As the global community intensifies its focus on mitigating climate change, businesses face increasing pressure to reduce their carbon footprint. In the quest for sustainability, carbon offsetting has emerged as a valuable tool.
Although many companies are working to eliminate emissions entirely, carbon offsets will remain a critical tool in fighting climate change. In fact, the voluntary carbon offset market is expected to grow from $2 billion in 2020 to around $250 billion by 2050.
This means that understanding the implications of carbon offsetting is crucial for businesses aiming to strike a balance between environmental responsibility and good business decision-making.
Here’s how it works:
A company emits greenhouse gases (GHGs) across all of its operations, it’s ‘carbon footprint’, represented as CO2e. This footprint can be broken down into the 3 different scopes of emissions.
A company sets a carbon reduction target and takes steps to reduce its carbon footprint.
If a company cannot completely reduce its emissions, steps can be taken to address the residual emissions which remain.
One of these steps is carbon offsetting projects, enabling you to negate the impact of those remaining emissions, balance your emissions output, and subsequently achieve net zero.
What is carbon offsetting?
A carbon offset broadly refers to a reduction in GHG emissions – or an increase in carbon storage (e.g., through land restoration or the planting of trees) which is used to compensate for emissions that occur elsewhere.
A carbon offset credit is a transferrable instrument certified by governments or independent certification bodies to represent an emission reduction of one metric tonne of CO2, or an equivalent amount of other GHGs. The purchaser of an offset credit can “retire” it to claim the underlying reduction towards their own GHG reduction goals.
Carbon offset credits can be produced by a variety of activities that reduce GHG emissions or increase carbon sequestration. In most cases, these activities are undertaken as discrete “projects.” A carbon offset project may involve:
Renewable energy development (displacing fossil-fuel emissions from conventional power plants)
The capture and destruction of high-potency GHGs like methane, N2O, or HFCs
Avoided deforestation (which can both avoid the emission of the carbon stored in trees, as well as absorb additional carbon as trees grow)
Projects can range in scale from very small (e.g., reducing a few hundred tonnes of CO2e per year) to very large (e.g., millions of tonnes reduced per year). Carbon offset credits are also sometimes produced by large-scale “programs of activities,” which aggregate together many similar small projects or coordinated efforts across entire jurisdictions (such as in the case of avoided deforestation).
Because GHGs mix globally in the atmosphere, it does not matter where exactly they are reduced.
From a climate change perspective, the effects are the same if an organisation eliminates an emission-causing activity or enables an equivalent emission-reducing activity somewhere else in the world. Carbon offsets are intended to make it easier and more cost-effective for organisations to pursue this second option.
In many cases, carbon offset projects produce social and environmental benefits beyond just GHG reductions. Depending on the project type, these “co-benefits” can include: improvements to community employment opportunities, enhanced air or water quality, biodiversity and habitat conservation, improved energy access, and better access to community health and education services.
Carbon offsets can thus be part of a comprehensive strategy for corporate social responsibility, combining efforts to address climate change with contributions to other public goods. One challenge is that the types of projects that make for higher-quality carbon offsets tend to be those with the fewest co-benefits – and vice versa.
How to incorporate offsets into a business carbon management strategy
In principle, carbon offset credits offer a convenient and cost-effective way to reduce GHG emissions. Often, this means offset credits are used to compensate for (or “offset”) an organisation’s GHG emissions, in lieu of reducing those emissions directly.
For example, since most organisations find it impractical to completely eliminate their carbon footprint using only internal measures, carbon offsets offer the only practical way to claim “carbon neutrality” or “net zero”.
But let us be clear – offset credits are far from a perfect tool. If used carelessly, carbon offsets could slow progress on climate change and amount to little more than greenwashing. However, used responsibly, they can accelerate action on climate change beyond the slow pace that has so far been set and enabled through government policies.
Using offset credits responsibly requires, first, a strong plan for reducing one’s own GHG emissions. Comprehensive and accurate carbon accounting processes are vital here to understand where hotspots lie and which actions will have the biggest impact. Simply buying credits instead of taking more direct and aggressive action – flying less for example, or investing in improving the energy efficiency of your buildings, equipment, and vehicles – is not defensible given the strong need for action in all areas of human activity.
Responsible use also requires spending time to understand and seek out high-quality credits. For example, Gold Standard was established in 2003 by WWF and other international NGOs to ensure projects that reduced carbon emissions featured the highest levels of environmental integrity and also contributed to sustainable development. With the adoption of the Paris Climate Agreement and the Sustainable Development Goals, it launched a best practice standard for climate and sustainable development interventions, Gold Standard for the Global Goals, to maximise impact.
Carbon offset programmes provide a necessary level of quality assurance for the credits they issue; you should avoid offsets that have not been certified by an established programme. Quality exists along a continuum defined by the level of confidence one has in an offset project’s additionality (first and foremost), as well as its quantification, permanence, exclusive claim to emission reductions, and avoidance of social and environmental harms.
What are the different types of offset projects?
The 2020 Oxford Principles for Net Zero Carbon Offsetting outlines five different categories of carbon offsetting projects. Understanding the nuances between these categories, the impact different projects can have on your offsetting ambitions and the benefit of developing a balanced offsetting portfolio are key to understanding the true value of carbon offsetting as a method of addressing carbon emissions.
