The ambitious target set by the 2015 Paris Agreement and other multilateral initiatives aimed at tackling climate change require a whole-economy transition. Most organisations will have to adjust their business models so that the global community can reach net zero emissions by 2050 - and ultimately limit global warming to 1.5 degrees Celsius. As the risks of global warming and the physical consequences of climate change continue to increase in severity and scale – as recent extreme weather events worldwide have reinforced -, curbing greenhouse gas (GHG) emissions will remain key. Stay informed by contacting our carbon experts for any enquires.
Carbon offsets represent a certified unit of emission reduction or carbon removal carried out by another organisation. They are generated by activities, such as ecosystems protection, improvement in energy efficiency or harnessing of renewable energy. All these projects reduce, avoid, or remove greenhouse gas emissions from the atmosphere.
In practical terms, achieving NZ will require organisations to reduce emissions and balance any residual emissions with carbon removals. However, many companies – especially those operating in hard-to-abate sectors such as agriculture or aviation – will struggle to completely reduce emissions. These organisations will need to partly rely on carbon offsets to achieve their decarbonization goals.
Challenges with offsets
Unsurprisingly, then, the use of carbon offsets is on the rise. This trend will likely continue as organisations position themselves as being environmentally and socially conscious, as well as committed to net zero. This has created an extremely promising market that is currently worth USD 1bn and could be worth USD 50bn in 2030.
However, carbon offsets present several challenges. These include ethical objections to carbon offsetting as a practice: some members of civil society consider offsets to be at best, distractions, and at worst, false accounting, that do not ultimately help companies reach net zero and instead keep their true CO2 emissions ‘off the books’. Others object to their credibility, as carbon emissions occurring today will only be offset by nature-based solutions that require time to develop their full carbon sequestration potential. For example, trees planted as part of a reforesting campaign can take 20 years to grow.
These challenges create significant integrity risks for organisations, leaving them exposed to allegations of greenwashing and the accompanying reputational impacts. These are already being felt by large multinationals – who both sell and purchase the offsets – worldwide. On the sale side, for example, global NGO The Nature Conservancy (TNC) was accused in 2020 of selling offsets from protected areas they already owned and were in no danger of being logged, developed, or otherwise destroyed. This violated a fundamental offset criterion known as additionality (discussed below). Clients of TNC for these offsets were named by a Bloomberg investigation as JP Morgan, Walt Disney and BlackRock; both TNC and its clients were exposed to weeks of critical headlines about allegations of greenwashing. On the client side, Unilever and Nestle were accused in 2022 by independent watchdog the Corporate Climate Responsibility Monitor of greenwashing their net zero claims due to lack of integrity in their climate pledges and carbon offsets.
Ensuring integrity of carbon offsets
For these reasons and more, organisations need to take precautions in order to ensure that any offsets are credible and procured in a transparent manner: they need to make sure they are good quality assets.
A first ‘screen-out’ criterion for any carbon offsets should be whether the offset manager is aligned to international best practice, as outlined by credible institutions. This can be verified through the offset’s adherence to the principles set out by the Taskforce on Scaling Voluntary Carbon Market (TSVCM), membership with the International Carbon Reduction and Offset Alliance (ICROA), or verification by the Voluntary Carbon Standard or Gold Standard.
Once these best-practice credentials have been established, organisations can then follow the below checklist of eight criteria on which to judge the integrity risk of carbon offsets:
- Authentic: Emissions reductions and removals should be genuine and be reliably estimated and verified to ensure reductions have actually occurred.
- Unique: The carbon offsets should only be counted once and should not be double issued or sold.
- Additional: The emissions reductions must be additional and would have not occurred if the projects did not happen. The benefits are over and above those that would have arisen under the “business as usual” scenario.
- Permanent: Any carbon stored needs to be permanent and must have in place mechanisms to mitigate against reversal risk. Trees can be cut and burned and the carbon they have sequestered will return to the atmosphere.
- Measurable: Carbon offsets should be quantifiable against a realistic and credible emissions baseline.
- Minimised leakage: The projects should not contribute to an increase in emissions elsewhere.
- No net harm: Any carbon reduction projects must ensure that all projects consider related environmental and social risks and take action to prevent and mitigate any harm.
- Monitored and verified: Emissions reductions should be calculated in a conservative and transparent manner, based on accurate measurements and quantifiable methods. They must be validated by an accredited third party.
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Offsetting the risks
Purchasing offsets that meet the criteria laid out by this checklist will mitigate against some integrity risks – such as greenwashing allegations – associated with offsets. However, it will not mitigate against criticism that can – and likely will – be levelled at organisations for using offsets at all.
While this risk is more difficult to manage, organisations can choose the category of their offsets based on the following principles to ensure that additionality and integrity are at the forefront of their carbon project.
1. Choose an offset that supports carbon removals
Offsets based on avoiding emissions make up 96% of all offsets. This includes projects that prevent trees from being cut down or supporting renewable energy projects.
Since there are several challenges with such projects – because it is very difficult to determine how much carbon has been saved, carbon may not be permanently stored due to geographical and intertemporal carbon leakage – it is important to shift to offset projects that are actively removing carbon from the atmosphere.
2. Choose an offset that supports long-lived storage
Projects that do not store carbon permanently have a higher risk of being reversed. Reversal can happen through deliberate (policymaking) or non-deliberate (extreme climatic events such as fires) means. Biological storage methods that are subject to political and economic whims are particularly vulnerable to this. Once the reversal happens, the work of the carbon offset is undone and the carbon is ultimately released back into the atmosphere.
For this reason, procuring offsets from projects that constitute both a carbon removal and offer long-lived storage is vital. These types of programs can include direct air carbon capture and storage. However, these projects are still at their early stage of development, and thus there is limited, expensive supply.
Nevertheless, a net zero aligned portfolio of offsets must give priority to carbon removals and projects that lock in carbon permanently.
3. Support the development of net zero-aligned offsetting
Since the market for the high-quality offsets that support long-lived carbon removals through storage is immature, it needs support. Creating support for such projects through organisational collaboration and engaging in long-term offset purchase agreements is crucial, as these can provide assurances to such projects – and their other investors – that funding will be continue to be available, creating a positive feedback loop of growth and security.
Organisations should also support projects that restore and protect a wide range of natural and semi-natural ecosystems in their own right. Supporting habitats should be seen with a view of providing wider benefits they provide, not only because of the carbon offsets they provide.
4. Actively reduce emissions and regularly revise offsetting strategy
Finally, and perhaps most importantly, as best practice and guidance around offsets evolves, organisation should constantly review available technologies to identify and implement opportunities to reduce emissions absolutely within their operations and supply chains.
Conclusion
Offsetting is likely to stay, and companies need to mitigate their accompanying integrity risks. This deserves significant attention by organisations at the strategic level. Reputational backlash in the event of greenwashing accusations can be compounded by different regulatory actions and might lead to operational impacts. After all, ESG issues often present multidimensional risk materiality, reinforcing the complexity of their handling by organisations across multiple sectors and in most jurisdictions.
As both the private and the public sectors increasingly embrace green agendas in developed and emerging economies, carbon offsets are likely to play an important role in helping organisations achieve net zero. However, the scrutiny will only increase – and so will integrity risks. Organisations must start preparing now.