Sep 115 min read

An A-Z of Sustainability: O is for offsets

This week we return to carbon again and specifically the topic of carbon offsets; potentially the area with the most polarised views in all of sustainability. But before I explain why they are controversial, let’s start with what they are.

What are carbon offsets?

Carbon offsets are a mechanism to compensate for your own carbon emissions by funding activities that reduce, avoid, or remove an equivalent amount from the atmosphere elsewhere. These offsetting projects can come in a variety of forms, from emissions reduction activity to emissions removal and can be through natural means, like tree planting and peat restoration, or technological means, like direct carbon capture.

Use of carbon offsets

The idea behind offsets is not a “get out of jail free” card but a recognition that reducing company emissions to zero is very hard if not impossible, particularly for some sectors. Rather than throwing up your arms and saying, “we can’t do it”, the company should accept responsibility and pay for an equivalent amount of emissions to be reduced or removed by someone else who can.

Even the SBTi in their Corporate Net-Zero Standard accept that some offsetting may be required for most companies to hit their long-term net zero goal. The Standard specifies that no more than 10% of emissions should be offset, what they term the residual emissions. This requires you to focus on reducing all emissions you can, at least by 90%, and only then turn to offsets for the really hard bit.

The Corporate Net-Zero Standard is of course voluntary and many organisations choose to use offsets to reduce their emissions at a faster pace than the limitations of their internal decarbonisation projects or available technology allow. Others will already know that they will not be able to reduce their emissions to zero in the long terms and are getting involved in projects early to learn and help set standards and overcome the issues.

In addition companies are often thinking beyond just carbon. Offset projects can provide wider social or environmental benefits as well. Nature-based projects can have positive biodiversity impacts and community-based projects can deliver welfare and health benefits. Good projects can provide all three benefits.

Companies engaged in this way are also more likely to be more directly involved as partners rather than simply buying a financial instrument, with an interest in conducting due diligence and satisfying themselves of the benefits of the projects they fund. Often, their main driver is the quality of the project, not just the cost. Their involvement contributes to the view that a large collective of corporates offsetting results a pool of money to finance the massive societal transition to net zero that is needed that otherwise may not be available.

Offset controversies

One concern that is directed at companies using offsets is that they are not using them to only match hard to abate residual emissions, but are simply buying their way to continue to emit in the same way they always have. In other words, it is cheaper and simpler for them to pay someone else than to do harder work in reducing their own emissions. In many cases, what is needed however is the hard yards of a long-term commitment to drive out emissions in value chains, not a quick fix of offsets. That said, as every tonne of CO2 counts, it stands to reasons that all companies should be doing everything that is technically possible to reduce their own emissions whilst also investing any spare capital in carbon credits at the same time.

One concern is also that some projects that are funded through offset mechanisms could have happened anyway without the offset finance, so is it fair that they are allowed to be counted to net off emissions of a polluting company? And what if the project isn’t actually as effective in reality as it appeared to be on paper and that the emissions savings are not what are claimed? Even if they are, what if the project emissions savings disappear after a while, for example trees that have been planted succumb to a drought or wildfire and die, meaning there are no long-term emissions saved? So whilst there is sense in urgency for collective, rapid decarbonisation you can start to see why some see offsets as carrying a risk of greenwashing that cash rich companies can engage in to avoid the real actions that are required to move society towards net zero.

The status of the offset market

The offsetting industry is already estimated to be worth up to $2bn by some analysts and it is not that long ago that BloombergNEF forecasted that this would rise to $1tn by 2050. There is a lot of money to be made in a relatively new market and without tight regulations and standards, there is a fear that these conditions create an environment that allows for bad actors, either operating intentionally or unintentionally.

As it stands, the market for offsets does not have a single standard and standards that do exist are voluntary. Whilst some providers have taken steps to strengthen their standards and increase the integrity of the market, the offset market seems to continue to suffer from media coverage exposing incidents where projects fail to deliver to expectations, where the numbers don’t add up, or where projects have a negative effect on other areas such as social impacts.

This negative coverage and accusations of greenwash aimed at companies has led the market to decline recently and companies are becoming more cautious. A recent We Mean Business survey showed that only 20% of companies who are not currently buying offsets are now considering doing so. What is may potentially drive an increase in interest from here is that people are starting to realise just how difficult some net zero commitments are going to be to fulfil, particularly for those companies that have significant scope 3 emissions. Companies don’t like to be seen to be missing targets!

NGOs are concerned that some standards will be watered down to accept an increasing use of offsets. Earlier this year SBTi released some statements that hinted at this and was met by an backlash, from their own staff and external stakeholders alike. Since then, their latest publications question the effectiveness of offsets, but they have currently stopped short of confirming their stance for their planned future update of their standard.

So, what position on offsets should you take? My advice would be to approach carefully. If you are in a hard to abate industry and have the resources to understand projects that you may want to get involved with and undertake due diligence, then you will learn a lot and it may be the right thing to start early. But for the vast majority of companies, I would put all your efforts in getting the change required in your business and in your supply chain happening and leave the offset market to mature and revert to it if and when you feel you need them.

About the Author

Chris is a senior strategic leader with over 25 years’ commercial experience including sales, marketing, strategic planning and major business change initiatives at AkzoNobel and ICI. He has a wide knowledge of sustainability and how to integrate this into business having held senior sustainability roles at AkzoNobel for 12 years, including as Global Sustainability Director Decorative Paints and AkzoNobel Planet Possible Programme Manager. Chris is now an independent sustainability consultant and a pension trustee director.