the ETS; the other concerns the possibility that, outside the ETS (whether 
in the same jurisdiction or not), much cheaper emissions abatement options are unexploited. In theory, 
the use of emission offsets, i.e. the use of emission credits for offsetting emissions, offers a solution to 
the second issue, as it allows for emissions abatement within the ETS to be replaced by cheaper abate-
ment outside1. In this sense, the use of offsets offers efficiency gains that are similar to those achievable 
by  linking  ETSs with different  abatement costs. Moreover, as cheaper  abatement opportunities  tend 
to be concentrated in less developed economies, emission offsets provide a platform for international 
cooperation that involves those. In practice, however, the experience with emission offsetting has so far 
been mixed or even controversial.

The first experience of ETSs with emission offsetting is related to the Kyoto Protocol’s ‘flexible mech-
anisms’, namely the Clean Development Mechanism (CDM) and the Joint Implementation (JI). The ba-
sic difference between the two mechanisms is in whether the country hosting the project that generates 
emission credits is a developing country (CDM) or an industrialised one (JI). Again, while in theory the 
use of offsets in ETSs was meant to enhance cost-effectiveness in emission abatement, reality often 
turned out to be different. In the case of the EU ETS, major inflows of emission credits from the CDM 
and the JI, de facto raised the cap on regulated emissions. This aggravated a market imbalance that 
was mainly due to the effects of the Great Recession (2007-2009), thus further depressing allowance 
prices and undermining the cost-effectiveness of the system over the long term. Furthermore, credits 
generated  by  the  CDM  and  the  JI  were  riddled  with  doubts  about  their  environmental  integrity,  that 
is, their ability to represent real, permanent, additional, and verifiable emission abatement (see, e.g., 
Cames  et  al.,  2016;  Kuriyama  and Abe,  2018;  Schneider,  2003;  Mason  and  Plantinga,  2013). Also, 
while not directly relevant to the functioning of an ETS, many projects that generated emission credits 
came  under  the  spotlight  for  alleged  violations  of  human  rights  (see,  e.g.,  Schade  and  Obergassel, 
2014).

Of the six ETSs involved in the Carbon Market Policy Dialogue (CMPD) (namely, the EU ETS and 
the ETSs of California, China, New Zealand, Quebec, and Switzerland), all have some form of quali-
tative or quantitative restrictions in force. In the EU ETS, in response to persistent excess supply and 
environmental integrity concerns, the use of offsets was first restricted and then completely shut down. 
In the NZ ETS, all international offsets are excluded. Offsets have not altogether vanished, however – 
far from it. Not only do most ETSs admit regulated use of emission offsets, but there is also a general 
expectation that offsets will play a greater role in their future and in the future of climate mitigation more 
generally. Increasingly ambitious emission abatement targets will likely strengthen incentives for using 
emission offsets and, in this connection, the future rules operationalising Article 6 of the Paris Agree-
ment will be important.

Against  this  background,  the  present  report  reviews  the  literature  on  offsets,  with  a  focus  on  the 
implications of different offsetting rules for hypothetical linkages between ETSs, and summarises the 
relevant recent developments in each of the six ETSs involved in the CMPD. 

 While emission ‘credit’ refers to the achievement of a mitigation outcome, emission ‘offset’ refers to the use of a credit for 

1 
compensating emissions. 

1 

Emissions trading systems with different offsets provisions: implications for linking. 2. Conceptual framework

In this section we briefly illustrate the most relevant issues concerning offsets and their use in the con-
text of an ETS. A more in-depth analysis of these issues, including the implications for ETS linking, is 
offered in the subsequent sections.

2.1 Limits on the use of offsets

Offsets provisions in an ETS may include limits of a qualitative or quantitative nature, or both. Quan-
titative limits enforce a maximum number of offsets/credits that can be used for compliance. They are 
typically implemented in the form of a maximum share of emissions that a regulated firm or installation 
is allowed to cover with offsets, instead of allowances. Alternatively, quantitative restrictions may be 
expressed in terms of a maximum share of an overall emission reduction target that can be achieved 
with offsets (see, for example, the cases of the EU ETS and Switzerland’s ETS described in section 4). 
Qualitative limits, by contrast, do not impose a quantitative ceiling on the use of offsets. Rather, they 
restrict the types of activities that can generate eligible credits. ETS regulators may decide to accept 
credits only from certain specific activities or, more simply, they may prefer to exclude certain activities. 
Other restrictions could concern the geographical scope of the projects (e.g. international vs domestic) 
or the time of generation of the credits (e.g. the compliance period of the Kyoto Protocol). In an ETS, 
offset provisions typically include both qualitative and quantitative limitations.

2.2 Challenges and opportunities of offsets

The  use  of  offsets  in  emissions  trading  has  a  somewhat  controversial  history. This  is  mainly  due  to 
doubts as to the actual abatement underlying different types of emission credits. While many ETS regu-
lators have imposed limits on the use of offsets, these still account for a non-negligible share of compli-
ance in some ETSs. For instance, the Californian ETS allows operators to use offsets to cover up to 8% 
of their emissions. Indeed, the limits on offsets did not represent a lack of interest, but rather concerns 
about  the  governance  and  environmental  integrity  of  some  offsets,  notably  some  Certified  Emission 
Reductions (CERs) issued under the CDM. In general, the interest in offsets transcends economic ef-
ficiency considerations as there are also other potential benefits that offsets may offer. In the following, 
we outline the main issues concerning the implementation and the use of offsets under an ETS.

Environmental integrity

One of the main criticisms towards the use of emission offsets concerns the credibility of the underlying 
emission abatement, or, in other words, the environmental integrity of the credits/offsets. If there is any 
uncertainty on whether a credited tonne of CO2 was actually abated by the originating project, the envi-
ronmental value (and possibly also the market value) of the credit is compromised. If no or only partial 
abatement was actually achieved by the project that generated an emission credit and, yet, the same 
credit gave a firm the right to emit an additional tonne of CO2, then clearly the offsetting system would 
cause an increase in overall emissions. The credibility of an emission credit rests on the following four 
qualities (Santikarn et al., 2018):

•  Reality: For an offset to be credible, it should certify mitigation efforts that have already occurred, 

rather than prospective ones.

•  Additionality: In order to claim to have effectively abated emissions, credits need to derive from 
additional  abatement  efforts. Accordingly,  project  developers  should  be  able  to  prove  that  the 
abatement would not have occurred without the additional finance attracted through the issuance 
of the carbon credit. Therefore, an abatement is not additional if it is a consequence of any action 
that was, for instance, part of the plans of a national regulator or firm. To this end, a baseline sce-
nario of emissions and foreseen mitigation actions serves as a point of reference. An abatement 
would then be additional if it reduces emissions with respect to the baseline scenario.

•  Measurability:  The  mitigation  effort  that  yields  an  emission  credit  should  be  quantifiable  and 

2 

 RSC | FSR | LIFEDICETverified. Also, to ensure transparency, verification of abatement should be performed by an inde-
pendent entity, rather than by the project developer or by the government of the country hosting 
the project.

•  Permanence: Depending on the nature of the offset project, the emission abatement originally 
achieved could be subsequently reversed, for example by a natural event. An obvious example 
is an afforestation project whose CO2 removal is then reversed by a forest fire. 

If a credit lacked one or more of these qualities, its actual abatement value would be doubtful. There-
fore, if an ETS allowed the use of such credits for offsetting purposes, the environmental integrity of the 
ETS itself would be compromised.

Diversion of mitigation efforts

Independent of whether offset projects are domestic (i.e. located in the same jurisdiction as the ETS) 
or international (i.e. hosted in a foreign jurisdiction), they may discourage policy interventions. If a new 
or tighter climate policy would have been implemented in the baseline scenario (i.e. if the project had 
not existed), but it is instead delayed or suspended because of the project and its generation of emis-
sion credits, overall emissions may turn out to be higher than in the baseline scenario. For instance, a 
project aimed at decarbonising energy supply by deploying renewable energy technologies (e.g. wind 
turbines) could disincentivise further policy action and ultimately lead to higher emissions. Moreover, 
relying on offsetting as a strategy to lower compliance costs within an ETS may result in postponing 
investments in low-carbon technologies, by firms or countries, and thus increase long-term transition 
costs (de Alegría et al., 2017). The continuation of the technological and socio-economic infrastructure 
that supports existing, more carbon-intensive technologies may induce carbon lock-in: a state of inertia 
of the economic system that makes structural changes more expensive or difficult (Unruh, 2000).

Collateral risks and co-benefits

As offsets projects are developed in a geographical, socioeconomic, and institutional context, they are 
also bound to have broader effects on the country and the community in which they are located. On the 
one hand, some communities have contested that the implementation of the projects worsened their 
life conditions in several respects including gender issues, inequality, and human rights violations. On 
the other, offset projects may also bring relevant co-benefits to the communities they affect. Their im-
plementation may create employment and thus contribute to poverty alleviation, while also potentially 
improving the health and the environmental quality of the territory.

Cost-effectiveness potential

Last but not least, it should be remarked that offsets have the potential to deliver sizable reductions 
in  compliance  costs  under  ETSs  and,  more  in  general,  to  enhance  cost-effectiveness  of  mitigation 
actions.  Indeed,  as  argued  in  the  introduction,  emission  offsets  allow  for  the  exploitation  of  cheaper 
mitigation alternatives, thus minimising the cost of abating a given amount of emissions. Against the 
background of the Nationally Determined Contributions (NDCs) pledged under the Paris Agreement, 
which will require an increase in the climate ambition of policy frameworks in all countries, it is easy to 
see how the cost-effectiveness of mitigation actions will constitute a treasurable quality. By reducing the 
cost of mitigation for a country, offsets may increase the likelihood that that country can fulfil its pledge 
or even pursue a more ambitious one.

2.3 Interactions with the Paris Agreement

The use of offsets in the future, especially in the context of an ETS, will critically depend on the rules 
that will be agreed for operationalising Article 6 of the Paris Agreement, that is, the specific rules of the 
new emerging global carbon market.

Signed in 2015, the Paris Agreement is an international agreement under which all signatory coun-
tries pledge to achieve a Nationally Determined Contribution (NDC) to halt climate change and to limit 

3 

Emissions trading systems with different offsets provisions: implications for linking. the global temperature increase to well below 2°C above pre-industrial levels, with determined efforts 
to stay below 1.5°C. The progress in mitigation efforts is regularly assessed at Global Stocktakes, the 
first of which is planned to take place in 2023 and which will inform the next round of NDC pledges. 
The parties to the Paris Agreement have a legally-binding obligation to present their NDC, but their ful-
filment is not binding. This means that countries do not face direct negative consequences from failing 
to  meet  their  pledged  NDC.  Signatory  countries  can  present  a  double  pledge  too. They  can  specify 
whether the pledged target will be reached relying on international climate finance or global mitigation 
efforts (‘conditional NDC’), or independent of them (‘unconditional NDC’). The conditional NDCs are, 
thus,  more  ambitious  and  they  include  further  mitigation  actions  that  need  enhanced  cooperation  to 
be  enacted. Among  the  cooperation  mechanisms  present  in  the  Paris Agreement, Article  6.2  allows 
parties to exchange ‘internationally transferred mitigation outcomes’ (ITMOs) in pursuit of their NDCs. 
Similarly, Article 6.4 establishes a crediting mechanism for emission reductions which can be described 
as the new and expectedly improved version of the Kyoto Protocol’s CDM. The first mechanism, under 
Article 6.2, is largely conducted and authorised by the Parties participating in the transaction, whereas 
the second relies on supervision by a supranational body. Article 6 also specifies that a share of the 
proceeds are to finance administrative expenses and to support developing countries in their mitigation 
efforts. The details of how ITMOs are defined, how they are exchanged, the standards for ensuring the 
environmental integrity of the mechanisms, and the composition and governance of the supranational 
body will be contained in the Article 6 rulebook. This is to be discussed at the next annual meeting of 
the Conference of the Parties (COP), in Glasgow, in November 2021.

