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What Are Carbon Offsets?

What are Carbon Offsets?

On a broad level it is an instrument used to compensate for the emissions from greenhouse gas (GHGs) at other locations. Carbon offsets can be found in two fashions; reduced emissions or avoided emissions. One example of a avoided emission would be to turn landfill gas into fuel that can be used to burn. This avoids emittance of landfill gas into the atmosphere. It also decreases emissions from the extraction of traditional fossil fuels.

One example of emission reduction would be afforestation projects that capture CO2 from the atmosphere and then store it in the biomass sink. The diversity in offset types and project types could be specific to a company’s environment and social governance plan and used to create narratives. In the decarbonization context, offsets for carbon are utilized to decrease a company’s carbon footprint and achieve a net zero target. But companies are also finding different ways to use carbon offsets, such as offsets for business travel, events, new product lines, and the transportation of goods sold.

To incorporate carbon offsets into your strategy for decarbonization it is crucial to be aware of the benefits and drawbacks of carbon offsets. That way, it is possible to ensure that you are picking the most effective projects in order to determine how best to implement them within the larger strategy of decarbonization.

Benefits of Carbon offsets

Carbon offsets are a direct market signal through putting the economic value of a commodity that has historically not been priced. The aim for carbon offsets is to price GHG emission based on their economic and social impact. This is called the social cost of carbon.

A project has to be able to pass additionality prior to moving forward to verify methodology-specific requirements outlined by registry organizations. Additionality test an individual project in order to establish if it’s “additional”. The test determines whether the project can contribute further to the reduction and elimination in GHG emissions. The most important additionality test is an analysis of investment. In other words, could the project had been completed without the financial benefit to sell carbon offsets? If yes, the project won’t be considered for approval. This provides assurances that the benefits to the environment purchased by an end-user of a carbon offset led towards the decrease of GHG emissions that would not have been possible without this financing.

Projects issued offset allowances that are traded in the market of voluntary trade have to meet the registry’s rules and requirements, follow specific third-party approved methodologies, monitor emission reductions and avoidances, and be verified by third-party organizations. It is suggested that businesses seeking to access carbon offsets that were issued under the top registry. The top registries include: The Voluntary Carbon Standard, The Gold Standard, American Carbon Registry The Climate Action Reserve, as well as The Climate Action Reserve.

Carbon offsets come in a range of types of projects that could assist a company in reducing its emissions, but also in creating an image. Certain projects are associated with co-benefits like conservation of ecosystems as well as gender equality, helping poor communities, safe drinking water, and so on. An example would be providing solar cook stoves for women in South America. This is of benefit for the women living there, reduces biomass from being burned, and enhances the air quality in the region across the planet. Another example is converting land that was used for cattle grazing back into its original type of land use like a rainforest. This is a project that has the added advantage of ecosystem and wildlife management.

Offsets are an effective method to cut down on a company’s carbon footprint and create a narrative , but they must be utilized in a proper manner. Certainly, using offsets only to meet the zero-emissions requirement will bring a lot of scrutiny. It is suggested to use offsets to reduce unavoidable scope 1 emissions and scope 3. (value chain) emissions. This should be done in conjunction with stakeholder engagements as well as operational modifications.

The Carbon Offset limitation

The primary issue with carbon offsets that they are not a fix-all solution. They are just one method of decarbonization and must be used responsibly. Additionally, offsets are an expense. Other strategies like solar installations, energy efficiency and downsizing could generate a return-on-investment over time for companies and must be considered first before being combined with offsets. It is probable that the cost of offsetting will be passed on to the end consumer, however you can argue that the reverse is true. Setting a price for carbon has a direct market effect. If consumers must pay more for GHG heavy products, they’re more likely to switch to alternative products with lower prices and lower GHG intensities.

Other restrictions of offsets relate to setting targets. Target setting is a problem for offsets. Science-Based-Target Initiatives (SBTi) does not permit offsets to be counted towards the scope 2 targets and only permits them after operational changes have been made for emission levels in the scope 1. Offsets are allowed in internal strategies and can be marketed for carbon-neutral, but when they are used to achieve SBTi targets, must meet the requirements. Renewable energy certificates can use to offset the scope 2 emissions as per the SBTi.

There have been numerous controversy with businesses who pollute excessively and use offsets to offset their emissions instead of increasing their own energy efficiency, so it is highly recommended that companies protect their image by making sure that their organization views the purchase of offsets as an opportunity to offset emissions with operational adjustments, to cut down on emissions that are unavoidable to set internal targets strategies, and offsets against past emissions.

In the world’s decarbonization transition, many companies will have no choice but to utilize these credits to meet their net zero targets at a minimum in the short-term to mid-term time.

Carbon Offsets as One Tool in Decarbonization Strategies

In short carbon offsets are an extremely popular option for decarbonization, due to their ease of use as well as co-benefits, narrative-building unique applications, however, they have limitations. The offsets offer direct financial support to various projects, but it is vital to ensure that your organization is selecting projects which are registered with the most credible registry companies. There is the possibility of being perceived as indulgence in the practice of polluting or using offsets as to cover up, so companies are advised to consider implementing offsets for narrative purposes, reducing unavoidable scope 1 emissions, emission levels in scope three (value-chain) emissions historic emissions, events as well as business travel. Additionally, the regulatory environment is constantly changing and could put at risk long-term strategies that are based on offsets. This is why Inogen Alliance recommends that carbon offsets be considered just one option in the overall strategy to reduce carbon. Carbon offsets paired together with certificates for renewable energy or power purchase agreements and operational changes like energy efficiency, on-site renewables reduction in size, and green product sourcing can be a powerful method to achieve carbon neutrality.