Carbon offsetting explained

What is carbon offsetting?

Carbon offsetting is a process that involves a reduction in, or removal of, carbon dioxide or other greenhouse gas emissions from the atmosphere in order to compensate for emissions made elsewhere.

Carbon offsetting generally involves companies paying other entities to reduce carbon emissions that they cannot currently reduce themselves. The company may then count the emissions reductions they have paid for towards their own climate targets.

Emissions reductions from offsetting projects are first verified for accuracy by a third party. After verification, they are sold as a carbon credit or unit which represents a certain volume of emissions reductions. The money received from the sale of this unit provides an incentive for the offsetting project developer to reduce emissions, and the purchase and subsequent retirement of this credit gives the offset buyer a measurable reduction to claim. Credits that are traded in this manner are often referred to as making up voluntary carbon markets.

What types of offsetting projects exist?

Any activity that reduces emissions could constitute a carbon offset. This includes projects designed to help reduce future emissions (‘mitigation measures’) and projects that help soak up carbon dioxide from the air (‘removal measures’). Some offsetting project types include:

Offsetting projects vary widely by geography. A business can choose to fund domestic projects, or projects in a range of different countries. Businesses often offset their emissions to meet internal targets, but offsetting may also be used to meet legal obligations under certain compliance trading schemes. Different trading schemes take different positions on offsetting, and a business should consult guidance specific to the markets it is part of.

When could businesses consider carbon offsetting?

Reducing emissions should always be the primary focus of a net zero strategy. Carbon offsetting is a supplement, not a replacement, for directly reducing emissions within a company’s value chain.

Deploying offsets to meet net zero emissions targets may appear more cost-efficient than other measures in the short-term; but this may not be the case when considering the longer-term benefits of decarbonising. That said, offsets can play a role in meeting international climate goals when a business cannot directly reduce all its emissions. The Taskforce for Scaling Voluntary Carbon Markets suggests that voluntary carbon markets will need to be over fifteen times their current size in order to keep warming to 1.5 degrees.

One carbon offsetting option a business may consider is insetting, where the business chooses to fund or develop emissions-reducing activity within its own value chain. For example, a business in the food industry might help to deploy regenerative agriculture or agroforestry within the farms from which it purchases food. Insetting in this case offers the benefits of offsetting whilst also focusing on the business’s own value chain. The extent to which a business can deploy this approach will vary depending on its value chain.

Using carbon credits to finance further emissions reductions

Purchasing carbon credits can be more than a way to reach net zero targets. Carbon credits also present a means to finance emissions reductions once a business has already met its net zero goals through direct action. Indeed, this is the role of offsets envisioned by the Science Based Targets Initiative. Some companies have set specific targets beyond net zero, including aiming to offset all historical emissions. A business’s capacity to do this will vary, but it is important to recognise this option as an addition to systemic change within a company’s own activities, and an opportunity to fund external emissions-reducing projects.

What are the risks of carbon offsetting?

• Emissions reductions may not be delivered
  The most significant risk associated with offsetting projects is that their proposed emissions reductions do not reflect the actual volume of emissions avoided or removed. This may be the case for a number of distinct reasons:

  Additionality: To be effective as part of an emissions reductions plan, payments for offsets must create emissions reductions where they would not exist in a ‘business-as-usual’ scenario. Without an accurate business-as-usual scenario, the actual volume of abated emissions is unclear.

  Permanence: Certain methods of removing carbon from the atmosphere do not guarantee permanent reductions if, for example, a forest is later cleared or burned and releases stored carbon. Nature-based offsetting projects must guarantee not only the preservation or restoration of a certain area, but the continued protection of that area over time.

  Leakage: There is a risk that a reduction in carbon emissions in one area simply shifts emissive economic activity elsewhere, reducing or negating the decrease in emissions.

• Potential negative externalities
  Carbon offsetting projects may involve significant changes to local ecosystems and economies. They may risk disrupting or damaging biodiversity and local or indigenous communities. Offsetting through reliable verifiers, including some which have created standards that specifically aim to ensure co-benefits for local nature and communities, may mitigate this risk.

• Broader ethical concerns
  Carbon offsetting faces broad ethical criticism. Most offset buyers are based in wealthier parts of the world, whereas projects themselves are often based in developing countries. Some critics argue that it is unethical for companies from areas with a high historical carbon footprint to pay for reductions elsewhere rather than taking direct action.

• Reputational risks
  The concerns listed in this section have led to significant criticism of carbon offsetting by the public, with many high-profile allegations of companies using carbon offsetting to ‘greenwash’ activity that is otherwise harmful to the climate. Offsetting may therefore pose a reputational risk to a business if it does not also demonstrate that significant steps are being taken to reduce its emissions.

Carbon offset types and standards

Many different types of carbon credit are available each involving interaction with different organisations. Although most carbon credits are verified and sold through a small number of large and well-established standards, newer trading platforms and offsetting strategies are emerging.

In selecting a standard or platform, a business should consider some key factors. Most importantly, the standard should use evidence-based and robust methodologies and demonstrate how it addresses the key risks described above. Ideally, carbon credits should be transparent and convey as much information as possible about the carbon reduction or removal project to the buyer. Companies may also consider the range of different types of carbon offset verified by a particular organisation before making its decision.

Some examples of different standards and organisations, as well as key differences between established standards and newer trading platforms, are described below.

Offsetting terms explained