While the word ‘market’ does not even appear explicitly in the text of the Paris Agreement, ETS link-
ing is one key application of the voluntary exchange of ITMOs under Article 6.2. Moreover, linked ETSs 
may be affected by the Paris Agreement if one or more of the linked jurisdictions establish some degree 
of interchangeability between their own emission allowances and the ITMOs. We have identified three 
channels of interactions between ETS linkages and the Paris Agreement:

•  Double counting: In order to preserve the environmental integrity of ETSs, it is important to es-
tablish a robust emissions accounting method. In particular, instances of double counting must 
be avoided, that is the claim by multiple entities (either firms or countries) for the same mitigation 
outcome. If one jurisdiction in a linkage were to use credits deriving from offsets that are counted 
by more than one entity, the environmental integrity of the linked market would be compromised.

•  Target setting: Lowering the cap of an ETS (one with a cap) is the canonical approach for in-
creasing its environmental ambition. However, in theory, if one jurisdiction in a linkage were to 
sell its allowances as ITMOs, the price on the international carbon market could discourage the 
policymakers from decreasing the cap in the future. To the extent that this limits the convergence 
in environmental ambition with other ETSs, this might constitute an obstacle to a linkage (Verde 
et al., 2020). 

• 

ITMOs as compliance units: At the time of writing, the nature of the ITMOs is still not perfectly 
defined. On the one hand, some countries propose that ITMOs serve to keep track of net flows 
between countries exchanging mitigation outcomes. On the other hand, other countries advo-
cate that ITMOs should be issued to specific registries, much like the Assigned Amount Units 
under  the  Kyoto  Protocol.  Furthermore,  it  is  still  unclear  how  they  will  be  measured,  and  the 
option to use tonnes of CO2 as a metric is still on the table, greatly facilitating an equivalence 
with allowances from ETSs (Schneider et al., 2018). In this scenario, one regulator in a linkage 
might decide to accept ITMOs as compliance units. Even if one or more linking partners decided 
not to do the same, the effective cap on the linked market is increased, as allowances from the 
jurisdictions accepting ITMOs as compliance units would be “freed up” to be sold to firms in part-
ner jurisdictions. As any measure that could allow one partner to unilaterally affect the cap, the 
question of whether and to what extent to accept ITMOs as compliance units should be agreed 
by prospective linking partners.

4 

 RSC | FSR | LIFEDICET3. Literature review

The literature on the interactions between offset provisions and ETS linking in particular is quite thin. 
We focus on past experiences with offsets and provide insights into plausible future developments in 
offsets and, more generally, in the trading of mitigation outcomes under the Paris Agreement.

3.1 Missteps in carbon offsetting

Experiences  with  offsets  come  mainly  from  the  Clean  Development  Mechanism  (CDM)  established 
by the Kyoto Protocol. But some ETSs around the world have also admitted the use of credits coming 
from mechanisms other than the CDM. We here briefly review the problems that arose in the past with 
emission offsets use and the relative insights that may be drawn. 

Environmental integrity and diversion of mitigation efforts

The main criticism towards CDM credits in relation to an ETS concerns their environmental integrity, 
that is, the equivalence of the amount of CO2 mitigated by the offsets projects to the additional pollut-
ing rights granted under an ETS. In a much cited report, Cames et al. (2016) note that only 2% of the 
projects that they reviewed, and 7% of the corresponding credits supply, had a high likelihood of bring-
ing about actual (i.e. additional) emission reductions. For most projects with a low additionality score, 
emission  credits  funding  covered  only  a  minor  part  of  the  necessary  funding,  casting  doubts  on  the 
assumption that investments would not have been made without the implementation of the offsets proj-
ects. By contrast, the costs of hydrofluorocarbons (HFC) destruction were found to be generally low and 
were largely covered by crediting. While scholars found that perverse economic incentives actually led 
to increased production in these industrial gasses (Schneider and Kollmuss, 2015; Haya et al., 2020; 
Schneider, 2011), once these concerns were adequately addressed in a later version of CDM method-
ology, mitigation from HFC projects was deemed additional with high likelihood (Cames et al., 2016).

Another criterion used to assess the additionality of an offset project is the level of emissions as com-
pared to a baseline scenario. A problem with this approach is that if the project developer can influence 
the baseline to apply, she has an incentive to inflate the baselines so as to artificially increase the esti-
mated volume of abated emissions (Michaelowa, 2012; Lazarus and Chandler, 2011; du Monceau and 
Brohé, 2011). Similarly, to attract more international finance in their jurisdiction, policymakers might also 
attempt to influence the baseline to be applied. Indeed, depending on how additionality is measured, 
policymakers may be able to alter the additionality status of projects in order to attract more internation-
al finance (Dulaney et al., 2017; He and Morse, 2013). Even without affecting baselines, policymakers 
might find themselves influencing project implementation, shying away from mitigation policies in sec-
tors where offsets projects are developed, in order not to discontinue international funding. The decision 
of the US not to regulate federal methane emissions from coal mines could have been influenced by 
the role of these emissions in creating opportunities for cheap offsets for California’s ETS (Haya et al., 
2020). A similar concern affects the aforementioned HFC destruction projects, as their relatively low 
costs makes crediting very profitable, thus discouraging policy action (Cames et al., 2016). Developing 
countries are particularly exposed to the risk of reduced mitigation efforts as a consequence of offsets 
project  implementation.  Indeed,  projects  in  developing  countries  increase  their  marginal  abatement 
costs, inducing them to reduce their own mitigation efforts. Empirical evidence on CDM projects sup-
ports this hypothesis, thus pointing to the need for enhanced benefits for developing countries Stahlke, 
2020). These examples show how assessing the additionality of offsets proves a challenge because of 
the lack of counterfactual action by policymakers.

Finally, it should be noted that emission offsets may also suffer from carbon leakage, that is, the phe-
nomenon by which a given reduction in emissions delivered by a policy is at least partly compensated 
by an increase in emissions in another place, time, or sector. In the context of offsets, carbon leakage 
may be either direct or indirect. Direct carbon leakage occurs whenever emissions result from the im-
plementation of the offsets project itself. In an example concerning the substitution of cropping land use 
with pasture, scholars highlighted that carbon leakage from the activities deriving from the usage of the 

5 

Emissions trading systems with different offsets provisions: implications for linking. pasture might increase carbon emissions with respect to the baseline scenario (Thamo and Pannell, 
2016). Indirect carbon leakage may also derive from market effects, whenever demand for a relatively 
more carbon-intensive product increases as a consequence of the offset projects. For example, forest 
projects might be exposed to indirect carbon leakage insofar as they induce an increase in demand for 
imported wooden products, thus likely increasing deforestation elsewhere (Haya, 2019). 

Human rights and gender equality

Even emission offsets with the highest environmental integrity may (and have) become politically con-
tentious due to their implications for human rights and gender equality. The human rights implications 
of CDM projects deployment are underrepresented in the scientific literature compared to other aspects 
of offsets; most evidence relating to these areas was gathered and published by NGOs and civil so-
ciety organisations (Schade and Obergassel, 2014). Case studies illustrate how hydropower projects 
benefiting from carbon crediting finance have been forcefully implemented to the detriment of the local 
population. The communities of Naso and Ngobe hit international headlines when they sued the Pan-
amanian government over the construction of the dams for a hydroelectric power generation project 
(Finley-Brook  and Thomas,  2010).  Members  of  indigenous  communities  residing  at  the  project  sites 
were  reportedly  swindled  and  pressured  into  selling  off  their  land  to  project  developers.  They  were 
resettled without consent, and protestors at the dam construction sites, including women and children, 
were beaten and arrested by the police (Finley-Brook and Thomas, 2010; Ananya, 2009; Barber, 2008; 
Jordàn, 2008; Cultural Survival, 2007). Further pressure strategies were allegedly executed, as tes-
tified  by  the  Ngobe  community  during  a  court  hearing. These  included  unwarranted  house-to-house 
searches, death threats, and the destruction of property (Bird, 2013; Finley-Brook and Thomas, 2010; 
IACHR, 2009). In other case studies, protestors also reported physical violence (kidnappings, torture, 
sexual abuse). Armed confrontations between public and private security forces and locals, who were 
protesting the illegal confiscation of their land, were recorded in other instances, and also resulted in 
deaths (Schade and Obergassel, 2014; Bird, 2013; FIDH et al., 2011; Frank, 2011; CDM Watch, 2011).

While  countries  hosting  projects  that  generate  emission  credits  are  responsible  for  ensuring  that 
the projects do not involve any human rights violations (Schade and Obergassel, 2014), no provisions 
that directly address human rights were included in the CDM framework. Nor are there any strong in-
ternational guarantees that projects implemented in violation of human rights will not be credited with 
valid credits. This delay was also due to some developing countries refusing to attach human rights 
standards  to  credit  generation,  claiming  that  it  would  violate  their  national  sovereignty  (Schade  and 
Obergassel, 2014; Yamin and Depledge, 2004). The experiences illustrated above serve to show the 
importance that needs to be given in the Paris Agreement framework to clear human rights standards 
and the procedures to include them into emission crediting mechanisms. As argued by Schade and 
Obergassel (2014) and Cournil et al. (2012), in order to guarantee that no human rights violation un-
derlies emission credits, it is essential that projects are eligible to issue credits only once they have 
undergone a Human Rights Impact Assessment (HRIA). It is relevant to remark here that the preamble 
of the Paris Agreement stresses that “Parties should, when taking action to address climate change, 
respect, promote and consider their respective obligations on human rights”. Detailed standards and 
procedures are, however, to be written in the Paris Rulebook.

