(Bloomberg) -- The Biden administration unveiled a framework for using carbon offsets to drive climate progress, with principles it says are meant to help ensure the trading regimes deliver real emissions reductions — not a green mirage.

The documents released Tuesday by top cabinet officials, including Treasury Secretary Janet Yellen, take the controversial step of recommending companies be able to use carbon credits to offset a portion of their so-called Scope 3 emissions, those generated by their suppliers and customers.

In other respects, the guidelines largely align with those developed by prominent industry-led governance bodies. They amount to an endorsement of voluntary carbon markets’ potential to create economic opportunities for farmers and ranchers while helping reduce planet-warming pollution, despite the controversies they’ve sparked in the past. 

“We know this market can do better, and we’re committed to helping strengthen it,” Yellen said at a Washington event on the issue. “If we do it well, we will have the chance to enlist markets as a powerful ally in the fight against climate change.”

(The event was sponsored by Bloomberg Philanthropies, the philanthropic organization of Michael Bloomberg, who is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

Trading Credits

The new US guidelines, detailed in a 12-page joint policy statement and outline of principles, target the trading of credits that are meant to represent a ton of carbon dioxide reduced or removed from the atmosphere. Companies, not-for-profit groups and others can buy the credits — which help finance carbon-reducing but non-lucrative initiatives such as planting trees — as a way to compensate for their own emissions. 

However, some crediting methodologies haven’t fulfilled carbon-cutting claims. And unlike commodities that can be physically delivered to a buyer for inspection, the emission savings associated with carbon credits are more difficult to assess — stoking wariness among some corporations seeking to meet sustainability goals.

The US government principles “will give confidence to businesses that the rules of the carbon market promote best practice in the use and sourcing of high-integrity, project-based carbon credits,” said Chris Leeds, head of carbon markets development at Standard Chartered.

The market for offsets could soar to $1 trillion by 2050, from about $2 billion currently, if standard-setters ease some rules and expand their use, BloombergNEF forecasts.

“We need that finance, and we need those solutions,” said Nat Keohane, president of the Center for Climate and Energy Solutions. But “we only want that kind of scale if it represents real environmental integrity on both the supply and demand sides.”

Ensuring offsets truly compensate for pollution is a particular challenge, since carbon dioxide persists in the atmosphere for centuries. The activities that underpin most credits today often lack that same longevity. For instance, trees that suck carbon dioxide from the atmosphere can burn, die or be cut down. Other options, such as injecting carbon dioxide deep underground, could offer longer-term promise. 

The US government envisions the finance sector providing a solution. Insurance mechanisms such as buffer pools can help address permanence shortcomings, said senior administration officials who spoke anonymously to provide key details ahead of the announcement.

Read More: Insurers Are Working to Shore Up $2 Billion Carbon Offset Market

The US is recommending carbon credits simply meet their longevity claims, not a specific time frame. That departs from standards developed by the Integrity Council for the Voluntary Carbon Market, which sets a minimum threshold of 40 years and could expand that to 100.

‘Faulty’ Markets

Critics argue voluntary guidelines without the teeth of strong enforcement divert from essential emission-cutting work. 

“There is no real way to fix inherently faulty carbon offset markets,” said Mitch Jones, a managing director at the Food & Water Watch advocacy group. “Creating so-called guidelines for a phony climate accounting scheme is a waste of time and resources — and ultimately does more harm than good.”

While offsets frequently channel capital to nature-based activities today, under the US vision, they would increasingly support more innovative carbon-removal ventures, such as direct air capture projects. An Energy Department pilot project has up to $35 million to support the work, with 24 semi-finalists now competing for the chance to sell carbon dioxide removal credits directly to the agency. 

The US framework insists credit buyers should prioritize “measurable and feasible emission reductions within their own value chains” and that the offsets should be a complement, not a replacement, for that work. But in cases where it’s “unreasonable” to fully abate supply chain emissions within given time frames, the use of offsets should be considered, the US says.

The United Nations-backed Science Based Targets initiative has drawn scrutiny for plans to give companies greater leeway to use credits to offset their Scope 3 emissions. The Voluntary Carbon Markets Integrity Initiative has proposed a similar approach. 

(Updates with Yellen comments from event and other details, beginning in fourth paragraph.)

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