What is carbon offsetting?

A carbon offset is defined as “any activity that compensates for the emission of carbon dioxide (CO2) or other greenhouse gases (measured in carbon dioxide equivalents, CO2e) by providing for an emission reduction elsewhere” (1).

In other words, carbon offsetting is a mechanism through which an individual or an organization can compensate for their CO2 emission through the support of certified emission reduction projects that absorb or reduce CO2 emissions. This action is realized through the purchase of carbon credits, where 1 carbon credit corresponds to 1 tonne of CO2 absorbed or reduced by the projects. The price of the carbon credit reflects not only the CO2 reduction capacity of the project but also other ecosystem services, the protection of biodiversity, social benefits, and the contribution to the UN Sustainable Development Goals that the emission reduction project achieves. It is important to specify that carbon offsetting here refers to “voluntary offsetting,” which includes “all the approaches adopted by actors who voluntarily choose the compensation method to limit their CO2 emissions” (2), and must be distinguished from the regulated carbon offsetting market.In the regulated or  "compliance market", established by the Kyoto Protocol (1997), companies and governments are legally required to account for their greenhouse gas emissions, either to take advantage of unused allowances (CO2 that was not emitted) or to meet predetermined regulatory targets (3). The voluntary carbon market emerged alongside the implementation of the Kyoto Protocol for sectors not considered in the regulatory market.

 

Following the guidelines from the Net Zero Initiative, a new terminology was introduced to define carbon offsetting. The concept of carbon offsetting has been replaced by the idea of climate contributions. This shift is explained by the fact that carbon offsetting refers to the idea of compensating the emissions of CO2, which has gained a negative connotation because it suggests the action of compensating for unfavorable behavior and because this lacks a common definition. On the other hand, climate contributions are defined as a mechanism to support sustainable projects with positive impacts on the environment that enable people and organisations to contribute to global carbon neutrality. Climate contributions can be an effective practice to improve an organisation's sustainability strategy and contribute to achieving net-zero emissions at a global level.

 

In line with the Net Zero Initiative, we believe that the appropriate terminology should be to reach global carbon neutrality, defined as the overall balance between the GHG released in the atmosphere and the GHG absorbed (4), as a methodology to reach and assess carbon neutrality at a corporate level has not been defined yet.In addition, projects supported by climate contributions go beyond absorbing or avoiding carbon, and achieve other environmental and social impacts that are aligned with the United Nations’ Sustainable Development Goals (SDGs), such as benefits on health, biodiversity, gender equality, and economic development.

 

It is important to underline that carbon offsetting must always be combined with emission reduction practices for it to be a viable and effective measure. According to the Science-based Targets initiative’s (SBTi) most recent report, compensation and neutralization measures (carbon offsetting) play a critical role in accelerating the transition to net-zero emissions at the global level, but “they do not replace the need to reduce value-chain emissions in line with science” (5).

The report notes that reduction efforts may not be sufficient to meet the 1.5°C target set by the Paris Agreement due to residual emissions (emissions that companies cannot reduce due to technical or economic constraints). Carbon offsetting is therefore one of the necessary steps to achieve global net-zero emissions. The following sections outline the various measures that organisations or individuals should take to minimize their impact on the planet and contribute to global carbon neutrality.

  

How can organizations contribute to global carbon neutrality?

Organizations can contribute to global carbon neutrality following a path consisting of four steps: measurement, reduction, offsetting, and transparent communication. This short guide will detail each of the four steps to better understand the development of an overall strategy for companies to achieve net-zero emissions.

Step 1. Measure: You can't reduce what you can’t measure. 

 

For organizations:

 

The first step an organization can take to fight climate change is to measure its carbon footprint. Carbon footprint measurement at an organizational level follows precise rules. Several protocols exist to measure CO2, such as the GHG Protocol, which is the most widely used greenhouse gas accounting standard and is internationally recognized. As illustrated in the graph below, the GHG Protocol divides greenhouse gas emissions into three scopes (Scope 1, 2, and 3), which account for direct company emissions and indirect company emissions from upstream and downstream activities. All greenhouse gas emissions are expressed in tCO2e, tonnes of carbon dioxide equivalent, which includes other greenhouse gases, methane (CH4), and nitrous oxide (N2O) being the two main ones. A company’s carbon footprint (Scope 1, 2, and 3) should be assessed once a year and is usually included in the sustainability or extra financial report of a company. In Europe, the measurement of GHG emissions is mandatory for companies with more than 500 employees (6).

 

Step 2.  Reduce: Take action to reduce your emissions.

