What Are Carbon Offsets?
In a broader sense, an offset is an instrument that is used to compensate for emissions from greenhouse gas (GHGs) in other locations. Carbon offsets can be found in two forms: offsets that avoid emissions as well as reductions in emissions. An example of a reduced emission would be to turn landfill gas into fuel for combustion. This eliminates the release of landfill gas into the atmosphere. It also decreases emissions from sourcing traditional fossil fuels.
An example of an emission reduction would be the afforestation project that collects CO2 from the atmosphere and then store it in the biomass sink. The range of offset types and project types is adjusted to fit a business’s environmental and social management strategy, and used in narrative development. In the context of decarbonization offsets for carbon are utilized to reduce the carbon footprint towards a net-zero goal. But companies are also finding new ways to make use of carbon offsets, such as offsets on business flights or events, the launch of different product launches, as well as transportation of products sold.
To properly implement carbon offsets into your decarbonization plan, it is important to comprehend the advantages and drawbacks of carbon offsets. That way, you can ensure you are selecting the most effective initiatives to decide how to utilize them within the larger decarbonization strategy.
Benefits of Carbon Offsets
Carbon offsets provide a clear market signal by placing the economic value of a commodity which has not previously been priced. The goal of carbon offsets is to price GHG emission based on their economic and social impact. This is known as the social cost of carbon.
The project must be able to be able to pass additionality prior to moving forward to ensure that the methodology is in line with requirements set out by the registries. Additionality examines projects to find out if its “additional”. The test will determine if the project will contribute in the reduction and reduction from GHG emissions. The most crucial additionality test is an analysis of investment. That is, would the project be possible without the financial incentive of selling carbon offsets? If so, the project is not considered for approval. This provides assurances that the environmental benefits derived by the user of a carbon offset contributed towards the decrease of GHG emissions, which would not have occurred without that financing.
Projects that are issued offset allowances to trade in the market of voluntary trade have to conform to the registry’s rules and regulations. They must also follow third-party approved methodologies, monitor emissions reductions and avoidances and be validated/verified by third-party verification agencies. It is strongly recommended that firms who are seeking offsets use offsets which were granted by top registered organizations. The top registries include: The Voluntary Carbon Standard, The Gold Standard, American Carbon Registry along with The Climate Action Reserve.
When you access carbon offsets there are a wide variety of projects that could assist a company in not only reducing its emissions but also creating the foundation for a story. Certain projects have associated benefits that are co-beneficial, such as protection of the ecosystem, gender equality, improving impoverished communities, safe drinking water, and so on. One example is providing solar cook stoves to women in South America. It is a benefit socially to the women who live there, reduces biomass from being burned and improves the air quality in the region of the world. Another example is to convert land used for cattle grazing back into its natural land-use such as a rainforest. This is a project that has the added benefits of wildlife and eco-system management.
Offsets can be a great way to lower a company’s emissions and build narrative but must be used appropriately. Certainly, using offsets only to achieve zero will cause an abundance of scrutiny. It is recommended to employ offsets to decrease unnecessary scope 1 emissions as well as scope 3. (value chain) emissions. This should occur in tandem with stakeholder engagements and operational changes.
Limitations of Carbon Offsets
The main problem with carbon offsets is that they are not a solution-all-for-all. They are a tool for decarbonization and must be used wisely. Secondly, offsets are essentially costs. Other strategies like solar installations, energy efficiency, and downsizing will generate a return-on-investment over time for businesses. These strategies are best employed in conjunction with offsets. It is possible that the cost of offsets will be passed down to consumers at the final level, although you can argue that the reverse is true. A price tag on carbon will have a direct market effect. If consumers must pay more for GHG intensified products, they will be more likely to look for alternative products that have lower prices and less GHG intensities.
Other restrictions of offsets concern target setting. Target setting is a problem for offsets. Science-Based-Target Initiatives (SBTi) does not permit offsets from being counted towards the scope 2 targets and only allows them once modifications to operations are made for emission levels in the scope 1. Offsets are definitely allowed in internal purposes and are advertised as carbon neutral, but when used for SBTi targets, must meet the SBTi requirements. However, renewable energy certificates can use to offset the scope 2 emissions for the SBTi.
There have been numerous controversies in which businesses pollute without justification and use offsets to offset their emissions instead of increasing their energy efficiency. It is highly recommended that companies protect their reputations by ensuring that their business sees buying offsets as an opportunity to offset emissions with changes in operations, in order to lessen the emissions from unavoidable events, for internal target setting strategies, and offsetting historic emissions.
In the in the midst of the global decarbonization transition, many companies will have no choice but to take advantage of these credits to meet their targets of net zero, at least in the short and medium term.
Carbon Offsets as a Tool in Decarbonization Strategies
In summary carbon offsets are an extremely popular method of decarbonization due to their convenience and co-benefits, narrative construction and distinctive use-cases however, they have limitations. Offsets can provide financing directly to various projects, but it is important to ensure that your business is selecting projects which are registered with the most credible registries. The risk is being perceived as indulgence in harmful behavior, or using offsets as to disguise their actions, and therefore, businesses must consider using offsets to build narrative, reduce unavoidable scope 1 emissions, scope 3 (value-chain) emissions, historical emissions, events as well as business travel. The regulatory environment is constantly evolving and could endanger long-term strategies that are based on offsets. In this regard, Inogen Alliance recommends that carbon offsets are only one option in the overall strategy for decarbonization. Carbon offsets paired along with Renewable Energy Certificates and power purchase agreements and other operational modifications such as: energy efficiency, on-site renewables down-sizing, and green product sources can be a potent instrument to reach carbon neutrality.
What Are Carbon Offsets?