Offsets projects may also have implications for gender equality by affecting (positively or negatively) 
women. For instance, cookstove projects are presented as being capable of generating sizable econom-
ic and time savings for women, allowing them to focus on other economic or care activities. The same 
projects, however, have been criticised too, as they might consolidate the traditional roles of women in 
society, rather than increasing their leverage within said societies and their families (Lehman, 2019). 
In general, while women are recognised as being disproportionately exposed to climate change, their 
role as agents of change for scaling up climate mitigation activities is often overlooked (Glemarec et al., 
2016). Offsetting projects have the potential to increase the economic independence of women and to 
reduce their burden of care work. But clear guidelines would be needed to secure the gender equality 
co-benefits  in  all  projects  (UNDP,  2011).  In  order  to  empower  women,  gender  equality  perspectives 
should be streamlined across the whole process of the financing of mitigation activities, including the 
supply chains and employment involved (Glemarec et al., 2016; UNDP, 2011). Furthermore, to increase 

6 

 RSC | FSR | LIFEDICETthe direct participation of women in mitigation projects, gender-biased procedural obstacles should be 
identified and removed. To foster the development of gender-sensitive offsetting projects, jurisdictions 
might also explicitly include gender equality requirements for credits admitted under their ETS (UNDP, 
2011). Gender equality remains difficult to assess for its pervasiveness in the life of women. However, 
dedicated emission offsets standards have been recently developed and their demand is increasing in 
the voluntary carbon market (WOCAN, 2021).

Foregone economic and health co-benefits

Focusing now on the potential co-benefits of emission offsets, that is, their positive externalities to the 
local communities, the overall performance of CDM offsets seems to be poor, though with significant 
spatial and technological heterogeneity (Hultman et al., 2020). For instance, a variety of offset projects, 
ranging  from  energy-related  to  forest  ones,  enhanced  the  quality  of  water  basins  in  the  proximity  of 
the implementation area (Karlsson et al., 2020; Anderson et al., 2017, Torres et al., 2015). By contrast, 
employment  co-benefits  in  developing  countries  were  found  to  be  short-lived  at  best.  On  average, 
they dwindled after about three years from project implementation (Mori-Clement and Bednare-Friedl, 
2019; Crowe, 2013). On the bright side, the weak link with employment in developing countries also 
means that the collapse of the CDM credit price did not have major negative repercussions on employ-
ment. Employment effects also show strong sectoral heterogeneity. Employment in some sectors was 
positively  affected  (e.g.  construction),  whereas  others  suffered  economic  damages  (e.g.  agriculture) 
(Mori-Clement and Bednar-Friedl, 2019).

In general, scholars highlight that when there are trade-offs between climate change mitigation and 
other  societal  objectives,  project  developers  tend  to  focus  on  emissions  abatement,  since  crediting 
proceeds depends on the latter (see Freeman and Zerriffi, 2012 for a review of health co-benefits of 
cookstove projects, and Hultman et al., 2020 for a broader review of co-benefits). The economic incen-
tive linked to emission abatement is, therefore, insufficient for bringing about broader co-benefits and a 
market premium needs to be applied to reward projects with a positive societal impact (Dulaney et al., 
2017; Crowe, 2013).

3.2 Linking-specific literature

A dedicated literature on the implications for ETS linking of heterogeneity in offset provisions does not 
really exist. However, some scholarly works dealing with the possible barriers to ETS linking do touch 
upon offsets provisions. From a technical perspective, perfect harmonisation of offsets provisions is not 
deemed to be necessary, as the linking arrangement between California and Quebec demonstrates. 
While the two jurisdictions apply the same quantitative limit to offsets use (8% of emissions covered by 
allowances), they differ in the qualitative limits (Purdon et al., 2014). However, there are reasons for 
which harmonisation over offset provisions might be regarded as being highly relevant in economic and 
political terms. Different qualitative restrictions, in particular, may reflect different preferences or prior-
ities of policymakers. If so, harmonisation could become a politically sensitive matter and thus hinder 
linking negotiations (Burtraw et al., 2013; Hawkins and Jegou, 2014; Tuerk et al., 2009). Differences in 
quantitative restrictions appear to be more relevant to the economic dimension. It has been noted that if 
one ETS accepts credits as compliance units, while the other does not (or only to a lesser extent), enti-
ties under the first scheme will likely use cheaper credits for compliance up to their maximum. By doing 
so, they would ‘free up’ allowances that could be sold to the other jurisdiction (Santikarn et al., 2018; Ka-
chi et al., 2015; Lazarus et al., 2015; Burtraw et al, 2013; Zetterberg, 2012). While quantitative limits on 
offsets use may shelter an ETS from external price fluctuations (Diaz-Rainey and Tulloch, 2018), if the 
same limits do not apply in all linked ETSs, then the ‘freeing up’ effect would still hold in some measure 
(Lazarus et al., 2015; Beuermann et al., 2017; Santikarn et al., 2018). Overall, the literature seems to 
indicate that differences in quantitative limits to the use of offsets between ETSs reflect a more general 
divergence in terms of climate ambition. As to qualitative limits, a sufficiently high level of trust seems 
to be required for regulators to overcome their reluctance to accept reciprocal standards. Arguably, if 
both sufficient convergence on ambition (stringency) and mutual trust are necessary pre-conditions for 
any linking negotiation to start (Verde et al., 2020; Mehling and Haites, 2009), the alignment of offsets 
provisions is a necessary condition for a linkage negotiation to succeed. 

7 

Emissions trading systems with different offsets provisions: implications for linking. 4. Data from the ETSs in the Carbon Market Policy Dialogue

4.1 California-Quebec

4.1.1 State of Play

Compliance Offset Programs have been critical cost containment provisions since the inception of the 
California and Québec Cap and Trade programs. Offsets are tradable credits representing real, verifi-
able, additional voluntary GHG emission reductions in projects or facilities not covered by the cap and 
trade  program.  Compliance  entities  with  emissions  obligations  use  offset  credits  to  reduce  program 
costs, provide flexibility, and motivate GHG reductions in uncapped sectors. 

In establishing Compliance Offset Programs, California and Québec follow the 2010 Western Cli-
mate  Initiative  (WCI)  Offset  System  Essential  Elements  Final  Recommendations  and  the  2012  WCI 
Final  Recommendations  for  the  Offset  System  Process  which  include  guidelines  for  the  inclusion  of 
offsets that can be used for compliance across linked jurisdictions. The WCI recommendations ensure 
that offsets reduce compliance costs and maintain the environmental integrity of the cap, or emissions 
limit, by specifying rigorous criteria to ensure that offsets result in real, additional, verifiable, and perma-
nent GHG reductions. The WCI recommendations specify that a maximum of 49% of emissions reduc-
tions can be achieved through offsets (allowing for jurisdictions to implement lower offset usage limits) 
and define requirements of WCI offset projects, including issues related to offset ownership, geographic 
boundaries, quantification and uncertainty, leakage, and ensuring real GHG emission reductions.

Under the WCI guidelines, an offset credit is defined as a compliance instrument issued by a partner 
jurisdiction representing a reduction or removal of one metric ton of carbon dioxide equivalent (CO2e) 
that meets criteria to be “real, additional, permanent, and verifiable.” Jurisdictions can issue offset credit 
from projects located inside their boundaries and in any non-WCI jurisdiction within North America. The 
WCI recommendations also stipulate that jurisdictions may develop criteria to accept offset credits from 
outside North America that meet the rigorous WCI standards.

Following the WCI recommendations, California and Québec developed rigorous Compliance Offset 
Protocols to ensure consistent, transparent, and accurate quantification of GHG emission reductions 
from  offset  projects.  Protocols  include  quantification  methodologies  and  regulatory  program  require-
ments for offset providers to develop specific offsets projects that can be used to generate offset credits 
for each jurisdiction. Compliance Offset Protocols are considered regulatory documents and are devel-
oped through robust public processes in each jurisdiction. California and Québec have coordinated to 
ensure that offset protocols follow the 2012 WCI Final Recommendations for the Offset System Process. 
This includes the process for pre-verification (monitoring and quantification, validation and registration, 
and reporting), verification and issuance (verification, certification, and issuance), and post-verification 
monitoring to ensure that offset credits are fungible across linked jurisdictions.

Compliance offset protocols 

The California Air Resources Board (CARB) implements California’s Cap and Trade Program. It devel-
ops and approves compliance offset protocols with provisions for quantification, documentation, veri-
fication, monitoring, and enforcement of GHG reductions achieved through offset projects. California 
works closely with linked jurisdictions to ensure that offset protocols are consistent with WCI require-
ments and that offsets provide cost-effective GHG reductions and co-benefits for the jurisdiction, in-
cluding an emphasis on in-state projects. Legislation in California, Assembly Bill 32 the Global Warming 
Solutions Act of 2006, puts additional requirements on offsets used for compliance in the California Cap 
and Trade Program. California must ensure that all GHG reductions are real, permanent, quantifiable, 
verifiable, enforceable, and additional.

8 

 RSC | FSR | LIFEDICETSince the inception of the Cap and Trade Program, California has developed six compliance offset 

protocols following WCI offset project requirements. These six offset protocols are:

•  Compliance Offset Protocol Livestock Projects: GHG emission reductions associated with the 

installation of biogas control systems for manure management on dairy cattle and swine farms.

•  Compliance Offset Protocol Mine Methane Capture Projects: GHG emission reductions associ-
ated with the capture and destruction of methane that would otherwise be emitted from active 
surface and underground mines and abandoned underground mines.

•  Compliance Offset Protocol Ozone Depleting Substances (ODS) Projects: GHG emission reduc-
tions associated with the destruction of high global warming potential (GWP) ozone depleting 
substances that would otherwise be released from foam blowing agents and refrigerants in the 
U.S.

•  Compliance Offset Protocol Rice Cultivation Projects: GHG emission reductions associated with 

methane emissions from flooded rice fields.

•  Compliance Offset Protocol for U.S. Forest Projects: GHG emission reductions associated with 

activities that sequester carbon on forestland.

•  Compliance Offset Protocol for Urban Forest Projects: GHG emission reductions associated with 

tree planting and maintenance activities to sequester carbon in trees in urban areas.

The Ministère de l’Environnment et de la Lutte contre les changements climatiques implements Qué-
bec’s Cap and Trade System and develops Compliance Offset Protocols following WCI requirements 
to ensure fungibility of offset credits across linked jurisdictions. Québec has developed five Compliance 
Offset Protocols:

•  Compliance  Offset  Protocol  Covered  Manure  Storage  Facility  Projects:  GHG  emission  reduc-
tions  associated  with  installation  of  biogas  control  systems  for  manure  management  on  dairy 
cattle and swine farms

•  Compliance Offset Protocol Landfill Site Projects: GHG emission reductions associated with the 

capture and destruction of methane from landfill sites 

•  Compliance Offset Protocol Destruction of Ozone Depleting Substances (ODS) Projects: GHG 
emission  reductions  associated  with  the  destruction  of  high  global  warming  potential  (GWP) 
ozone  depleting  substances  that  would  otherwise  be  released  from  refrigeration,  freezer,  and 
air-conditioning appliances 

•  Compliance  Offset  Protocol Active  Coal  Mine  Projects:  GHG  emission  reductions  associated 
with the capture and destruction of methane that would otherwise be emitted from drainage sys-
tems in active coal mines

•  Compliance Offset Protocol Active Underground Coal Mine Projects: GHG emission reductions 
associated with the capture and destruction of methane that would otherwise be emitted from 
ventilation air in active underground coal mines

Offset Project Operators develop offset projects within these California and Québec certified protocols 
and generate offset credits that can be used for compliance across linked jurisdictions. Third-party Off-
set Project Registries help administer the Compliance Offset Programs. Registries facilitate the listing, 
reporting, and verification of offset projects developed under Compliance Offset Protocols. They must 
meet specific regulatory criteria from each jurisdiction as well as follow WCI offset guidelines.

