Carbon offsetting
Carbon offsetting definition
Carbon offsetting, or CO2 compensation, refers to companies or individuals compensating for the greenhouse gas (GHG) emissions they have caused by making investments that reduce global emissions, such as by financing climate projects. Climate projects demonstrably reduce, avoid, or remove greenhouse gas emissions from the atmosphere, for example through reforestation or renewable energy.
For the climate, it is irrelevant where emissions are generated or avoided. Carbon offsetting therefore enables companies or individuals to compensate for their GHG emissions by financing climate projects – regardless of the project's location.
How does carbon offsetting work?
The basis of carbon offsetting is calculating the carbon footprint. This involves calculating the amount of greenhouse gas emissions caused by a company, individual, activity, or product. Emissions that cannot be avoided through direct reduction measures can be offset through suitable external measures, such as financing climate projects.
In principle, all companies can offset their GHG emissions. However, offsetting is mandatory for some sectors and companies. The compliance market is a key mechanism for implementing climate policy and is generally regulated by governments.
On the other hand, there is the voluntary carbon market. Here, carbon offsetting takes place through the purchase of Verified Emission Reductions (VERs), also referred to as carbon credits or CO2 certificates, that are issued by climate projects. A VER corresponds to one tonne of carbon dioxide or carbon dioxide equivalent that has been reduced, removed from the atmosphere, or avoided by a climate project. The VER is entered into a public registry and managed by one of the various international standards, such as the Gold Standard. Once the VER has been used, it must be retired, and this must be recorded in a registry. This ensures that each VER is only used once and that there is no double counting.
Carbon offsetting for companies
Organisations are the most important target group for the voluntary carbon market. In Germany alone, companies emitted 573.2 million tonnes of carbon in 2020, almost three times as much as households (207.4 million tonnes). Therefore, the responsibility of companies to engage in climate action is particularly high. Companies can purchase VERs and offset the carbon footprint of the entire company or individual products. As recommended by the United Nations Framework Convention on Climate Change (UNFCCC), emissions that remain after reduction measures have been implemented should be offset. The basic rule for corporate carbon offsetting is: first avoid and reduce emissions, then finance climate projects to offset what remains unabated.
How much do carbon credits cost?
There are different prices for offsetting a tonne of carbon on the voluntary carbon market. The price depends on the type of project, the technology, and the size of the climate project. The project location also plays an important role: VERs from projects based in countries with less-developed economies are generally sold at a lower price due to lower project costs. At the same time, it is these very countries that require financial support most urgently. In addition, supply and demand, as well as the timing of the generation of the VER, also affect pricing.
What are some current trends in carbon offsetting?
The practice of offsetting emissions and the basis for calculating the amount of VERs to purchase has faced increasing criticism in recent years. At the same time, the voluntary carbon market is undergoing a period of radical change. The top priority for companies must always be to do everything they can to reduce emissions and avoid environmental pollution in the first place. However, it is almost impossible for companies to reduce their emissions to zero. Financing climate projects is therefore a central part of a comprehensive climate action strategy.
In this context, the concept of contribution claims has emerged. Contribution claims focus on the importance of financing climate projects to reduce global emissions, rather than to offset a company's carbon footprint. By moving away from the direct correlation between the carbon footprint and the number of carbon credits, climate projects can be supported even at the development stage, and new and innovative technologies can be promoted. This approach shifts the focus to the added social value of a company's climate action commitment.
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