Carbon offset projects can take two forms: “reduction” and “removal”.
Carbon reduction projects reduce the amount of CO2 that is released into the atmosphere, through avoided emissions. Carbon removal projects scrub carbon directly from the atmosphere and store it.
These projects can be broken down further, into short-lived, long-lived and projects without storage. The result is a network of different offsetting project categories, achieving slightly nuanced outputs.
While both categories have the same effect on the atmosphere in the near term, carbon removal projects will be critical moving forward, given their focus on scrubbing emissions from the atmosphere.
Carbon reduction without storage
Types of project in this category tend to focus on alternative methods that reduce the use of old technologies or equipment which relied heavily on GHG to operate. Examples include renewable energy infrastructure or cleaner technology.
+ Widely available and the cheapest options on the market today, enabling immediate action and results.
- Over time, emission reduction alone won’t be sufficient to take the necessary action against climate change.
Carbon reduction with short-lived storage
Types of project in this category tend to focus on the protection of valuable ecosystems. Examples include blue carbon and forestry projects.
+ Widely available on the market today, enabling immediate action and results.
- Over time, emission reduction alone won’t be sufficient to take the necessary action against climate change.
Carbon reduction with long-lived storage
Projects in this more nascent category of carbon reduction with long-lived storage include directly capturing and storing carbon in places besides plants and soil. Examples include directly capturing CO2 from the atmosphere and injecting it into stable rock formations underground or sequestering CO2 in concrete via mineralisation.
+ If projects within this category can scale, they will provide significant benefits in the shape of long-term or permanent carbon storage potential.
- Currently, these solutions are scarce and largely underfunded.
Carbon removal with short-lived storage
Carbon removal with short-lived storage projects tend to focus on initiatives which emphasise the protection and/or restoration of natural environments and ecosystems. Examples include afforestation and ecosystem restoration.
+ Projects in this category are well established, with known benefits.
- Projects can be easily reversible with the longevity often under threat.
Carbon removal with long-lived storage
Carbon removal with long-lived storage projects tend to focus on more permanent forms of removing GHG from the atmosphere and storing them, with a lower chance of reversal. Over time, we should look to shift focus towards these types of projects. Examples include Direct Air Capture and Storage (DACS) and biochar.
+ Will be the most impactful carbon offsetting category in the long-term.
- A lot of projects in this category are still in the development phase of their technologies and construction methods. Therefore, projects able to demonstrate tangible results are currently few and far between.
Top tips: Things to consider when it comes to carbon offsetting
Here are some things to consider when it comes to the optimal way to develop an offsetting portfolio:
The offsetting projects that are best placed to be pursued now, won’t necessarily be the best options as we move into the future.
Fundamentally, a net zero aligned portfolio of offsets must increase the proportion of carbon removal projects over carbon reduction projects and the proportion of long-lived storage over short-lived storage or without storage projects.
To make this achievable, there must be a significant increase in the volume of viable and affordable carbon removal and long-lived storage offsetting projects. However, this long-term transition is not yet feasible, hence we must continue to supplement our offsetting projects with carbon reduction and short-lived or without storage projects.
An ideal carbon offsetting portfolio will evolve over time as technology matures and as availability of certain offsetting projects becomes more commonplace.
Carbon offsetting should be in addition to, and not a substitute for, decarbonisation efforts across the entirety of your businesses value chain. Therefore, always follow the principle – “Reduce what you can, offset what you can’t”.
Businesses should undertake a thorough assessment of the implications of carbon offsetting, including both financial and operational aspects. Here is a guide on some factors to consider:
Financial implications of offsetting:
Cost of carbon offsetting: Evaluate the costs associated with purchasing carbon offsets. Consider whether it aligns with the budget and financial goals of the organisation. The price of carbon is set to increase rapidly, so make sure to take this into account.
Return on investment (ROI): Assess the tangible benefits of carbon offsetting, such as potential cost savings from operational efficiencies and the long-term value of a positive environmental reputation.
Regulatory compliance: Weigh the potential costs of non-compliance with environmental regulations against the cost of implementing carbon offsetting strategies.
Innovation opportunities: Evaluate the potential for innovation in sustainable practices. Consider whether investments in research and development for carbon-saving solutions instead of offsetting can lead to financial returns.
Strategic considerations of carbon offsetting:
Alignment with business goals: Ensure that carbon offsetting aligns with the long-term strategic goals of the business.
Feedback mechanisms: Consider the ethical implications of chosen carbon offset projects and ensure alignment with the values and principles of the organisation. Implement mechanisms for gathering feedback and continuously improving carbon offset initiatives based on performance and stakeholder input.
Monitoring and reporting: Determine the data collection and reporting requirements for monitoring the effectiveness of carbon offset initiatives. Develop clear communication strategies for stakeholders, emphasising the commitment to sustainability and the rationale behind carbon offsetting.
Adaptation to changes: Assess the adaptability of the business to changes in carbon offsetting standards, regulations and best practices. Engage in scenario planning to anticipate future changes in the carbon offset landscape and adjust strategies accordingly.
And some final advice. Don’t get overwhelmed by the prospect of offsetting. If your business has multiple product lines or services, consider whether you could split your offsetting activity into sections.