As of June 2021, 221 million compliance offset credits have been issued under four California Com-
pliance Offset Protocols (ODS, livestock, U.S. forests, and mine methane capture projects). In addition, 
1.1 million compliance offset Québec has issued credits under two Offset Protocols (ODS and landfill 
projects). These  credits  can  be  used  for  compliance  by  regulated  parties  in  California  and  Québec. 
Through April 2021, 94 million offset credits had been used for compliance by regulated parties in Cal-
ifornia and Québec.

9 

Emissions trading systems with different offsets provisions: implications for linking. Moving forward, both California and Québec are considering additional Compliance Offset Proto-
cols. These new Protocols focus on achieving GHG emission reductions within the boundaries of each 
jurisdiction and maximize environmental, social, and economic co-benefits in line with legislative and 
regulatory requirements as well as WCI recommendations. 

Compliance offsets in the California Cap and Trade Program

California’s  Cap  and Trade  Regulation  outlines  the  quantitative  offset  usage  limit  for  each  regulated 
entity following WCI recommendations. Legislation in California has also required regulatory changes 
to California’s offset usage limit and placed requirements on offset usage that maximize direct environ-
mental benefits of offset projects to California. During the first three compliance periods, 2013-2020, 
California  regulated  entities  could  satisfy  up  to  8%  of  their  compliance  obligation  using  Compliance 
Offset Credits. Assembly Bill 398 (AB 398) passed in 2017 and changed the Offset Usage Limit for the 
2021-2030 period. From 2021-2025, the Offset Usage Limit is 4% for California covered entities and 
increases to 6% from 2026 to 2030. 

AB 398 also places limits on the types of offsets used by California covered entities, which is re-
flected in the current California Cap and Trade Regulation. Beginning in 2021, no more than half of a 
covered entity’s Offset Usage Limit can come from offset projects that do not provide direct environ-
mental benefit (DEBS) to California. Offset projects located inside California provide DEBS, while offset 
projects outside California may provide DEBS based on specific criteria as evaluated by CARB.

California’s  Cap  and  Trade  Regulation  also  contains  monitoring,  verification,  and  enforcement  of 
GHG  reductions  associated  with  California  offset  credits.  The  California  Cap  and  Trade  Regulation 
includes a provision to invalidate Compliance Offset Credits that have been issued but found to violate 
the requirements of WCI and the Cap and Trade Regulation. If CARB determines that a Compliance 
Offset Credit is invalid after it is issued, CARB will cancel it. The user of the credit is required to replace 
it  with  another  valid  compliance  instrument.  The  buyer  of  the  Compliance  Offset  Credit  is  therefore 
liable for the validity of the offset credit, known as buyer liability, as the buyer (and not the issuing juris-
diction of California) is responsible for the integrity of the GHG emission reduction.

In  addition, AB  398  requires  the  creation  of  the  Compliance  Offset  Protocol  Task  Force  to  guide 
CARB in creating additional Compliance Offset Protocols that provide DEBS to California, prioritizing 
disadvantaged communities, Native American or tribal lands, and rural and agricultural regions. 

Compliance Offsets in the Québec Cap and Trade System

Quantitative offset usage limits are outlined in Québec’s Regulation Respecting a Cap-and-Trade Sys-
tem for Greenhouse Gas Emission Allowances. Up to 8% of a regulated entity’s compliance obligation 
can be satisfied using Compliance Offset Credits issued by Québec or linked jurisdictions. The Ministère 
can only issue Compliance Offset Credits for the five approved protocols. However, an additional Com-
pliance Offset Protocol related to afforestation and reforestation projects on private lands in Québec is 
currently under development and anticipated to be finalized in 2021.

The Québec Regulation also includes specifications on the handling, processing, and enforcement 
of  Compliance  Offset  Credits.  Offset  credits  issued  in  Québec  are  guaranteed  by  the  Offset  Project 
Operator, who develops the offset projects and generates the GHG emission reduction. Thus, if Com-
pliance Offset Credits are issued and later found invalid, the credit generator (and not the buyer) is re-
sponsible for providing credible compliance instruments to cover the GHG emission reductions from the 
invalidated offset. If the Offset Project Operator cannot replace the offset credits, the Ministère will retire 
an equivalent number of compliance instruments from the Minister’s Environmental Integrity Account, 
funded by withholding 3% of issued Québec Compliance Offset Credits. 

10 

 RSC | FSR | LIFEDICETSector-based offset credits

As outlined in the 2010 WCI Offset System Recommendations, WCI partner jurisdictions may accept 
offset certificates outside North America. In addition, recognizing the significant role of GHG emissions 
from tropical deforestation and degradation in contributing to global climate change, the California Cap 
and Trade Regulation includes the potential for international offset credits generated through approved 
sector-based crediting programs in developing countries. CARB has not approved any sector-based 
crediting programs but is evaluating the potential to include sector-based crediting programs related to 
tropical forestry. 

4.1.2 Relevant experience

California and Québec have a well-established Compliance Offset Program built on the foundation of 
WCI recommendations and historical experience of offset usage in other ETS programs. California’s 
and Québec’s Compliance Offset Protocols with stringent requirements for real, verifiable, additional, 
and  permanent  emission  reductions  are  often  viewed  as  a  gold  standard  in  global  offset  programs. 
Each jurisdiction ensures that GHG emission reductions attributed to Compliance Offset Credits are 
guaranteed – either by the generator, the buyers, or the regulating jurisdiction – ensuring the environ-
mental integrity of the emissions caps. 

Compliance Offset Credits have been part of the California and Québec Cap and Trade Programs 
since inception. Historically, regulated entities have not utilized the full compliance offset limit. Across 
all entities, about 4% of California’s Compliance Offset Limit has been historically used for compliance. 
California  and  Québec  Compliance  Offset  Credits  are  fully  fungible  across  jurisdictions  and  traded 
on the secondary market through the InterContinental Exchange as California Carbon Offset Futures 
(CCO). As of June 2021, Compliance Offset Credits are trading at about 70% of the value of current 
vintage Compliance Allowances on the secondary market.

Compliance  Offset  Credits  are  a  fundamental  cost  containment  provision  of  ETS  systems.  They 
provide compliance flexibility, motivate GHG emission reductions in uncapped sectors, and can reduce 
the overall cost of compliance. California and Québec are working to increase the supply of Compli-
ance Offset Credits that can reduce costs and ensure the environmental integrity of the Cap and Trade 
Programs while also maximizing direct environmental benefits to the jurisdictions. As the auction price 
floor continues to rise at 5% each year and the stringency of the emissions caps increases on the way 
to stringent 2030 emissions targets, there is certain demand for low-cost compliance options, including 
Compliance Offset Credits into the future. 

4.2 China

4.2.1 State of play

In 2017, the “National Carbon Emission Trading Market Construction Plan (Power Generation Industry)” 
proposed to “include national certified voluntary emission reductions in the national carbon market as 
soon as possible.” On April 3, 2019, the Ministry of Ecology and the Environment of the People’s Re-
public of China drafted the Interim Regulations on the administration of Carbon Emission Trading (Draft 
for comments). According to the draft, the carbon emission reduction units that meet the requirements 
of the competent department of Ecology and the Environment under the State Council can be used for 
offset, but the rules for this are not clearly stated. On March 30, 2020, the Ministry of Ecology and Envi-
ronment publicly solicited opinions on the Interim Regulations on the Administration of Carbon Emission 
Trading (Revised Draft). The State encourages enterprises and institutions to implement projects on 
renewable energy, forestry carbon sink and methane use in Chinese territory in order to carry out tech-
nological replacement, emissions absorption and to reduce greenhouse gas emissions.

As with the operation experiences of the current pilot carbon market, the types and restrictions of 
using certified emissions reductions vary across pilots. Chinese Certified Emission Reduction (CCER) 
is not the only option for some pilots, and the Fujian carbon market can use the Fujian forestry carbon 

11 

Emissions trading systems with different offsets provisions: implications for linking. sink (FFCER), while the Guangdong carbon market allows the use of Puhui Certified Emission Reduc-
tion (PHCER2). Different carbon markets also have different limits and restrictions for CCER.

On February 1, 2021, the Ministry of Ecology and the Environment published Measures for the Ad-
ministration of Carbon Emission Trading (For Trial Implementation). According to this, the ceiling offset 
use limit of CCER shall not exceed 5% of the allowances in the next years. 

The development of China’s CCER mechanism

In 2012, the National Development and Reform Commission (NDRC) officially issued Interim Measures 
for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading3 and the Guidelines 
for the Accreditation and Certification of Voluntary Greenhouse Gas Emission Reduction Projects. They 
also recorded the related methodology, and established a voluntary greenhouse gas emission reduc-
tion trading mechanism. The emission reductions produced by voluntary emission reduction projects 
can be registered as national CCER through relevant methods and procedures. CCER’s project review 
and certification are strictly managed and filed by the Department of Climate Change response to the 
State Council. Furthermore, in 2015, the national voluntary emission reduction trading registration sys-
tem was put into operation. With this system, the project owner could open an account to record any 
CCER credits that were issued.

By March 2018, the NDRC had recognized nine trading institutions that can act as a trading platform 
for  CCER  credits,  and  twelve  certification  institutions  for  project  validation  and  verification. At  pres-
ent, the state has issued 200 greenhouse gas project verification and emission reduction certification 
methodologies. Of these, 173 were adapted from CDM methodologies, while 27 were newly developed 
methodologies. All relevant information on voluntary emission reduction credit trading, including project 
process (publication, registration and issuance situation), approved methodologies and other relevant 
administrative and technical regulations such as the validation/verification standard of CCER projects 
and provisions concerning additionality, persistency, measurability, and real (past) abatement, can be 
obtained from the Chinese voluntary emissions trading information platform4. This is the official platform 
for  CCER  information  disclosure.  CCER  projects  in  China  have  developed  rapidly.  By  February  28, 
2018, the NDRC had published a total of 2,856 projects which have achieved validation: 1,047 projects 
have been registered and 287 projects have been issued emission reduction credits.

The offset mechanism in the ETS pilots

All ETS pilots in China accept CCER credits as compliance units, and have designed restrictions. The 
restrictions mainly focus on project type, location and issuance time. 

Regulatory framework

The general provisions on the offset mechanism in the pilot areas are embodied in “management mea-
sures”. In addition, Beijing, Shenzhen, Guangdong and Fujian have promulgated separate offset mech-
anism management measures or regulations which specify restrictions. Shanghai, Hubei and Tianjin 
have issued relevant notices on the use of the offset mechanism. Such notices were issued annually 
by Shanghai and Hubei pilots, so some details of the restrictions differ between compliance periods.

