The Road to Carbon Neutrality: Understanding Carbon Offsets
A Necessary Tool
Publicly declaring a carbon neutral commitment and setting a target should be applauded, but it’s also important for a company to be clear and transparent as to how it is reducing its emissions. It is imperative that companies back up their carbon neutral claims with measurable efforts to decarbonize their operations and supply chains. However, since current technologies and economic conditions prevent businesses from operating with zero emissions, the use of carbon offsets is one method available to bridge this gap to carbon neutrality.
Carbon offsetting refers to a reduction of greenhouse gas (GHG) emissions – or an increase in carbon storage (e.g., through land restoration or the planting of trees) – that is used to compensate for emissions that occur elsewhere. An organization buys carbon offsets to decrease its carbon footprint, but those reductions are associated with a project elsewhere that would not have occurred without the buyer’s investment – a concept known as “additionality.” For credibility purposes, offsets should be third-party verified and purchased from a reputable seller or registry to ensure that they meet the criteria for being “real, additional, permanent, quantifiable, and verified” as well as transparent and available to be monitored by third-parties.
There are two types of markets for carbon offsets: compliance and voluntary.
Compliance markets are those created by governments (e.g., California’s Cap and Trade System) to help regulated entities meet their emissions reduction obligations, whereas voluntary markets derive from commitments made by the private sector and non-governmental organizations to reduce emissions. Compliance markets are underpinned by regulation—they allow governments, private companies, and other entities to purchase carbon offsets in order to comply with caps on the amount of GHG emissions they are allowed to emit. Underpinning includes ongoing verification and reporting requirements. The voluntary markets allow private investors, governments, non-governmental organizations, and businesses to voluntarily purchase carbon offsets to offset their GHG emissions.
This article focuses on offsets used in the voluntary market, such as those that many corporations use to support their carbon neutral or “net zero” claims. Note that while carbon offsets are currently regarded as an important tool to achieve carbon neutrality, corporations should be cognizant of overreliance on the tool, opening them up to potentially justifiable criticism from stakeholders that the company is not doing all it can to reduce its emissions through its own policies and management systems. In general, strategies for achieving carbon neutrality should emphasize on-site operational emissions reductions through energy efficiency and zero carbon technologies before turning to offsets to “bridge the gap.”
Ensuring Credibility of Offsets
- Real: Carbon emissions reductions or enhancements must result from a demonstrable action or set of actions, and are quantified using appropriate, accurate, and conservative methodologies that account for all GHG emissions sources, GHG sinks, and GHG reservoirs within the offset project boundary and account for uncertainty and the potential for activity-shifting leakage and market-shifting leakage.
- Additional: Carbon offsets must represent actual emissions reductions compared to what would have otherwise happened under the offset implementor’s “business as usual”—in other words, the reductions must be additional to any GHG reduction or removals otherwise required by law, regulation, or legally binding mandate, and must exceed any GHG reductions or removals that would have otherwise occurred because of normal market conditions.
- Permanent: GHG reductions and GHG removal enhancements must not be reversible, or, in cases where they may be reversible (e.g., reforestation projects), there must be mechanisms in place to replace any reversed GHG emissions reductions and to ensure that all credited GHG reductions will endure for at least 100 years.
- Verified: The existence of the carbon offset as real, additional, and permanent throughout the offset project’s lifetime must be well documented and transparent such that it lends itself to objective reviews by an accredited verification body (VB). There are different sets of VBs for both compliance and voluntary registries. For example, the accredited VBs and Lead Verifiers for the CARB offset program can be found here: https://ww2.arb.ca.gov/our-work/programs/compliance-offset-program/offset-verification
- Quantifiable: The emissions reductions must be accurately measured, with the GHG reductions or GHG removal enhancements being calculated relative to a project baseline in a reliable and replicable manner for all GHG emissions sources, GHG sinks, or GHG reservoirs included within the offset project boundary, while accounting for uncertainty and activity-shifting leakage and market-shifting leakage. Baseline refers to annualized GHG emissions that have occurred in the past and are produced prior to the introduction of any strategies to reduce emissions. Leakage refers to the moving of emissions from one jurisdiction to another.
Markets and Pricing
Over the past few years, carbon finance has become a hot topic, with many new sectors of the economy joining the voluntary carbon market. Ecosystem Marketplace’s latest annual report credits this expansion to the rapid acceleration of “net zero” carbon commitments from corporations, noting that voluntary carbon markets posted a near 60 percent increase in value from 2021 compared to 2020. To this end, there are now several different standards used by suppliers of offsets to certify that offset projects produce credits that are real and verifiable. The most reputable standards in the over-the-counter voluntary market include:
Approved protocols, created by a number of registries such as the Climate Action Reserve, include creating offsets from projects that capture, sequester, store, and otherwise offset carbon related to forestry, livestock management, ozone depleting substance reduction, rice cultivation, direct air capture, and other projects. A “spot check” conducted by ESA in April 2022 of over-the-counter established offset retailers reveals current prices for high-quality offsets ranging from approximately $15 to $25 per metric ton of carbon dioxide equivalent (MTCO2e).
Meeting Climate Goals
How do offsets aid us globally in achieving goals that will help solve the climate crisis? According to the World Bank’s latest annual report, carbon needs to be priced at between $50 per MTCO2e and $100 per MTCO2e by the year 2030 to achieve the goals of the Paris Agreement. However, even supported by these prices, carbon offset projects alone cannot solve the climate crisis, and stakeholders know this. Globally, we must reduce emissions by 80 to 90 percent by 2050 to keep the temperature increase manageable. No amount of carbon offsets can enable attainment of the Paris Agreement targets if coal power stations continue to be built, petroleum-fueled cars continue to be bought, and the growing global population continues to consume as it does today. Thus, both compliance markets like the California Air Resources Board (CARB) and voluntary standards like the Corporate Net-Zero Standard from the Science-Based Targets initiative (SBTi) are tackling the issue head on by greatly restricting the use of offsets in supporting longer-term net zero claims.
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