The Essential Guide to Carbon Offsetting

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.

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 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 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.