The challenge of reaching net zero is both enormous and complex, and will require a plethora of strategies and systems to be utilized. One important piece of the decarbonization jigsaw puzzle is carbon offsets, which are predicted to increase 15-fold in volume (to as much as USD 50 billion by 2030) and have been backed by financial heavyweights such as ex-Bank of England Governor and UN Special Envoy on Climate Action and Finance, Mark Carney.

In this article, we take a closer look at the key role carbon offsets play in funding green projects and how they can be utilized best in the race to decarbonize.

What are carbon offsets?

Also referred to as Voluntary Emission Reductions (VERs), a carbon offset represents the avoidance, destruction, reduction or sequestering of the equivalent of a ton of greenhouse gas in one place to ‘offset’ an emission elsewhere. Typically, offsets represent direct emission reductions or sequestration, such as destroying methane emitted from manure on a farm. This means they can be used to offset a company’s Scope 1 direct emissions. In particular, nature-based offsets that store carbon (such as allowing forests to regrow or restoring coastal wetlands) are gaining popularity for their co-benefits of restoring habitats and biodiversity.

Offsets can be sold in the form of a carbon offset credit, which is a transferable instrument certified by a government or independent certification body, which allows the purchaser to ‘retire’ it to claim the underlying reduction towards their emissions reduction goals. The strict rules for approval require that the emission reduction credited is real, permanent and verifiable, and is in addition to a business-as-usual scenario. This concept of additionality enforces that a ton used as an offset is fully equivalent to the ton emitted in its place to ensure that the emission is completely neutralized.

It is also important to differentiate between offsets and renewable energy certificates (RECs). RECs represent one MWh of electricity generated from a renewable source. As the renewable electricity displaces electricity that otherwise would have been generated by a fossil fuel generator, Scope 2 emissions are reduced. As RECs provide a different mechanism to offsets, the same principles of additionality needn’t apply. Purchasing RECs supports demand for renewable energy; that’s the important point. It also means that RECs shouldn’t be used as an offset for Scope 1 or Scope 3 emissions.

When should carbon offsets be used?

Offsets are becoming increasingly popular among companies since buying credits is immediate and can reduce emissions while companies invest in long term structural changes that take time to take effect and lower a firm’s emissions. While offsets may appear as a good quick fix, using offsets is less reliable than eliminating the sources of emissions. Increasing difficulty in proving offset emissions, growing demand and challenges around auditability mean they are likely to increase in price and create reputational risk.

Priority should be given first to reducing energy consumption as much as possible, then generating green energy (or purchasing, where on-site generation is not adequate) and matching demand with supply as much as possible, and only offsetting what remains.

It is also important that users of offsets increase the portion that comes from carbon removals (such as afforestation projects) rather than from emission reductions, such as substituting natural gas for coal to generate electricity. To ensure compatibility with the Paris Agreement goals, all offsets should be 100% carbon removal by 2050. By creating demand today for carbon removal offsets, companies can send a strong market signal.

However, nature-based carbon removal offsets are unlikely to provide all the carbon storage capacity we need to restore the levels of atmospheric carbon. Technologies such as direct air capture of carbon dioxide are still nascent industries that will take time and investment to bring to scale. Given these realities, offsets must be seen as a rapidly evolving tool, where standards and requirements will change over time, so ensure you document your approach to selecting offsets, and be conscious that the quantity and type of offsets you purchase today will likely be very different from those you buy in the future.

Purchasing the right offsets

In order to function properly, a carbon offsets market requires strict quality controls and strong oversight. As a result, global standards groups such as The Gold Standard and Green-e have been established. In Australia, the federal government developed Climate Active (formerly the National Carbon Offset Standard) which publishes clear guidelines to help organizations purchase the right offsets.

Certifications by these standards groups ensure that carbon offset credits that are purchased are real and verifiable, and that projects make measurable contributions to sustainable development.

In addition to ensuring the carbon offsets purchased have quality labels, companies should also carefully select their vendor and not hesitate to ask for any information that is not publicly accessible on their website. Companies should also make sure that offsets they purchase are only sold once, and that their offset vendors guarantee to retire the offset from the market on your behalf and use a third-party, publicly accessible registry that tracks ownership of the offset throughout its lifetime. Finally, companies should be careful to only purchase offsets that are ‘additional’ (e.g. that would not have happened anyway).

In September 2020, The Oxford Principles for Net Zero Aligned Carbon Offsetting was published and is considered the go-to document on how to evaluate and select the right offsets.

How software can help carbon offset management

Having the right software in place will go a long way in simplifying greenhouse gas accounting during the ESG reporting process. The IBM Envizi ESG suite enables you to capture and manage all emissions-related data, including purchased offsets, in a single system of record. Envizi enables you not only to report against your benchmark, but also to identify and quantify emissions reduction opportunities in your portfolio. Once emission reductions have been achieved, organizations can more accurately determine the quantity of emissions per scope that remain for offsetting, and track offsets in the system. Since carbon offsets need to be managed and tracked over a long period and these records need to meet audit and compliance standards, sustainability software can simplify the process. Envizi ensures all data captured is linked back to the transaction, with robust audit trails for any changes subsequently made to that data.

Conclusion

The carbon offset market is a complex space that is expected to grow in the coming years. Companies using carbon offsets to help meet their net zero pledges will need to demonstrate to stakeholders and investors that their purchases continue to meet strict quality controls. An informed approach to emissions reduction tactics, coupled with carbon accounting and ESG reporting processes underpinned by technology, will equip leading organizations with the tools they need to accelerate their net zero journey.
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