The Essential Guide to Carbon Offsetting
What companies need to know about offset projects
Reducing emissions is a key component to tackle climate change
There is no doubt that reducing greenhouse gas emissions is the most crucial component in tackling climate change and keeping global warming under 1.5 °C. For this reason, the global economy needs to undergo rapid and deep decarbonisation. Businesses of all sizes and industries around the world are called upon to reduce emissions within their operations and value chains. At the same time, companies need to be investing in climate mitigation to address climate change and help the global community to reduce its carbon footprint. This is where carbon offsetting comes in.
This mechanism is both an immediate way for businesses and organisations to take responsibility for their unabated emissions now and to contribute to achieving the United Nations‘ Sustainable Development Goals.
People are increasingly aware of the urgency to join forces in the challenging battle against climate change by taking climate action.
Even though civic engagement around the world has significantly increased and more countries have declared their commitment to drastically reduce greenhouse gas (GHG) emissions in order to limit global warming to 1.5 °C by 2050 as enshrined by the Paris Agreement, there is still much to do.
The IPCC report made it clear in early 2022: To reach the goal of net zero emissions by 2050, we need to reduce GHG emissions by 7.6% every year from 2021 until they are halved by 2030. State and citizen engagement is important to increase awareness of the urgency of tackling climate change and setting policies that enable climate action.
However, achieving this target is not that simple and requires both short-term and long-term strategies as well as the large-scale deployment of different measures: carbon offsetting is one of them.
Learn about the concept of carbon offsetting and what role it plays in a company’s transition towards net zero emissions, the different technologies used in carbon offset projects, and the standards of the Voluntary Carbon Market.
Halving emissions in only a few years from now will not be possible without the participation of all industries and businesses. This is a fact.
Carbon offsetting allows immediate climate action
You may have heard about “carbon offsets” and assume that they involve reducing CO2 emissions, but there’s a lot more to it than that. Let’s start with a clear explanation of what carbon offsetting really means.
The UNFCCC describes carbon offsetting as an action that allows companies and individuals “to compensate for the emissions they cannot avoid by supporting worthy projects that reduce emissions somewhere else.” In other words, carbon offsetting is climate action that organisations take voluntarily to reduce, remove, or prevent the release of CO2 and other GHG emissions.
Carbon offsetting allows companies to compensate for their hard-to-abate greenhouse gas emissions, which means the emissions that remain after reduction efforts, to balance out their carbon footprints.
Why is carbon offsetting so important?
Human activities, like transportation, agriculture, and electricity generation, are responsible for most of the GHGs in the atmosphere over the last 150 years, causing global warming and driving climate change. A report from the World Meteorological Organization predicted that the planet could reach 1.5 °C above pre-industrial levels by 2025, in only three years’ time. Going beyond that threshold means significantly increasing the impacts of climate change, like extreme weather conditions and rising sea levels. Moreover, according to recent research led by the University of Leeds, the current rates of warming will put Earth at risk of crossing several climate tipping points, which could lead to irreversible shifts and change the world forever, such as the disappearance of permafrost peatlands in Europe and Western Siberia.
Source: according to NASA
According to Columbia University, a tipping point is “the point at which small changes become significant enough to cause a larger, more critical change that can be abrupt, irreversible, and lead to cascading effects”. The permafrost peatlands store up to 39 billion tons of carbon, which is the equivalent of twice that stored across all European forests. As the global temperature rises, this permafrost is at increasing risk of thawing and potentially releasing carbon stored for millennia as well as methane, an even more potent GHG than carbon dioxide. This in turn will lead to increased global warming and could potentially accelerate climate change.
The answer is clear: To prevent climate change, companies need to drastically reduce greenhouse gas emissions, halving them by 2030. In the longer term, 90% to 95% of emissions should be eliminated before 2050, according to the Science Based Targets initiative (SBTi).
During their transition towards net zero emissions, companies should “take action to mitigate emissions beyond their value chains” by investing in climate mitigation projects outside of the value chain (i.e. carbon offsetting). Examples include “high-quality, jurisdictional REDD+ credits or investing in direct air capture (DAC) and geologic storage”.
The international community has agreed to adopt different measures with global impacts, to pave the way for the transition to net zero emissions by 2050. One of these measures that allow, among others, businesses to contribute to the overall mitigation effort is carbon offsetting.
Responsible offsetting must follow the mitigation hierarchy
The need to drastically reduce and cut carbon emissions is unequivocal. According to the SBTi’s net zero standard, companies should focus on rapid and deep emissions cuts first, not instead of, offsetting. This means, that companies should follow the “mitigation hierarchy”, committing as a first order priority to reduce their value chain emissions before investing to mitigate emissions outside their value chains.
Once this option is exhausted, companies should “go further by making investments outside their science-based targets to help mitigate climate change elsewhere”. This is where carbon offsetting comes in.
Carbon offsetting can play “a critical role in accelerating the transition to net zero emissions at the global level”, as stated by the SBTi. In this context, the UNFCCC declared carbon offsetting as part of three steps that companies should follow: measuring their corporate carbon footprint, reducing as much as they can, and offsetting what emissions they cannot avoid.