 

For organizations:

 

At an organization level, measuring the carbon footprint will allow the company to identify the major sources of emissions and design a sustainability strategy to achieve its emission reduction objectives. The Science Based Targets initiative provides companies with emission reduction guidelines that are in line with the achievement of the Paris Agreement objectives. According to the initiative, Scope 1, 2, and 3 targets must be consistent with a level of decarbonization required to keep global temperature increase well below 2°C compared to pre-industrial temperatures (7). To reach this ambition, organizations should set medium and long term targets up to 2050. The SBTi recommends using “the most ambitious decarbonization scenarios that lead to the earliest reductions and the least cumulative emissions.” (8). Reduction strategies vary depending on the sector and the type of company activities; however, some general guidelines can be identified. For example, to reduce Scope 2 emissions, the SBTi recommends companies to source renewable electricity suggesting a target of 80% renewable electricity procurement by 2025 and 100% by 2030 as thresholds. For Scope 3 reductions, supplier engagement is key as well as setting targets to influence the behavior of end-users.

 

Step 3. Offset: Compensate for your unavoidable emissions.

 

Carbon offsetting is a voluntary action that can be done at either an individual or an organization level. To account for their unavoidable or residual emissions (emissions that persist), organizations or individuals can purchase carbon credits, which are generated by emission reduction projects that either absorb or avoid CO2. These projects not only have environmental benefits but also co-benefits that target the United Nations Sustainable Development Goals, such as biodiversity protection and support local communities. 1 carbon credit corresponds to 1 tCO2e avoided or absorbed, which can account for 1 tCO2e of emitted emissions. 

 

To issue carbon credits, the project must be certified. Following the certification and the issuing of credits, monitoring and reporting activities are conducted to ensure the continuity of the projects. In turn, project activities can be monetized and carbon credits can be distributed and withdrawn by purchasers to compensate for their emissions. This procedure is known as the project value chain. 

 

Carbon credits are issued every year. Third-party auditors verify the number of emissions absorbed or avoided by the project compared to a base-line, following methodologies established by the standards. Then the standards can issue the carbon credits. All credits generated by a certified project are accounted for on the standards’ registry. Registries are of fundamental importance to avoid the risk of double-counting, which occurs when two or more organizations monetize and claim the same credit. Once an organization decides to purchase carbon credits, intermediaries such as ESG Solutions settle the transaction on behalf of their clients, transferring the credits and cancelling them once they are withdrawn.

 

There are different types of emission reduction projects that generate carbon credits, such as: 

- Forestry and Land Use, projects that protect and restore existing forest areas threatened by deforestation.
- Renewable Energy, renewable power infrastructure that contributes to the decarbonization of the local energy grid.
- Energy Efficiency and Fuel Switching, energy-saving measures that reduce carbon emissions and replace fossil fuels with sustainable energy sources.
- Household Devices, efficient cookstoves that significantly reduce wood consumption, or biogas digesters that provide sustainable fuel to local communities and hence prevent deforestation and avoid GHG emissions.
- Agriculture, agricultural practices that store carbon in soils while restoring biodiversity and developing new sources of income for smallholders.
- Water Management, projects that supply clean water to households in rural communities removing the need to boil water and reduces GHG emissions. 
- Waste Management, landfill projects designed to capture the methane released by the waste disposal and that can turn into clean fuel. 

 

When offsetting, companies should ensure they are supporting high-quality projects. Thus, the first element to consider is the project certification, that is if the project is certified by an international standard such as Gold Standard, VCS, Plan Vivo, or Climate Action Reserve or a national standard such as Label Bas Carbone in France. Once the project has been certified, it is verified periodically by a third party, so the standard can issue the relevant amount of carbon credits the project has absorbed or avoided for that period. For the standards to issue carbon credits, the projects must follow specific rules and procedures. Specifically, the project must be real, measurable, permanent, additional, independently verified, and unique. 

 

To ensure that a project is of the highest quality, ESG Solutions performs additional audits, which include banking due diligence and the review and validation from our internal Sustainability Committee.

 

Step 4. Communicate your climate action to your stakeholders. 

 

For carbon offsetting strategies to be successful, companies must be able to communicate about them in an accurate and precise way. A good and transparent communication strategy will protect an organization from greenwashing accusations and malpractices. Therefore, a valid communication strategy is to properly disclose information on supported projects, the environmental and social impacts generated as well as the co-benefits, such as biodiversity, and the SDGs targeted. It also requires an additional explanation of the carbon finance mechanism and its role to achieve the 1.5°C climate goals. Finally, using the right terminology to communicate about climate action is essential for a successful communication strategy.

