What Are Carbon Offsets?
At a high level, an offset is a tool used to compensate for emissions of greenhouse gases (GHGs) in other locations. Carbon offsets come in two fashions; avoided emissions and emission reductions. An example of an avoided emission would be converting landfill gas into a fuel used for combustion. This avoids emittance of landfill gas to the atmosphere and also reduces emissions from sourcing traditional fossil fuels.
An example of an emission reduction would be afforestation projects that capture CO2 from the atmosphere and store it in a biomass sink. The diversity in offset types and project types can be tailored to a company’s environmental and social governance strategy and utilized in narrative buildingIn the decarbonization context, carbon offsets are used to reduce a business's carbon footprint towards reaching carbon neutrality. However, companies are finding other innovative ways to utilize carbon offsets such as; offsetting business flights, events, new product lines, and transportation of products sold.
To properly implement carbon offsets into your decarbonization strategy, it is important to understand the benefits and limitations of carbon offsets so you can ensure you are selecting the most effective projects in order to determine how to utilize them within the larger decarbonization strategy. Check out a portion of our pros and cons from this article published in Energy + Environment leader.
| Pros of Carbon Offsets | Cons of Carbon Offsets |
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| Immediate claim to environmental benefits from offset project | Not a fix-all solution for reducing corporate GHG emissions |
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| Co-benefits of offset project such as: ecosystem management, forest preservation, sustainable agriculture, renewable energy generation in third-world countries, etc. | Are not accepted for offsetting avoidable scope 1 emissions for science-based-targets |
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| Can count towards internal reduction goals, unavoidable scope 1 emissions, and scope 3 (value-chain emissions) | Are not accepted for offsetting scope 2 emissions for science-based-targets |
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| Provide market demand signals to a commodity that has historically been undervalued. | Offsets are a cost and do not have a financial return-on-investment compared to other operational efficiencies such as on-site solar. |
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| Innovative offset opportunities such as: business travel, hotel accommodation, events, product lines, etc. | Can be viewed as “green washing” if used improperly |
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| Registry accredited projects are third-party validated (Verified Carbon Standard, Climate Action Reserve, American Carbon Registry) | |
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| Great tool for narrative building within ESG strategies. | |
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Benefits of Carbon Offsets
Carbon offsets send a direct market signal by putting economic value on a commodity that has historically not been priced. The goal of carbon offsets is to price GHG emittance on their social and economic impacts. This is called the social cost of carbon.
A project must pass additionality before moving forward to check for methodology specific requirements outlined by registries. Additionality tests the project to determine if its “additional”. The test determines if the project contributes additionally to the reduction and avoidance of GHG emissions. The most important additionality test is an investment analysis. Meaning, would the project have occurred without the financial incentive of selling carbon offsets? If so, the project will not be approved. This provides assurances that the environmental benefits purchased by an end-user of a carbon offset contributed to the reduction of GHG emissions that would not have occurred without that financing.
Projects that are issued offset allowances to trade on the voluntary market have to meet the registry’s rules and requirements, follow specific third-party approved methodologies, monitor emission reductions and avoidances, and be validated/verified by third parties. It is recommended that companies seeking offsets procure offsets that were issued under the top registries. The top registries are: The Voluntary Carbon Standard, The Gold Standard, American Carbon Registry, and The Climate Action Reserve.
Carbon offsets have a diverse plethora of project types that can aid a company in not only reducing its emissions but also build a narrative. Certain projects have associated co-benefits such as: ecosystem preservation, gender equality, improving impoverished communities, safe drinking water, etc. An example would be providing solar cook stoves to women in South America. This has a social benefit to the women there, reduces biomass from being burned, and improves air quality in that region of the world. Another example is converting land that was used for cattle grazing back to its native land-use type such as a rainforest. This project has the added benefit of eco-system and wildlife management.
Offsets are an easy tool to reduce a company’s emissions and build narrative but must be used properly. Certainly, only using offsets to meet-zero will create a lot of scrutiny. It is recommended to use offsets to reduce unavoidable scope 1 emissions and scope 3 (value chain) emissions. This should occur in tandem with stakeholder engagements and operational changes.
Limitations of Carbon Offsets
The main issue with carbon offsets is that they are not a fix-all solution. They are one tool for decarbonization that must be used responsibly. Secondly, offsets are essentially a cost. Other strategies such as solar installations, energy efficiencies, and downsizing will generate a return-on-investment over time for companies and should be recommended first or used in tandem with offsets. It is likely that the cost of offsetting will be passed down to the end consumer, however the opposite can be argued. Putting a price on carbon has a direct market effect. If consumers have to pay more for GHG intensive products, they are likely to switch to alternative products that have lower prices and lower GHG intensities.
The other limitations of offsets concern target setting. The Science-Based-Target Initiatives (SBTi) does not allow offsets to count towards scope 2 targets, and only allows them once operational changes are implemented for scope 1 emissions. Offsets are certainly allowed for internal strategies and can be marketed for carbon-neutral, but when utilized for SBTi targets, must meet those requirements. However, renewable energy certificates can be used to offset scope 2 emissions per the SBTi.
There have been many controversies involving businesses that pollute unnecessarily and buy offsets instead of increasing their own energy efficiency, so it is recommended that businesses protect their reputation by ensuring their organization views the purchase of offsets as a tool to offset emissions in tandem with operational changes, to reduce unavoidable emissions, for internal target setting strategies, and offsetting historical emissions.
In the midst of the global decarbonization transition, many companies will have no choice but to use these credits to achieve their net-zero targets, at least in the short to medium term. Antea Group USA carbon leaders were interviewed in this article by Agenda (an information service of Money Media, a Financial Times company).
Carbon Offsets as One Tool in Decarbonization Strategies
In summary, carbon offsets are a popular tool for decarbonization given their ease of use, co-benefits, narrative building, and unique use-cases, but they do have some limitations. The offsets provide direct finance to different projects, and it is important to ensure that your organization is selecting projects which are registered with the top trusted registries‘indulging’ in polluting behavior and using the offsets as a cover, so businesses should consider implementing offsets to build narrative, reduce unavoidable scope 1 emissions, scope 3 (value-chain) emissions, historical emissions, events, and business travel. Finally, the regulatory climate is always changing and could endanger long-term strategies centered around offsets. For these reasons, Inogen Alliance recommends that carbon offsets be considered just one tool used within the overall decarbonization strategy. Carbon offsets paired with renewable energy certificates, power purchase agreements, and operational changes such as: energy efficiency, on-site renewables, down-sizing, and green product sourcing can be a powerful tool in reaching carbon-neutrality.
The previous posts in this series discussed energy audits and purchasing renewable energy – two very useful and important tools when creating a proper decarbonization strategy. A third tool in the decarbonization toolbox is the purchase of carbon offsets. Check out our global climate change and decarbonization services.
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