Carbon Offsets Are More Popular than Ever, and That’s a Problem

Your company may be considering carbon offsets as part of your strategy to reach net-zero or even to take you to net-positive. If so, you’re not alone; companies around the world are facing increasing pressure to reduce their emissions profile, and demand for carbon offsets is exploding. The voluntary carbon offsets market is projected to reach USD 2655.75 million by 2028 from $535.60 million in 2021.¹

At the same time, the legitimacy of offsets as a climate change solution is being seriously questioned (and increasingly revoked) by civil society groups, academics, and the public at large.² These critics fear that offsets empower emitters to continue emitting instead of taking the strategic action required to truly meet their emissions reduction targets.

Illustrating this, over the last few months, one investigation after another by journalists, businesses, environmental groups, ratings agencies, and even offset-brokering companies have surfaced dubious claims, egregious accounting errors, and what have been described as overt attempts to mislead customers and communities.³

In this first of our three-part blog series, we explain the concept of carbon offsets (and credits) and why companies may need to use them. In our second post, we’ll explain the problems endemic to the offsets market and provide suggestions and insights for those that still find themselves in the market for offsets. In our third post, we will discuss insetting – an alternative approach that may help you to reduce your carbon emissions profile while also supporting your value chain and advancing climate justice.

What are carbon offsets and carbon credits?

The terms ‘carbon offset’ and ‘carbon credit’ are often used interchangeably – let’s start by discussing the differences between them.

When a business purchases a carbon offset, they are paying someone else to remove a given quantity of emissions from the atmosphere or to prevent it from entering the atmosphere in the first place. In other words, offsetting is the act of cancelling out CO2 emissions produced in one place by reducing or preventing them in another.⁴

A wide range of offset projects exist: energy offsets (such as renewable energy development like solar, wind, or biogas, or ones improving energy efficiency within facilities and technology); methane destruction (such as from landfill gas or livestock); capturing carbon in plants and soil (nature-based offsets); carbon capture and storage (where technology is used to pull carbon from the air and store it long term); and carbon capture and utilization (where the carbon is captured and then used as an input for other industrial processes to create building material, textiles, biofuels, and even ink).⁵

Energy offsets have typically been the most popular form of offset, but nature-based offsets are rising rapidly in popularity.⁶ These nature-based offsets have historically involved companies funding the protection of forests that might otherwise be cut down. This type of transaction was previously called REDD+ (Reduced Emissions from Deforestation and Degradation), and we’ll revisit nature-based offsets and the REDD+ story in our next blog.

Carbon credits operate differently, rather than trading carbon reductions, it is about selling the right to emit them. This is because in some jurisdictions, certain industries are regulated under a cap-and-trade system. In these cases, companies have a cap on how much they can emit without penalty. Each company will generally have an allowance of credits they can use towards their cap. If they emit fewer emissions than they are allocated, they can then trade or sell their remaining credits. When a company sells these credits, they are selling their surplus emissions allocation.

Carbon credits and carbon offsets both come in denominations of one metric tonne of CO2 equivalent that can be traded or sold. Thus, if a company will be exceeding their cap, or if they have a specific climate change-related goal they want to reach, they can purchase carbon credits or offsets to help reduce their emissions footprint.

Both carbon offsets and carbon credits must adhere to rigorous criteria and pass verification by independent third-party agencies, and must be reviewed by experts at carbon offset standards such as Gold Standard or Verra.

Why is there a growing market for offsets?

Industry caps are not the only reason that companies seek to purchase carbon offsets. Pressure is growing for companies to set net-zero goals, and many have already done so, or plan to do so in the coming years. Despite making these commitments, many companies have not determined their pathway to zero emissions and are relying on the purchase of carbon offsets to make up the difference.

As we note above, there is rising criticism of this approach. Companies are being asked to clarify the extent to which their net-zero commitments will rely on offsets. There is concern that without this transparency, businesses may try to buy their way to neutrality without making the investment needed to address their direct and indirect emissions. Offsets, the thinking goes, should be a last resort that should be used only to address the most intractable of emissions.

Two factors may account for the current over-reliance on carbon offsets: affordability and convenience. Offset prices within the voluntary carbon market need to ride a fine line between affordable and uncomfortable: if the price is too low, they won’t generate enough pressure to change the carbon-intensive behaviour of businesses and governments, and if the price is too high then the demand for voluntary offsets will dry up.⁷ At present, carbon offset prices stand at $3-5 USD per metric ton of CO2, but this is expected to grow tenfold by 2030.⁸ Purchasing carbon offsets also simplifies what would otherwise require complex and systemic changes. Offsets obviate – or at least delay – the need to implement meaningful shifts in strategy.

That said, both supporters and critics of offsets agree that offsetting is only an acceptable tool once companies have done everything they can to reduce emissions, and the latest net-zero guidance from the Science-Based Targets initiative (SBTi) aligns with this.⁹ In order to set and achieve an SBTi net-zero-aligned target, businesses must pursue deep, long-term decarbonization targets of 90-95% across all scopes before 2050. No more than 5-10% can be removed through high quality carbon offsetting.¹⁰

Are offsets a credible solution for emissions reduction?

The unfortunate reality is that carbon offsets have a long and well-researched history of failures.¹¹ Whether they realise it or not, far too many offset purchasers end up relying on offsets without really contributing to climate crisis solutions.

There is ample evidence to indicate that offsets, by and large, do not reduce the amount of pollution they’re claimed to remove; result in temporary and quickly reversed benefits; or provide benefits that can’t be accurately measured.¹²

Given the growing attention to nature-based solutions, our next blog highlights some of the problematic issues of nature-based offsets so that you can be better informed and make better decisions when it comes to your carbon-reduction activities and investments.

Image by Kai Vogel on Pixabay.