Qualitative restrictions on the offset credit type

All pilots can use a certain number of CCER credits for compliance obligations, while Beijing, Guang-
dong, and Fujian have their own design with a combination of local features. Beijing recognizes two 
additional types of local emission reduction credits, from energy saving projects and carbon sink proj-
ects. The eligible energy saving projects allow organizations not covered by the Beijing pilot to reduce 

 PHCER is approved by the Chinese local government tier (usually at the provincial level).

2 
3   http://cdm.ccchina.gov.cn/WebSite/CDM/UpFile/File2894.pdf 
4   http://cdm.ccchina.gov.cn/ccer.aspx 

12 

 RSC | FSR | LIFEDICETemissions and to generate credits through energy savings from technological transformation activities, 
energy  performance  contracting  or  clean  production  projects.  The  forestry  carbon  sink  projects  are 
essentially  based  on  the  mechanism  of  the  CCER  carbon  sink  projects.  Sixty  percent  of  emission 
reductions achieved by local carbon sink projects, which are not registered, could be used as credits 
in Beijing’s pilot. The CCER project registration and credit issuance process could be conducted after 
registration. 

Fujian introduced its own forestry carbon sink projects to be accepted for the pilot trading system. 
According to Interim Measures for the Administration of Carbon Emission Offset in Fujian Province, the 
forestry carbon sink projects must be implemented in accordance with the methodology issued by the 
NDRC or the provincial Development and Reform Commission. By November 2019, 12 forestry carbon 
sink projects had been registered under the Fujian pilot, and 1.84 million tonnes of credits had been 
issued.

Guangdong introduced the provincial Pu Hui Certified Emission Reduction (PHCER) project mech-
anism.  As  a  supplementary  mechanism  for  the  emissions  trading  market,  the  emission  reductions 
achieved under the PHCER mechanism is equivalent to CCER credits generated in the Guangdong 
province, and can be used to offset the actual carbon emissions of covered entities in the trading sys-
tem. At present, there are five approved provincial-level methodologies, covering forest protection and 
management, distributed photovoltaic power generation, energy conservation, as well as urban mobili-
ty. By January 2020, a series of forest protection and management projects and distributed photovoltaic 
power generation projects have been registered with 1.07 million tonnes of PHCER credits.

Quantitative restrictions on credits 

The current CCER offset ratio in the local carbon markets at home is around 1% to 10%. In Shenzhen, 
an upper limit to offsets use is set at 10% of compliance: Shanghai does not exceed 1% of allowances; 
Beijing no more than 5% of allowances; Guangdong no more than 10% of compliance; Tianjin no more 
than 10% of compliance; Hubei no more than 10% of initial allowances; Chongqing no more than 8% of 
compliance; and Fujian shall not exceed 10% of compliance.

Qualitative restrictions on project types

All pilot ETSs have restrictions on the project type from which credits can be used for compliance. Bei-
jing, Guangdong, Chongqing and Tianjin do not accept credits from hydropower projects, while Hubei 
accepts small-scale but not large- and medium-sized hydropower projects. Beijing has excluded indus-
trial gas (HFCs, PFCs, N2O, and SF6) projects from crediting. Guangdong requires that only credits from 
projects with CO2 and CH4, accounting for more than 50% of total emission reductions, can be used. 
In addition, Guangdong has restricted emission reduction projects in power generation and heating by 
fossil fuels except for coalbed methane and waste energy recovery projects. From 2016 to 2018, the 
annual notice on offset mechanism issued by Hubei Province stipulated that only emissions reduction 
credits generated by rural methane and forestry projects could be used for compliance in those years.

Qualitative restrictions on project location

Pilot carbon markets in Beijing, Guangdong, Hubei, and Fujian have some localized requirements for 
carbon offset credits. 50% of the CCER used for offsetting in the Beijing pilot carbon market must be 
generated locally in Beijing. The carbon offset credits of Chengde City in Hebei Province, which has 
developed cross-regional cooperation with Beijing, are recognized as carbon offset credits generated 
locally in Beijing. The Guangdong pilot carbon market requires that more than 70% of the CCERs used 
for offsets are from Guangdong. The Hubei and Fujian pilot carbon markets require that all CCERs used 
for offsets must come from local areas. In July 2016, the Hubei carbon market required that the CCER 
used for offset must be generated in contiguous destitute areas in Hubei Province; in June 2017, the 
CCER utilized for offsets was required to come from the key counties included in the national plan for 
poverty alleviation through development of the city cluster on the middle reaches of the Yangtze River.

13 

Emissions trading systems with different offsets provisions: implications for linking. Qualitative restrictions on issuance time

The carbon markets in Beijing, Shanghai, Tianjin, Guangdong, Hubei, Chongqing, and Fujian all have 
clear  restrictions  on  the  time  of  CCER  issuance. The  pilot  carbon  markets  in  Beijing,  Shanghai  and 
Tianjin require that the CCER issuance time must come after January 1, 2013. The Hubei pilot carbon 
market sets different time requirements depending on the supply and demand of allowances each year. 
In 2016, the crediting period for projects’ emission reductions was from January 1, 2015 to December 
31, 2015. In 2017, the crediting period was required from January 1, 2013 to December 31, 2015. The 
Guangdong pilot carbon market does not have a clear time limit. But credits from pre-CDM projects 
(i.e. projects that generated emission reductions prior to CDM project registration) cannot be used for 
compliance, and most of the early projects were actually cancelled, which is equivalent to a time limit. 
The Chongqing pilot carbon market required that CCER projects must have been put into operation 
after 2011. The Fujian pilot carbon market stipulated, instead, that the CCER project has to start after 
February 16, 2005.

4.2.2 Relevant experience

According to the trading data published by various regional trading institutions, as of March, 2020, the 
total trading volume of CCERs was as listed in the table below. It is worth noting that under current 
CCER offset rules in pilot markets, wind power, small hydropower, solar power and forestry carbon sink 
projects are relatively popular. 

Table 1 CCER trading amount in the pilots

Pilot
Shanghai

Beijing

Guangdong

Shenzhen

Hubei

Tianjin

Fujian

Chongqing

Total

Cumulative trading amount (CCERs, tCO2eq)
94,354,660

24,206,687

45,465,895

18,406,664

7,659,169

3,508,926

7,888,745

-

201,490,746

After several years of pilot operation, the operating mechanism for each pilot carbon market has been 
continuously improved to increase integrity, but the problem of too many available offsets still exists. 
It is found that the available supply of credits is much larger than demand in most pilots. This has led 
to trading downturns in some pilots (Li et al, 2018). Table 2 shows available offsets and actual offset 
market amount for seven pilot carbon markets in China in 2017. The total credits volume traded in 2017 
represented nearly 50 million tonnes, about three times that of 2014. But the available amount of offsets 
over the same period exceeded 100 million tonnes. Among them, only two pilots, Shenzhen and Beijing, 
recorded a demand for credits larger than its supply. The Tianjin pilot carbon market traded only about 
one million tonnes, less than 10 percent of the public auction volume (not including trading under large 
agreements). In general, there is still the problem that the number of available credits in the current 
pilots is too large.

14 

 RSC | FSR | LIFEDICETTable 2 Available amount and actual trading volume of offsets for seven pilot carbon markets 
(2017)

Shanghai Beijing Guangdong Shenzhen Hu-

Tianjin Chongqing

Use limit

Available amount of offsets 
(Mt)

Actual market trading 
amount of offsets (Mt)

5%

7.8

5%

2.3

10%

42.2

2.46

2.38

12.37

10%

3.0

6.91

bei
10% 10%

25.7

16.0

8%

8.0

14.87 1.16

6.78

From the perspective of the relationship between CCER transaction price and the price fluctuation of 
the allowance, Guangdong was taken as an example to be analyzed by the neural network model (Rao, 
2019). By fitting the allowance trading price fluctuation in Guangdong Province, significant influencing 
factors are the price of crude oil, the auction price of allowance, the trading price of clean energy and 
the trading price of CCER. Among these four factors, the energy price has the largest influence, while 
the trading price of CCER has the least influence. By analyzing the impact of offsetting mechanisms 
on allowance prices in six pilots in China (Lu, 2019), it has been found that due to the current low price 
of CCER, the introduction of CCER will reduce the allowance price. At the same time, the influence of 
the CCER offset mechanism on allowance prices is continuous and stable, and there is no significant 
difference when near the compliance deadline.

In  terms  of  the  correlation  between  offset  mechanism  and  market  liquidity,  the  price  of  CCER  is 
lower than that of allowance most of the time. Taking Guangdong as an example, the average price of 
allowance is 27 RMB/t in 2020, while the average price of allowance is 20 RMB/t (Tanjitaoyi.com, 2021). 
When CCER is supplied to increase overall supply, the market will reduce the demand for allowances, 
thus reducing the liquidity of the carbon market (Dai et al, 2019; Fu et al, 2017).

Concerning the relationship between carbon trading and forestry carbon sinks, Shanghai was taken 
as an example to be analyzed based on a computable general equilibrium model (Zao et al, 2018). The 
results show that in the early development of carbon trading, the offset use limit should be appropriately 
controlled. On the one hand, the stringency of CCER needs to be improved upon to prevent low-quality 
projects entering the market. On the other, we will enhance the price stability of offsets by controlling 
the total amount for compliance while making full use of forestry carbon sinks. There are also several 
studies that have analyzed the proposed CCER use limit on the national carbon market. It is found that 
CCER scheme can save costs for China’s carbon trading system. Depending on the actual situation in 
China, the ceiling offset use limit of CCER does not exceed, it is suggested, 6% (Li et al, 2019).

In general, the introduction of offsets could increase the overall supply, reduce the allowance price, 
and increase the liquidity of the carbon market. In the initial stage of the construction and operation of 
the national carbon market, especially at the stage when carbon price control measures are insufficient, 
offsets may be considered to help keeping prices in check. Regarding the types of offset credits, it is 
recommended to follow the principle of “starting with the easier ones before difficult ones and adjusting 
step by step”. This is in order to reduce the complexity of the system design. Initially, CCER should be 
used, and then other carbon emission reduction certificates would be considered. At different stages 
of the development of the carbon market, the Department for Addressing Climate Change under the 
State  Council  can  choose  different  carbon  emission  reduction  certificates  based  on  different  market 
conditions.

15 

Emissions trading systems with different offsets provisions: implications for linking. 4.3 European Union (EU)

4.3.1 State of play

Quantitative and qualitative restrictions

In the EU ETS, offsets of any kind have no longer been accepted since the start of Phase IV (2021-
2030).

4.3.2 Relevant experience

Brief history of the impact of offsets on the EU ETS

During its pilot Phase I (2005-2007), the EU ETS admitted the use of CDM and JI credits as compliance 
units, without a corresponding adjustment in allowance supply. This means that, in effect, each credit 
used for compliance increased the supply of the carbon market, as one allowance was ‘freed up’. How-
ever, no credit was actually used for compliance, as firms received most of their allowances for free and 
allowance supply significantly exceeded emissions. So much so that, in April 2006, the allowance price 
nearly  reached  zero  when  it  first  became  clear  that  the  market  was  oversupplied  (Trotignon,  2012). 
Back then, banking between trading periods was not allowed, so there was no point in buying or keep-
ing compliance units for future periods. Even if no transaction of credits occurred during this period, the 
European Commission had already put forward some qualitative limitations to the use of credits. This 
was  the  case  of  nuclear  power  generation  projects  and  Land  Use,  Land  Use  Change,  and  Forestry 
(LULUCF) projects (European Parliament and the Council of the EU, 2004).

