As the world moves towards the target of net zero greenhouse gas emissions, many companies are using short-term mechanisms to balance out some of their environmental footprint through carbon offsetting and carbon credits.

What are carbon offsets?

Carbon offsets are certificates that denote the CO2  and other greenhouse gas (GHG) emissions which have been reduced or removed from the atmosphere. Carbon offsets tradeable and found in voluntary markets, where companies can invest in carbon reduction projects outside of their business operations. 

Carbon offsets are a kind of measurement, compensating a business for its investment in environmental projects or developments which eliminate emissions. (1)

What are carbon credits?

Carbon credits are a measurement unit to "cap" permitted emissions. The credits are permits which give companies the right to emit one tonne of CO2 or other GHGs. These tradeable credits are used in compliance markets, where governments set limits on emissions and businesses need to take action. (2) There are emissions trading schemes, where participating firms face a legal requirement to cover their emissions with a corresponding volume of permits. (3) 

There can be some confusion between the two carbon options. Offsetting is when a business funds external carbon projects that remove, reduce, or avoid greenhouse gas emissions to compensate for their own. Carbon credits are what the company purchases in order to offset its “unavoided” emissions. Each credit proves that one tonne of CO2e has been avoided or sequestered out of the atmosphere. (4)

How do carbon offsets work?

Carbon offsets are usually generated when companies, organisations or individuals finance mechanical or natural projects to reduce greenhouse gas emissions outside of their daily operations. For example, wetland restoration and reforestation schemes are natural solutions which capture carbon from the atmosphere.

Mechanical solutions could include new technology that is new, more efficient and/or has lower emissions, such as carbon capture, usage and storage (CCUS) and renewable energy projects. (5)

Effectively, this means that companies pay other organisations to reduce carbon emissions through mitigation or removal that they cannot reduce themselves. The emissions reductions they have paid for can then be added to their own climate targets.

Offset emissions reductions are validated by a third party and then sold as units on the voluntary carbon markets. This can have the twin benefit of not only reducing the carbon footprint of the firm investing in the units, but also incentivising the offsetting project developer to reduce emissions measurably.

While there are no regulations governing voluntary market participation, offsets traded meet specific requirements. Companies are encouraged to invest in approved projects that demonstrate environmental credentials and avoid charges of greenwashing. The Verified Carbon Standard and the Gold Standard, for example, set industry benchmarks, providing criteria any offset should meet for full certification. (6)

Offsets can help a company meet international climate goals when it cannot directly reduce all emissions. The Taskforce for Scaling Voluntary Carbon Markets suggests that voluntary carbon markets will need to be over fifteen times their current size in order to keep warming to 1.5 degrees. (7)

Companies could consider “insetting”, where the business chooses to fund or develop emissions reductions in its own value chain. For example, a company in the food sector could fund agricultural regeneration projects on farms it purchases food from, for the benefit of both organisations. (8)

How do carbon credits work?

The UK government advises that a carbon credit is an instrument representing the avoidance, reduction or removal of atmospheric greenhouse gases (GHG), measured in tonnes of carbon dioxide equivalent (tCO2e). There are three main outcomes for projects creating carbon credits: 

• Avoided emissions, for example by preventing deforestation and forest degradation (REDD+). 

• Reduced emissions, for example by restoring peatlands. 

• Removal and storage of CO2, for example by direct air capture or restoring forests

The government says that the effectiveness of carbon credits is influenced by their integrity, with evidence that globally there are over-estimates of the amount of emissions that are avoided or reduced. There are several initiatives seeking to address issues relating to the integrity of carbon credits such as the Oxford principles, the Science Based Targets initiative and the Voluntary Carbon Markets Integrity Initiative. (9)

Carbon credits are bought and sold when a "cap-and-trade" system is used. A cap-and-trade system establishes a cap on maximum emissions to reduce aggregate emissions from a group of emitters. The market-based approach promotes lower pollutant emissions while increasing investment in energy efficiency and fossil fuel alternatives. (10)

The credits they are issued, monitored, and verified within a stringent framework of internationally recognised standards, which means that businesses can compensate for “unavoidable” emissions reliably and transparently.

Carbon credits, can allow companies to provide stakeholders with proof that they have offset emissions and at the same time provide a mechanism for much-needed finance to fund decarbonisation projects around the world, which in turn can help to meet global climate goals and support a wide range of communities. (11)

Carbon credits can also be a way to finance emissions reductions when a business has met its net zero goals through direct action and some companies have set specific targets going beyond net zero, for example, offsetting all historical emissions.

Conclusion

Companies should make emissions reduction the main focus of any net zero strategy, in SaveMoneyCutCarbon’s view. Carbon offsetting and carbon credits should be seen as “top-up” facilities rather than replacing the direct reduction of emissions within a company’s value chain. Using offsets to meet net zero emissions targets might be more cost-effective than other action in the short-term but direct decarbonisation over the longer term could be a better business choice.

The carbon offset and carbon credit markets are set to grow as pressures to meet net zero targets increases, and guidelines will help to stabilise and add confidence in these markets. The Oxford Principles for Offsetting (12) were published in 2020, while the Science-Based Targets Initiative (13) encourages companies to align near and long-term emissions reduction goals with the Paris Agreement. Both groups emphasise the importance of direct reductions with companies and their value chains before utilising offsets and a gradual shift from avoidance/reduction credits towards carbon removal credits.

Bibliography

1 PSU: Understanding Carbon Credits and Offsets (accessed September 2024) https://extension.psu.edu/understanding-carbon-credits-and-offsets

2 PSU: Understanding Carbon Credits and Offsets (accessed September 2024) https://extension.psu.edu/understanding-carbon-credits-and-offsets

3 LSE: What are carbon offsets? (accessed September 2024) https://www.lse.ac.uk/granthaminstitute/explainers/what-are-carbon-offsets/

4 Climate Impact Partners: Carbon Credits Explained (accessed September 2024) https://www.climateimpact.com/services-projects/carbon-credits-explained-what-they-are-and-how-they-work/

5 PSU: Understanding Carbon Credits and Offsets (accessed September 2024) https://extension.psu.edu/understanding-carbon-credits-and-offsets

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7 IIF: Taskforce on Scaling Voluntary Carbon Markets (accessed September 2024) https://www.iif.com/Portals/1/Files/TSVCM_Summary.pdf

8 Chapter Zero: Carbon offsetting explained (accessed September 2024) https://chapterzero.org.uk/review-ambition/credible-net-zero-targets/carbon-offsetting-explained/

9 UK Parliament: Carbon Offsetting (accessed September 2024) https://post.parliament.uk/research-briefings/post-pn-0713/ (Open Parliament Licence v3.0)

10 PSU: Understanding Carbon Credits and Offsets (accessed September 2024) https://extension.psu.edu/understanding-carbon-credits-and-offsets

11 Climate Impact Partners: Carbon Credits Explained (accessed September 2024) https://www.climateimpact.com/services-projects/carbon-credits-explained-what-they-are-and-how-they-work/

12 SSEE: The Oxford Offsetting Principles (accessed September 2024) https://www.smithschool.ox.ac.uk/research/oxford-offsetting-principles

13 The Corporate Net Zero Initiative (accessed September 2024) https://sciencebasedtargets.org/net-zero