The same report affirmed the necessity of nature-based removals and technological solutions such as direct air capture and carbon storage as an integral part of any climate action strategy on the road to net zero.
Therefore, to counteract the unabated emissions, we will need to enhance and add to GHG sinks around the globe. These are natural storage systems that absorb and remove GHGs from the atmosphere, such as plants, the soil, and the ocean.
According to the SBTi, most industries will only be able to reach net zero through neutralisation (i.e. investing in carbon removal offset projects). That’s why we need to invest in carbon removals today to increase the supply and drive innovation in the space. This is where carbon offset projects come in. So, what is a carbon offset project?
How does voluntary carbon offsetting work?
Carbon offsetting is quantified in tonnes, also called metric tons, of carbon dioxide equivalents (CO2e). Once the carbon saving has been verified, a project issues carbon credits each corresponding to 1 tonne of carbon dioxide. As a reference, one carbon credit is equivalent to 1 tonne of CO2 not emitted or an equivalent amount of other GHGs removed, reduced, or prevented by a carbon offsetting project. The issuance is recorded on a public registry managed by an independent standard body such as Verra or the Gold Standard. For a company to make an offsetting claim, they would need to purchase the carbon credit, and then retire it on the registry. This avoids double counting and ensures that no one else can make a claim with the same carbon credit. This is a very important requirement that will be explained later in this eBook.
Two types of carbon credits are the most common. Verified Emissions Reductions (VER) are exchanged within the voluntary market, while Certified Emissions Reductions (CER) are carbon credits that were created within the compliance market but can also be purchased voluntarily. This leads us to explain how carbon credits are traded.
Understanding the Voluntary Carbon Market
The purchase and sale of carbon credits are conducted through carbon markets. There are two types of carbon offset markets: voluntary and compliance.
As our focus here is on voluntary offsetting, compliance offsetting is not explored further in this article. Companies, organisations, or even individuals are participants in the Voluntary Carbon Market (VCM), which functions in parallel with compliance markets. So, what is the VCM?
Generally, the VCM is a decentralised market that facilitates trade between buyers and sellers of carbon credits from GHG emissions reduction, removal, and avoidance.
As the name suggests, the VCM is driven by voluntary, private initiatives and not regulated by governments. In other words, while governments were wrestling with ways to address the impact of climate change, private parties, who were concerned about the increase of GHG emissions and wanted to take climate action into their own hands, took initiative and established the VCM.
In this market, companies and organisations can buy and sell carbon credits voluntarily, not because they are obliged to comply with legal obligations.
However, there are no global regulations that define how carbon credits purchased on the VCM align with science-based decarbonisation targets.
But various organisations have built on existing standards and guidelines from compliance markets to ensure the quality of voluntary offsets and increase their transparency and credibility.
Why do high standards in voluntary markets matter?
Even though voluntary offsetting is based on a self-imposed commitment to contribute to climate action, carbon offset projects must be stringently validated, registered, and regularly verified by third-party auditors according to strict and internationally recognised standards, like the Gold Standard, the Verified Carbon Standard (VCS), or Plan Vivo.
Carbon credits issued under one standard and retired in the registry of that standard cannot be transferred or used again by another standard. For example, a carbon credit issued under the VCS is stored in the VCS registry. Once it is sold, it is then retired in the VCS registry and cannot be moved to the registry operated by another standard.
The Clean Development Mechanism (CDM), established under the Kyoto Protocol as the first major offsetting scheme, set three basic criteria to evaluate carbon offsets: additionality, permanence, and verification. Other standards now comply with the same criteria. Later, a fourth criterion was added to exclude double counting.
Therefore, to ensure that carbon offset projects satisfy internationally recognised quality standards, they must abide by at least the following four characteristics:
Exclusion of double counting
Regular verification by independent third parties
Beyond carbon reduction, projects improve the lives of local communities
As previously mentioned, standards such as the Gold Standard or the VCS are designed to provide interested companies and consumers with “greater transparency and confidence in the credibility and integrity of certified offsets”. Additionally, certified projects are regularly audited and verified by independent, third-party VVBs.
On top of this, additional standards such as the Climate, Community, and Biodiversity (CCB) Standards and SocialCarbon provide transparency that the certified carbon offset projects provide co-benefits to the environment and local communities.
While the main focus of carbon offset projects is to reduce, prevent, or remove GHG emissions from the atmosphere and restore the delicate balance of the carbon cycle, many also aim to provide social, economic, and other environmental co-benefits for local communities and contribute to achieving the UN‘s SDGs.
Social and economic co-benefits include the fight against poverty and hunger, creating jobs, better education and health, improving the supply of clean drinking water, free cooking stoves, and the dissemination of clean and affordable solar, biomass, wind, and hydroelectric energy.
Environmental benefits include protecting biodiversity, maintaining habitats for native animal and plant species, improving local air and water quality, and clearing plastic waste from the ocean.
Carbon offsetting: Contributing to global climate goals
Primarily intended to reduce, remove, or prevent GHG emissions from being released into the atmosphere, carbon offset projects have significant benefits not only for the environment but also for societies. Furthermore, they should provide additional social and economic benefits to the sustainable development of the hosting countries and local communities.
Carbon offsetting is an important source of financing climate action and helps communities around the world to improve their livelihoods.
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