 

Following the Net Zero Initiative’s guidelines, here are some useful communication tips for an effective communication strategy:
- Avoid the terminology “carbon offsetting” and favor “climate contribution” instead. The concept of climate contribution is not to compensate for negative emissions, but to contribute to projects that capture or avoid CO2 emissions to accelerate the fight against climate change. Projects supported through climate contributions go beyond carbon absorption or avoidance and achieve other environmental and social impacts that are aligned with the United Nations’ Sustainable Development Goals (SDGs), such as benefits on health, biodiversity, gender equality, and economic development. The more we contribute to high-quality emission reduction projects, the bigger the positive impact on climate and natural ecosystems.
- Avoid being vague and quantify your impact. Make sure to define the scope (1,2,3) your climate contribution accounts for.
- Refrain from claiming your company to be “carbon neutral” as a universal definition of carbon neutrality at a company level has not been defined yet.
- Disclose the number of credits purchased, in tCO2e, to support an emission reduction project.
- Communicate about your climate action by following ISO 14021.
- Educate and inspire your stakeholders to also support an emission reduction project to generate a larger positive impact.

 

  

How should you select a carbon offsetting project?

These are some recommendations to select projects that are not only high-quality emission reduction projects, but also meet your organizations’ needs and objectives. In particular, the WWF has outlined several characteristics for carbon credits to be considered high-quality (9): 


- Be real: each carbon credit must legitimately measure a tonne of CO2 absorbed or avoided by the project.
- Be measurable: carbon credits must be computed based on robust scientific data and verified methodologies.
- Be additional: “carbon credits must represent emission reductions or removals that would not have otherwise occurred without the added incentive resulting from the carbon market”, as stated in the WWF report.
- Be permanent: the emission reductions represented by the carbon credits cannot be reversed after the issuance of the credit.
- Avoid leakage: generating carbon credits must not generate emissions elsewhere.
- Be monitored, reported, and verified by credible third-party verification systems.
- Comply with social and environmental safeguard: the generation of carbon credits must not violate any law, regulation, or treaty and must meet the international best practice standards for social and environmental safeguard. 

 

Additional recommendations
- Ensure that the selected projects match your organization’s environmental and social goals. You can rely on experts to select the appropriate projects.
- Ensure that the price margins are clear, and the money you are paying for actually reaches the projects and the local communities. 
- Match the project location to where your organization operates or sells its products. 
- Match the project typology with your company’s activities or interests.

- Conduct a banking due diligence on the project developers.
- Ensure that the project meets the highest quality standards by ensuring that the project is certified by either an international or national standard such as Gold Standard, VCS, Plan Vivo, or Climate Action Reserve.

  

Conclusions

Measure, Reduce, Offset, and Communicate. These are the 4 steps for an effective strategy to reach net-zero emissions, which has today become a necessity to reach the 1.5°C goal established by the Paris Agreement. In addition, supporting emission reduction projects can allow companies and individuals to achieve a truly positive impact on the environment and society. 

 

We hope that this short guide on carbon offsetting has helped you to better understand the importance of supporting emission reduction projects and has provided you with relevant information to reach net-zero emissions. 

Sources:

  1. Selin N.E., “Carbon Offset”, 2011, Encyclopaedia Britannica, available at: https://www.britannica.com/technology/carbon-offset/additional-info

  2. Bellassen, V. Leguet B., “The emergence of voluntary carbon offsetting” [Research Report], 2007, 36 p. Hal-01190163, available at https://hal.archives-ouvertes.fr/hal-01190163/document

  3. Carbon Market: Overview- Ecosystem Marketplace available at: https://www.ecosystemmarketplace.com/marketwatch/carbon/

  4. https://www.climatecouncil.org.au/resources/what-does-net-zero-emissions-mean/

  5. Science-based Targets Initiative, “Foundations for Science-based Net-Zero Target setting in the corporate sector”, 2020, available at:  https://sciencebasedtargets.org/wp-content/uploads/2020/09/foundations-for-net-zero-full-paper.pdf

  6. https://www.bilans-ges.ademe.fr/fr/accueil/contenu/index/page/art75/siGras/0

  7. Science-based Target Initiative , “SBTi Criteria and Recommendations”, 2020, available at: https://sciencebasedtargets.org/wp-content/uploads/2019/03/SBTi-criteria.pdf

  8. Science-based Target Initiative , “SBTi Criteria and Recommendations”, 2020, available at: https://sciencebasedtargets.org/wp-content/uploads/2019/03/SBTi-criteria.pdf

  9. “WWF position and guidance on voluntary purchases of carbon credits”, October 2019, available at: https://c402277.ssl.cf1.rackcdn.com/publications/1310/files/original/WWF_position_and_guidance_on_corporate_use_of_voluntary_carbon_credits_EXTERNAL_VERSION_11_October_2019_v1.2.pdf?1591194127