Use  of  offsets  for  compliance  under  the  EU  ETS  started  during  Phase  II  (2008-2012).  But  soon 
multiple  problems  arose  related  to  frauds  on  the  double  counting  of  offsets,  additionality  concerns, 
and questions about the environmental value of the projects (Trotignon and Delbosc, 2008). For this 
reason, Phase II also saw the first quantitative limits to offsets use being implemented. Member States 
applied quantitative limits to offsets use in the form of maximum shares of offsets over compliance units. 
Such limits had to be compatible with the national Kyoto Protocol commitment and showed significant 
cross-country variation, ranging from 0% in Estonia to 20.6% in Spain. Operators could use offsets up 
to the allocated limit in Phase II or they could bank them for future use in Phase III (2013-2020). In addi-
tion, strict requirements were applied to credits from hydroelectric power generation (Trotignon, 2012). 
During this period, the Great Recession hit the European carbon market, leading to a dramatic fall in 
allowance demand and, thus, to a huge excess supply and low carbon prices. On average, installations 
did not use offsets up to the nationally determined limits. Besides the economic downturn, another rea-
son why operators did not rely more heavily on credits, despite being cheaper than allowances, is that 
the supply of credits was still lower than the potential demand of European installations, represented 
by the national quantitative limit. Overall, during Phase II, 11% of emissions under the EU ETS were 
covered by offsets (Ellerman et al., 2014, 2015).

More stringent limits on the use of offsets were set for Phase III (2013-2020). First, a targeted re-
striction applied to industrial GHG destruction projects, as it appeared to be economically convenient 
to produce these emissions to be later destroyed for credits issuance and sale (Cames et al., 2016; 
Schneider and Kollmuss, 2015). Therefore, credits from industrial gas destruction (HFC-23 and N2O) 
were no longer accepted. Second, credits issued within the first commitment period of the Kyoto proto-
col (2008-2012) could be used only up to 2015. Third, credits generated during the second commitment 
period of the Kyoto Protocol (2013-2020) were only admitted if the related projects were located in least 
developed countries. Finally, during Phase III, centralised quantitative limits applied: offsets could rep-
resent maximum 50% of the overall cap reduction to take place within the trading period. The number 
of offsets used decreased significantly between Phase II and Phase III, falling from roughly one and a 
half billion CERs, in the former period, to almost half a billion in the latter.

Along with the harsh crisis that hit the European economy in 2008-2009, and the consequent accu-
mulated excess supply of allowances, the availability of cheap offsets contributed to allowance prices 
taking persistently low values until 2018.

16 

 RSC | FSR | LIFEDICETOther relevant experience with offsets

Over the years, the European Commission contracted several studies assessing the performance of 
emission credits (e.g., Alessi and Fujiwara, 2011; Chatterjee, 2011; du Monceau and Brohé, 2011; du 
Monceau et al., 2011; Nyaoro and Chatterjee, 2011; Ruthner et al., 2011). Many of them were released 
in 2011 and informed the subsequent reform of the rules on offsets use. The main points highlighted in 
the reports include: the additionality concerns discussed above; evidence of carbon leakage; benefits 
from technological transfers to developing countries; and compatibility with a commitment to sustain-
able  development.  Building  on  the  analysed  evidence,  the  reports  outlined  potential  reforms  of  the 
CDM crediting system that informed Phase III reforms on offsets provisions. The European Commis-
sion commissioned another study, released in 2016, which focused on additionality concerns, already 
acknowledged to be the most controversial issue from previous reports. Cames et al. (2016), the study 
in question, found that only 2% of the CDM projects (representing 7% of potential CER supply) had a 
high likelihood of ensuring emissions abatement that was genuinely additional and not subject to over-
estimation. The main recommendations of the authors for the EU ETS were to restrict offsets use to 
credits from emission abatement projects with a high likelihood of additionality and, more generally, to 
set mitigation objectives so that they would not be overly reliant on the use of credits.

Interactions with linking

The linkage between the EU ETS and Switzerland’s ETS became operational on 1 January, 2020. As 
part  of  the  linking  negotiation,  the  EU  and  Switzerland  agreed  not  to  admit  the  use  of  offsets  in  the 
linked market from 1 January 2020. The two ETSs are not currently linked, either directly or indirectly, 
to any other carbon market.

Public debate and future directions

The European ambition of carbon neutrality by 2050 implicitly suggests the possibility that carbon re-
movals or offsets may be (re-)introduced in the policy framework. Recently, the relevant public debate 
has  centred  on  Negative  Emission Technologies  (NETs),  which  remove  GHGs  from  the  atmosphere 
and either store it or use it as inputs to other economic activities. While there are still no economic in-
centives for deployment of NETs at scale, different policy options are envisaged. Inclusion of NETs in 
the EU ETS is one of the discussed scenarios, whereby removals could be incentivised by the issuance 
of credits admitted for compliance (see e.g., ICAP 2021; Verde and Chiaramonti, 2021).

4.4  New Zealand

4.4.1 State of play

Quantitative and qualitative restrictions

The NZ ETS does not currently accept offsets from international sources. The Emissions Trading Re-
form Act 2020 put in place provisions for the future acceptance of ‘approved overseas units’. The legis-
lation requires that any future use of international units in the ETS must have quantitative limits which 
are to be set as part of the process of setting and enforcing caps. In addition, it puts a responsibility on 
the Government to ensure that ‘offshore mitigation’ should be real, additional, and robustly accounted 
for. 

About 38% of New Zealand’s land area is covered by forest, comprising 8 million ha of indigenous 
forest and over 2 million ha of plantation forest. The management of indigenous forest is regulated to 
ensure sustainability, and it is almost entirely unaffected by the NZ ETS. Plantation forestry, however, 
is largely a commercial enterprise. CO2 emissions and removals from plantation forestry are a very im-
portant part of New Zealand’s emission profile. Forestry removals have an important role and may be 
used to offset emissions, but there is also potential for significant emissions related to harvesting and 
deforestation. 

17 

Emissions trading systems with different offsets provisions: implications for linking. Plantation forest owners who establish and maintain ‘post-1989’ forest – on land that had not previ-
ously been used for long-term forest – may register voluntarily and receive emission units equal to their 
removals over time. Once registered, a forest owner must monitor and report on the carbon stocks in 
the forest. They must surrender New Zealand emission units (NZUs) for any losses due to deforestation 
or timber harvesting. There is also an option to deregister and leave the NZ ETS, but all units allocated 
must be repaid.

This ‘stock change accounting’ approach is currently used for post-1989 forestry in the ETS. How-
ever, the Government now has plans to move to an ‘averaging’ approach for forests that are registered 
from 1 January 2023. This will mean that owners of a newly planted forest can only be allocated units 
up to its expected average carbon stocks, and in general they will only surrender units if they deforest. 
The NZ ETS will provide a clearer incentive to plant new forest, and a corresponding disincentive to 
deforest the land.

New Zealand also has a forestry offset scheme known as the Permanent Forest Sink Initiative (PFSI) 
which is used for establishment of new indigenous forest. It has similar rules to post-1989 forestry in the 
NZ ETS, with the addition of long-term commitments to manage the forest sustainably. 

4.4.2 Relevant experience

Brief history of the impact of offsets on the NZ ETS

Using the Kyoto mechanisms

When the New Zealand Parliament passed the 2008 legislation that established an ETS, linking to the 
international Kyoto system was considered an integral part of the policy. The Kyoto flexibility mecha-
nisms were considered important to provide liquidity and scale that would not have been possible with a 
purely domestic market. The legislation allowed for NZ ETS participants to import and surrender Kyoto 
units derived from project activities. Participants could import and surrender CERs, ERUs, and RMUs. 

The legislation did not make any provision for the Government to impose limits on the number of 
international offsets that could be imported or surrendered from time to time. At the time that this legis-
lation was passed, prices for these Kyoto units were higher than for New Zealand units. There was no 
immediate prospect that New Zealand participants would buy large numbers of international offsets – 
they only functioned as a reserve supply. Some surplus New Zealand forestry units were exported for 
voluntary or compliance use as offsets in other jurisdictions.

The Government made several changes to the NZ ETS in 2012, and the possibility of setting limits 
on international offsets was discussed at that time. However, in the context of recovery from the global 
financial crisis, the Government saw low emission prices as necessary in the short term. No decision 
was made to change this aspect of the legislation, and it signalled its intention to continue accepting 
international offsets for surrenders covering the calendar 2013 and 2014 compliance years. Although 
the prices of Kyoto units fell to very low levels with the end of the first commitment period, the Govern-
ment followed through on this perceived commitment to keep accepting them. They were accepted for 
surrender until 31 May 2015, which was the deadline for the 2014 compliance year 5.

There were concerns about additionality and other issues for some Kyoto projects as early as 2008. 
The  Government  excluded  units  from  some  classes  of  projects,  such  as  large  hydroelectric  dams, 
from surrender in the NZ ETS because of concerns about their environmental and social impacts in 
host countries. Some classes of CDM and JI project units were banned by regulation in 2011 and 2012 
because of concerns about their additionality. However, Kyoto units from all other project types were 
still eligible for surrender, with no quantity limit. Participants took advantage of this rule from late 2012 
when large numbers of ERUs became available at low prices. Many of these also came from projects 
with issues of doubtful additionality and probable over-reporting of emission reductions (Kollmuss et 
al., 2015).

 New Zealand could have also allowed the import of second commitment period CERs – the only second commitment 

5 
period units available – after 2012, but did not do so. 

18 

 RSC | FSR | LIFEDICETIn late 2013 and early 2014, some forestry participants deregistered part or all of their forest land 
from the NZ ETS, using newly imported Kyoto units to cover all the repayments that were required. At 
the time NZUs traded at higher prices than Kyoto units, because NZUs were not vintaged and would still 
be tradable and valid after 2015. Forest owners could benefit from the difference in value between the 
NZUs that they had been allocated, and the cheap Kyoto units (mainly ERUs derived from Russia and 
Ukraine) that they surrendered. It is likely that they had an intention of trying to achieve further arbitrage 
by re-registering the same forests.

The Government passed urgent legislation in early 2014 to stop this arbitrage activity, by requiring 
only NZUs to be used for deregistration of forest land. Forest owners and other participants could still 
use international offsets for surrenders covering actual emissions, up to the date that had already been 
announced. The unlimited use of international offsets depressed prices and reduced the effectiveness 
of the NZ ETS up to 2015. It also allowed participants to build up a stockpile of NZUs, since very few of 
the NZUs allocated at that time were surrendered. This resulted in an over-supply of NZUs which still 
exists and is being addressed by withholding units from the ETS caps. 

