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17 Nov INSIGHTS | Carbon Offsets for Net-Zero: How to Do It Right?
Carbon offsets are essentially investments in greenhouse gas-reducing projects. When individuals and organizations purchase carbon offsets, funds in these transactions are funneled towards environmental and social projects with decarbonization benefits, such as the conservation of natural habitats, reforestation, and clean cooking fuels for rural communities. In return, carbon offset purchasers receive credits proportionate to their amount of carbon reduction, which can be used to lower their carbon footprint in carbon accounting. Typically, one carbon offset credit is equivalent to the removal of one ton of carbon dioxide-equivalent (tCO2e) of greenhouse gas.
Many organizations have made or intend to make net-zero pledges to show their commitment to a sustainable future. In 2022, 3125 companies in the MSCI ACWI IMI Index (which captures 9235 listed companies of all sizes from developed and emerging markets) have announced some sort of net-zero pledges, and the share of companies with net-zero targets is steadily increasing. However, for a lot of industries (such as agriculture, aviation, and construction), emissions cannot be neutralized fully by the reduction of emissions in their operations and value chains only. To compensate, carbon removal, whether through carbon capture and sequestration (CCS) technologies or nature-based sequestration, may be applied to abate residual emissions that could not be mitigated, as illustrated by the Science-based Target Initiative (SBTi) in the graph below. Since implementing a removal program from scratch is financially unrealistic for many businesses, carbon offsetting is the simplest and most efficient way to meet the needs for carbon removal at the end of a net-zero pathway.
If purchasers are not careful in their selection of offset programs, the carbon removal effect of their contribution may be seriously compromised. Participation in a discredited carbon credit program could implicate the company in ‘greenwashing’ (marketing unsubstantiated environmental claims), thereby exposing the company to reputational and regulatory risks. Therefore, ensuring the credibility and quality of their carbon offsets is imperative to minimize risks.
How to select the right offset program?
The essence of the corporate net-zero movement is to shift business models towards sustainability and lower emissions across all industries. As a principle, a business should always prioritize the reduction of its own emissions before engaging with carbon offsets. This also means that carbon offsets should not be used to meet interim carbon targets. According to the Net-Zero Standard from the SBTi, carbon offsets should not be applied to neutralize more than 10% of a company’s total baseline emissions. All carbon offsets should be preceded by concrete actions to decarbonize business activities and never be treated as justifications to continue business as usual.
Once a company has reduced emissions wherever reduction is viable in its operation and value chain and is ready to neutralize residual emissions with carbon offsets, it should carefully evaluate the credibility and quality of offset programs to ensure that its carbon credits are translated into tangible climate impact. When vetting carbon offset programs, there are several key features to look for:
- Transparency through comprehensive and ongoing disclosure
The hallmark of a credible carbon offset program is a high level of transparency. The carbon offset provider should publicly disclose its methodologies for quantifying the greenhouse gas reduction benefits of a project. The methodologies should provide detailed explanations of project boundary definition, baseline emission calculation, assessment metrics, and determination of project lifespan. The provider should have methodologies corresponding to different impact categories to which its projects belong, such as energy efficiency, carbon capture and utilization, regional forest management, methane reduction, and so on. Pricing models should also be clearly explained and publicly accessible.
For compliance purposes, organizations are recommended to source verified carbon credits from national, international, or recognized offset programs, some of which are listed below.
- Management of natural carbon sinks to ensure long-term storage
Companies commonly gravitate towards nature-based offsetting solutions for their marketing appeal. Among nature-based options, the most popular is reforestation, commonly known as tree planting. These projects are widely accepted by the public, as the carbon removal effect of forests is well-understood. However, the quantification of impact from forestry-based offsetting is often overly simplified. Forests, as with many nature-based carbon sinks, can release carbon back into the atmosphere in a short period if not properly managed, such as by wildfires, pests, diseases, logging, or land conversion. On one hand, carbon offsetting programs may commit mistakes by neglecting the management of natural assets, exposing them to high risks of damage, thereby nullifying all previous efforts. On the other hand, most forms of nature-based carbon removal take a long time to become effective, as plants must mature and stabilize in their environment. During this process, a certain percentage of planted trees may not survive. Therefore, when choosing nature-based offsets, organizations should pay special attention to the project’s lifespan, impact indicators, and methodology. Choose projects with long lifespans (preferably above 10 years) and demonstrate rigorous ongoing management of ecological reserves.
- Full-project engagement of local communities
Most carbon offset projects have additional social and economic impacts on local communities, including public health, women’s empowerment, and economic opportunities. A well-designed and executed offsetting project should strictly follow the principle of “do no harm” and ensure that access to opportunities created from carbon offset projects prioritizes local stakeholders. To ensure this, companies should look for offsetting programs that can demonstrate active engagement from local communities throughout the project. For example, does the project explicitly work with local contractors and hire local experts? Do beneficiaries receive payment directly from the project, and how much of the funding goes towards such payment? Was the idea for this specific project originally pitched by the local people? These are just some sample questions an organization should ask the carbon setting program to gauge its impact management and understand its level of transparency and effectiveness.