Forestry in New Zealand

The PFSI was established in 2006, so predates the NZ ETS. This activity will be transferred into the 
NZ ETS in the next two years as ‘permanent post-1989 forestry’. In addition to the same obligations as 
post-989 forest owners, PFSI or permanent forest owners have a commitment to maintain the forest 
sustainably. There is an option to leave the scheme after 50 years and again every 25 years, but only 
on the condition of repaying all units. PFSI forest owners have often sold units for cancellation as part 
of a voluntary offsetting market. 

There was significant deforestation in New Zealand in the five years before the NZ ETS was estab-
lished, as existing plantation forest was removed to convert land for dairy farming. The Government 
saw forestry emissions and removals as an urgent issue that needed to be addressed immediately to 
ensure that New Zealand could meet its Kyoto Protocol commitments, as well as for the longer term. 
The NZ ETS put mandatory surrender obligations on any deforestation of pre-existing plantation forests 
(established before 1990) from 1 January 2008.

Voluntary participation of post-1989 forest was also made available from the start of the NZ ETS in 
2008. It has had success in incentivising forestry, in spite of low unit prices from 2012 to 2016 (Carver 
et al., 2017). However, the stock change accounting approach has meant that substantial numbers of 
units have been allocated and are expected to be banked and surrendered to cover harvesting obliga-
tions. Long-term banking obscures the true level of supply in the NZ ETS and may reduce liquidity for 
other participants. 

Other relevant experience with offsets

New Zealand’s independent Climate Change Commission delivered its final advice on the first three 
national emission budgets, and on the basis for an emission reduction plan, to the Government in June 
2021 (Climate Change Commission 2021). The Government now has a statutory responsibility to re-
spond and to develop the emission reduction plan by the end of the year. The advice includes high-level 
guidance on the future of forestry, with strong suggestions that the Government should further modify 
the NZ ETS approach to forest removals and emissions. If the Government follows this advice, it will 
have to make further changes to the NZ ETS to ensure that more emphasis goes to establishing new 
indigenous forestry (with marginally less new plantation forestry) and that forestry offsets do not affect 
the incentives to reduce emissions in other sectors.

New Zealand is likely to have some need for international offsets to contribute to meeting its first Par-
is Agreement Nationally Determined Contribution (NDC). Meeting the national emission budgets rec-
ommended by the Climate Change Commission will put New Zealand’s domestic emissions on a path 
that is consistent with the legislated goal of neutrality by 2050. However, the first and second emission 
budgets (up to 2030) allow for emissions that would exceed the NDC commitment. The Commission’s 

19 

Emissions trading systems with different offsets provisions: implications for linking. advice is therefore a signal that during the 2020s New Zealand may again become a net buyer of inter-
national offsets.

In comparison to the past, any such future use of international markets would have to meet very 
different expectations for environmental integrity. Article 6 of the Paris Agreement makes countries that 
engage in such co-operative action responsible for ensuring the integrity of transferred mitigation, and 
New Zealand’s domestic legislation has been updated to include this responsibility.

4.5 Switzerland

4.5.1 State of play

Art. 6 of the CO2-Act broadly defines quality requirements for units from Kyoto’s Flexibility mechanisms, 
explicitly  mentioning:  additionality,  the  contribution  of  compensation  projects  to  sustainable  develop-
ment in the host countries, and the absence of adverse social and ecological impacts. Further criteria 
are  defined  in  annex  2  of  the  CO2-Ordinance.  This  notably  excludes  projects  involving  biological  or 
geological sequestration and hydropower from plants with installed capacities greater than 20 MW. In 
the 2013-2020 period, the origin of certificates was limited to Least Developed Countries for projects 
registered after 2012 (FOEN, 2015). Eligible projects are brought together on a project whitelist of the 
Swiss Emissions Trading Registry6. The projects included there meet the requirements set out in the 
revised CO2 Ordinance of 1 January 2015 (see “Whitelist Information”).

The possibility of using Kyoto units within the Swiss ETS (CH ETS) was excluded in the revised CO2-
law, valid as of 1 January 20217. With this revision, all relevant emissions of the participating facilities 
must be covered by freely allocated or auctioned emissions rights alone. However, the use of Kyoto 
units remains an option within other policy instruments defined by the CO2-Act outside the CH ETS; for 
instance, if a participant fails to fulfill the compensation obligation for motor fuels.

4.5.2 Relevant experience

Since its inception, the Swiss CO2-Act allowed for the use of units from Kyoto’s flexibility mechanisms 
(CDM and JI) within the CH ETS as well as the compulsory compensation scheme for fuel importers.8 
The use of offsets generated from domestic programs in the context of the CH ETS was never an op-
tion. The domestic emissions compensation scheme is solely relevant for compulsory compensation by 
motor fuel importers (see below).

During the period 2013-2020, the maximum share of Kyoto units as a fraction of total compliance 
units used by ETS participants was defined in the CO2-Ordinance9. For companies which had already 
participated in the 2008-2012 period, this share was calculated from the allowances and Kyoto units 
used during these years: 8% of five times the yearly freely allocated emission units during the years 
2008-2012, minus the number of Kyoto units used during this same time period. For new participants 
after  2013,  a  maximum  share  of  4.5%  Kyoto  units  was  eligible  for  compliance.  Remaining  emission 
allowances which were not used during the years 2008-2012 were converted “into emission allowances 
in accordance with” the then introduced CO2-Ordinance10.

During the period 2013-2018, about 94% of emissions were covered by freely allocated or auctioned 
emission allowances and 6% by Kyoto units (FOEN 2019). Given high allowance prices (between CHF 
20 and 40) at the onset of the CH ETS 2013-2020 trading period, the purchase of much cheaper Cer-

6   www.emissionsregistry.admin.ch/crweb/public/whitelist/list.action
7 

 Federal Act on the Reduction of CO2 Emissions 641.71 (status as of 1 January 2021),  
https://www.fedlex.admin.ch/eli/cc/2012/855/en 

8   Art. 5 of the Swiss CO2 Act 641.71, https://www.fedlex.admin.ch/eli/fga/2012/14/de
9 

 Art. 55b of the Swiss CO2 Ordinance 641.711 (Status as of 1 November 2019),  
https://www.fedlex.admin.ch/eli/cc/2012/856/en

10  Art. 138 of the Swiss CO2 Ordinance 641.711 (Status as of 10 February 2021),  

https://www.fedlex.admin.ch/eli/cc/2012/856/de

20 

 RSC | FSR | LIFEDICET 
 
 
tified Emission Reductions (CERs), at a price around 0.9 EUR, was a viable strategy for market partic-
ipants. Due to this large price discrepancy, even those companies which benefited from an overalloca-
tion of free permits, purchased additional CERs to cover their obligations. This resulted in large shares 
of CERs on the Swiss ETS market in 2013-2014: around 23% of the 2013 obligations were covered with 
Kyoto units (EFK, 2017). The quantitative limit on the use of offsets was then reached early during the 
trading period and the use of Kyoto-units became negligible after 2014 (FOEN, 2019). 

Interactions with linking 

As of 1 January 2020, the Swiss ETS has been fully linked to the EU ETS. Neither of the two markets 
allows  for  the  use  of  international  credits  after  202011. Already  before  2020,  the  strong  alignment  of 
the Swiss ETS with the EU ETS led to analogous regulations concerning the use of Kyoto units. This 
includes, notably, the limitation on the units’ origin to the Least Developed Countries (as defined by the 
United Nations) for projects registered after 2012. It also includes the upper limit of 4.5% for Kyoto units 
as a share of each company’s total emissions obligation. 

Other relevant experience with offsets 

Switzerland is home to a domestic emission offsetting scheme. Since the first CO2-act, 1 January 2013, 
motor fuel importing companies are required to compensate increasing shares of road transport sector 
emissions using domestic offset projects (2% in 2014, 12% in 202112). To source these projects, the 
“Foundation  for  Climate  Protection  and  Carbon  Offset”  (KliK)  was  established  in  2013  by  the  Swiss 
Petroleum Association. The  domestic  offsetting  system  has  been  developed  broadly  along  the  lines 
of the UNFCCC’s CDM. Projects are financed through monthly fees paid by participants in the carbon 
offset grouping. These fees follow from the amount of imported fuel, greenhouse gas abatement costs, 
and the compensation quota defined by the law. During the period 2013-2020, this scheme resulted in 
a surcharge on motor fuel oil for end-consumers of 1.5 cents per litre. The generated revenues enabled 
domestic emissions offsets of 6.3 million tons of CO2-equivalent through payments of around CHF 100 
per tonne (KliK 2020). The Federal Office for the Environment issues certificates to project owners for 
their yearly emission reductions, which can be sold to KliK or that can be traded on the Swiss market13. 
The projects are implemented in a broad range of sectors, such as transportation (electric and hybrid 
buses and utility vehicles, freight shift from road to rail), buildings (heat networks, wood-based heating, 
building automation) and others (e.g. nitrous oxide reduction in wastewater treatment plants, in agricul-
ture, etc.) (KliK 2020; World Bank/PMR, 2015).

Public debate and future directions

According to the fully revised Swiss CO2-Act, which is due later in 2021, up to a quarter of the 50% 
emissions  reduction  target  by  2030  (relative  to  1990)  should  be  achieved  through  mitigation  efforts 
abroad14. The KliK foundation (see above) was commissioned to procure the necessary 35 million tons 
of CO2 equivalent reductions on behalf of Swiss transport fuel importers15.

In order to establish an enabling framework for this goal and in line with article 6 of the Paris agree-
ment, Switzerland implemented multiple bilateral agreements within the framework of Article 6.2. This 
was done notably with Peru and Ghana. These agreements serve as pilot projects with the stated aim 
of gaining experience (FOEN, 2020a; 2020b).

11   ec.europa.eu/clima/policies/ets/credits_en#tab-0-0
12  Art. 89 of the Swiss CO2 Ordinance 641.711 (Status as of 10 February 2021),  
  www.fedlex.admin.ch/eli/cc/2012/856/de#art_89

13 www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/reduction-measures/compensation/in-switzerland.html

14  www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/reduction-measures/compensation/abroad.html

15 www.international.klik.ch/news/publications/first-implementation-agreement-worldwide-under-the-paris-climate-agree-
ment

21 

Emissions trading systems with different offsets provisions: implications for linking. The agreement with Peru was approved by the Swiss parliament in December 2020 and is consid-
ered to be the first of its kind in the world16. It provides the framework for the implementation of emission 
compensation projects. Even though the international climate negotiations under the UNFCCC did not 
yet succeed in completing the rules for Article 6, the Paris Agreement allows parties to enter bilateral 
agreements under Article 6.2. These agreements define specific criteria for assuring the quality and 
environmental integrity of expected internationally transferred mitigation outcomes (ITMOs), and for re-
ducing the risk that these projects will cause environmental damage and human rights violations (Swiss 
Confederation and Republic of Peru, 2020; FOEN, 2020b). Important, the agreement incorporates ac-
counting methods to exclude double counting. Switzerland’s Article 6 activities are also in line with the 
San Jose Principles for Article 6 activities. Besides Peru, a similar cooperation was put in place with 
Ghana17. The specific activities to be implemented within the framework are yet to be defined. However, 
first steps were taken prior to the agreement with the Peruvian program “Tuka Wasi”. This distributes 
improved cookstoves, and the program helped to inform the design decisions of the agreement18. 

Since, as of 2021, the Swiss ETS excludes the use of foreign allowances, no direct interaction be-
tween the domestic trading system and these bilateral agreements is envisaged. Furthermore, annex 
2 of the CO2-act again limits the origin of international mitigation units usable in any of its policy instru-
ments to Least Developed Countries.

5. Discussion and conclusions

Well-designed offsets to boost climate action

Keeping the global average temperature increase well below 2 °C (the target of the Paris Agreement) 
will require some countries to hit an implicit carbon price of roughly $100/tonne of CO2 by 2030 (IETA 
and  University  of  Maryland,  2019).  While  allowance  prices  have  been  rising  in  all  operational  ETSs 
involved in the CMPD during the last year, with the EUAs reaching almost €57 in May, the $100/tonne 
of CO2 remains a tough challenge. ETS regulators might want to include offsets within their systems as 
the appetite for reducing compliance costs will likely increase over time, regardless of considerations 
about international cooperation and support of developing countries. In fact, emission offsets will very 
likely be needed to achieve increasingly ambitious climate goals. It is, therefore, fundamental to under-
stand what offsets provisions can allow for enhanced cost-efficiency while safeguarding environmental 
integrity. 

The scientific literature has identified a number of measures that would be useful for ensuring the 
environmental integrity of offsets in the context of an ETS. First, scholars have recommended to only 
consider projects that prove themselves financially unsustainable without crediting funds (Cames et al., 
2016; Claassen et al., 2014). The reason is that projects with returns on investment that are already 
competitive relative to the market would be implemented anyway, i.e. even without crediting. As such, 
they would not be additional. Secondly, project-type or sector-specific methodologies are preferable to 
generic one-size-fits-all criteria addressing all project types (Cames et al., 2016). Still, some over-cred-
iting could arise given potential pressure on policymakers from project developers and even from credit 
buyers (Haya et al., 2020). This is indeed the approach adopted by the California and Quebec regula-
tors. Thirdly, in the context of an ETS with a fixed cap, scholars suggest that credits should not be used 
to de facto increase the cap. This implies that for every emission credit used in the system, an emission 
permit would have to be cancelled. Furthermore, the role of offsets should be minor and international 
credits should mainly come from mitigation activities in developing countries (Haya et al., 2020; Cames 
et al., 2016).

16 www.bafu.admin.ch/bafu/en/home/documentation/news-releases/anzeige-nsb-unter-medienmitteilungen.msg-id-80708.
html

17 https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/reduction-measures/compensation/abroad/
host-countries.html

18  tukiwasi.org/en/

22 

 RSC | FSR | LIFEDICETOverall, adherence to these guidelines reflects a commitment to environmental integrity and, there-
fore, to environmental ambition too. The scientific literature does not identify technical barriers to linking 
ETSs with different offset provisions. However, it seems politically difficult and implausible to link sys-
tems whose offset provisions reflect very different levels of environmental ambition (see Verde et al., 
2020).

The crucial pieces of Article 6

The market-based mechanisms under Article 6 of the Paris Agreement could play a decisive role in 
fostering the integration of carbon markets. The possibility of exchanging mitigation outcomes between 
parties may yield sizable cost savings, which a recent study has estimated at about $250 billion per year 
by 2030 for achieving the 2 °C target of the Paris Agreement (IETA and University of Maryland, 2019). 
Besides, if these savings were channelled to enhance mitigation efforts, an additional 520 GtCO2 could 
be abated. According to the same study, if all countries participated in a common market-based mech-
anism, the carbon price requirement to achieve the 2 °C target would be much lower, staying at about 
$38 in 2030 and only rising to $107 by 2050. However, the environmental integrity of systems linking 
with this common carbon market would hinge on the specific rules contained in the Paris Rulebook, 
which is yet to be agreed by Parties (see Schneider and La Hoz Theuer, 2019).

First of all, it is important to stress the difference between unconditional and conditional NDCs (see 
Section  2.3)  and  its  implications  for  the  trade  of  ITMOs.  Intuitively,  allowing  countries  to  sell  ITMOs 
while not having achieved their own unconditional NDC, would likely jeopardise the environmental ef-
fectiveness of the whole system. Similarly, on the demand side, it could be argued that Parties should 
tackle unconditional targets with national policies and that they should only be allowed to use ITMOs 
to cover their conditional and more ambitious NDCs (Carbon Market Watch, 2020; Spalding-Fecher et 
al., 2017). The diverse nature of the NDCs adds to their complexity, as some of them are not expressed 
in  terms  of  CO2  abatement  (absolute  targets),  but  rather  as  carbon  intensity  (relative  targets)  or  as 
climate-related objectives19 (indirect targets) (Schneider and Laz Hoz Theuer, 2019). Against this back-
ground, understanding the extent to which one ‘mitigation unit’ is in excess of the unconditional NDC is 
even more challenging. At present, the very nature of ITMOs and the way they are to be exchanged are 
uncertain (La Hoz Theuer et al., 2019).

Secondly, and particularly relevant for this report, ETS regulators might consider admitting ITMOs 
as compliance units and exchanging them between linked systems. As long as the use of ITMOs un-
der ETSs is not in excess of the cap (if there is a cap) and the mitigation outcomes transferred only 
involve activities covered by the systems (i.e. they are represented by allowances), this would ensure 
exchanges with high environmental integrity (Schneider and La Hoz Theuer, 2019). However, this could 
increase demand for allowances in those ETSs whose allowance prices are lower, thus putting its car-
bon market under pressure. Similarly to what is proposed for import of allowances between linked ETSs 
(Lazarus et al., 2015), limits on the number of ITMOs that can be exchanged by each jurisdiction could 
effectively contain this problem. The flip side is reduced participation in the global carbon market and 
thus reduced trade gains (La Hoz Theuer et al., 2019; Gavard et al., 2016). If this solution were to be 
investigated, allocating a maximum number of ITMOs that can be issues, transferred, or acquired could 
be more effective and simpler than quantitative limits based on historical or projected (BAU) emissions 
(La Hoz Theuer et al., 2019). If one ETS opens to admitting ITMOs from activities not covered by an 
ETS (i.e. they are not allowances), its environmental integrity depends on the safeguards agreed upon 
in the Paris Rulebook. Unless robust eligibility criteria are applied, this could undermine linking negoti-
ations, due to concerns over environmental integrity.

Thirdly, many NDCs pledges are expressed in terms of single-year targets, e.g. emissions abated 
in  2030  with  respect  to  historical  emissions.  However,  the  financial  cycle  of  offset  projects  typically 
involves  different  time  spans  and  credits  issuance  occurs  over  multi-year  periods. Aligning  the  time 
frames of NDCs with the ones of offset projects is important for a robust accounting of emissions and to 
accurately assess the mitigation outcomes. This is especially relevant to limiting exchanges of mitiga-

19  For instance, the share of final energy consumption from Renewable Energy Sources.

23 

Emissions trading systems with different offsets provisions: implications for linking. tion outcomes to the over-achievement of NDCs (Schneider and La Hoz Theuer, 2019; Spalding-Fech-
er et al., 2017; Cames et al., 2016).

Finally,  voluntary  carbon  markets  (VCMs)  deserve  a  special  mention.  The  above-mentioned  dis-
tinction between unconditional and conditional NDCs has implications for the admissibility of Voluntary 
Emission Reductions (VERs) towards the achievement of NDCs. While there is little uncertainty that 
cooperation and financing mechanisms (including VCMs) may be employed in pursuit of conditional 
pledges,  it  is  not  clear  whether  they  could  also  be  used  for  the  fulfillment  of  unconditional  pledges. 
Avoidance  of  double  counting  and  the  principle  of  additionality  would  require  VERs  purchased  and 
claimed by a firm not to be ascribable towards the fulfillment of national NDCs. As such, VCMs could 
either give rights to claim international support, instead of emission abatement, or be limited towards 
the fulfilment of conditional pledges (Leining and White, 2021; Stahlke, 2020; Spalding-Fecher et al., 
2017). Operators developing offsetting projects for the VCMs took different stances on these issues: 
while Gold Standard acknowledged the need for a corresponding adjustment for emissions covered by 
the Paris Agreement, Verra argued against it (Carbon Pulse, 2021; Gold Standard, 2021; Verra, 2021). 

Low-hanging fruits vs scaffolding investments

The Paris Agreement reiterates the principle that countries have “common but differentiated responsi-
bilities” and that “support should be provided to developing countries”. Participation in the market-based 
mechanisms under Article 6 could channel valuable resources to developing countries, where emis-
sions abatement is cheaper than in industrialised countries. However, to ensure that these resources 
actually support the transition to a low-carbon economy in developing countries, long-term impacts on 
emissions abatement costs are fundamental. If the financial resources under the Article 6 market-based 
mechanism are directed towards low-hanging fruit – i.e. the cheapest or simplest abatement options – 
it could make achievement of the NDCs much more difficult for developing countries. The experience 
with the CDM shows that projects increased their abatement cost for developing countries, which in 
turn reduced mitigation efforts by hosting national legislators (Stahlke, 2020). In theory, this reduction 
in mitigation efforts might be addressed through making NDCs mandatory (e.g. sanctioning non-com-
pliant entities) or through enhancing offset projects with valuable co-benefits for developing countries 
(Stahlke, 2020).

Another possibility would be to use the $100 billion fund that industrialised countries committed to 
raise in support of mitigation and adaptation activities in developing countries. At the time of writing, 
however, the target is still unmet. The financial support requested by developing countries and least 
developed island nations far exceeds the $100 billion fund, even if it were to be renewed until 2030 
(Pauw et al., 2020). These financial resources could significantly help developing countries in reducing 
their abatement costs, at least partially compensating for the increase induced by the sale of ITMOs 
under  the  market-based  mechanism  of Article  6.  If  a  quantitative  absolute  limitation  were  to  be  im-
posed on participation in the market-based mechanism (as suggested in La Hoz Theuer et al., 2019, 
Schneider and La Hoz Theuer, 2019, and Gavard et al., 2016), the effect on marginal abatement costs 
of developing countries could be contained. This would be done at the price of lower climate benefits 
on a global scale, however (La Hoz Theuer et al., 2019). A more general principle concerning the use 
of ITMOs and offsets by industrialised countries would be to use emission offset to abate ‘residual’ (i.e. 
hard to abate) emissions, rather than to substitute for domestic mitigation. Another pathway would be 
to qualitatively limit crediting to projects aimed at closing a specific technological gap, empowering de-
veloping countries to abate at a lower cost in the future, while also providing co-benefits in the form of 
knowledge spillovers.

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30 

 RSC | FSR | LIFEDICETResearch Project Report 
Issue 2022/01
January 2022

doi:10.2870/965292
ISBN:978-92-9466-175-3
QM-01-22-007-EN-N

doi:10.2870/779640ISBN:978-92-9084-977-3ISSN:2600-271XQM-BA-21-002-EN-N