INSIGHT ARTICLE

Understanding Offsetting

By Cassidy McLean-House, Consultant, Eunomia Research and Consulting

What is offsetting?

Offsetting is a process that involves a reduction in or removal of carbon dioxide or other greenhouse gas emissions from the atmosphere, in order to compensate for emissions made elsewhere.

There are three main ways that people and companies refer to offsets: reduction, removal, and avoidance.

A carbon reduction is the process where an organisation directly reduces greenhouse gas emissions through efficiencies.

A carbon removal is where CO2 is removed directly from the atmosphere, via forestry or carbon capture and storage (CCS) for example.

Avoidance is where emissions were avoided, for example, through the switch to renewable energy. This is generally not accepted in many net-zero frameworks, however.

Key definitions

Ideally, credible voluntary offsets would satisfy the following:

• Transparency – The details of a voluntary carbon offset and how the offset meets all the principles of voluntary carbon offsetting should be clearly stated and publicly available

• Real, measurable and verified – The units for the voluntary carbon offset represent a tonne of CO2 or equivalent emissions, reduced or removed from the atmosphere from tangible activities that have been implemented. The reduction or removal should also be supported by evidence from credible monitoring and reporting, and, finally, it should be verified by a third party as well

• Additional – Any greenhouse gas emission reductions or removals are due to a specific intervention and would not have occurred under business as usual

• Not double-counted – This applies where two or more parties claim the same emissions reductions. For example, an organisation claims an emissions reduction in England to voluntary offset the carbon emissions for their business. That same emissions reduction cannot also be used to meet the UK’s international emissions reduction target as part of the company’s national accounting

• Address leakage – Ensuring the activity of reducing or removing emissions within the boundary of the credited activity does not result in increases to emissions elsewhere

• Permanent – Reductions or removals must be maintained over time and be unlikely to be reversed. For example, if a permanent forest is used for voluntary carbon offsetting and a natural disaster like a fire burns the forest down, the organisation is obliged to undertake further activity that will result in the emissions that were released during the fire be sequestered or moved somewhere else.

In addition to the six voluntary carbon-offsetting principles, organisations also need to ensure that their offset doesn’t cause net harm to people, animal welfare or to the environment.

State of play

The offsetting market has been the subject of several news stories in 2023 that have caused some to question its effectiveness. There is some real merit to the critique, as many offsets in the market don’t uphold many, if any, of the core principles of good offsets – as detailed above.

However, there’s a lot of methodological misunderstanding in this space, particularly from NGOs and the media. This misunderstanding is often not malicious, but offsetting is a very complicated practice. There’s no one set of overarching regulations, and no one set of good guidance that governs this area.

Legitimate offsets need to satisfy certain criteria in addition to the principles covered above, depending on what country the company is in, and what verifier an organisation is using. In New Zealand, for example, domestic offsets need to be forestry, which means they need to have 400 stems per hectare, and ultimately have ground coverage of around 30% forestry on the land that is being used to plant offsets.

International v domestic offsets

International offsets tend to attract the most controversy in the press. As mentioned above, organisations should ensure that offsets do no harm to people, animals or the environment. If, therefore, a voluntary carbon offsetting action is undertaken overseas, the offset providers should ensure foreign labour laws and standards are adhered to.

There are some benefits to international offsets. For instance, a thriving international offsetting market could potentially stop deforestation of important ecological assets, such as the Amazon. But there are also some real ethical challenges in this space too.

Meanwhile, domestically and in the Global North the cost of land is generally significantly higher, which of course drives up the cost of offsets. Forestry is also often a hot potato, especially where it may displace other land uses such as agriculture. As a result, many governments in developed economies are now placing an over-reliance in the strategic policy outlook for climate change on technical advancement in the form of CCS for example.

International case study – Disney

Disney has essentially bought and conserved a portion of rainforests about twice the size of New York City in Peru and have then claimed this as the offset for their cruise ships and their parks.

Disney Conservation International and Verra, a third-party offset provider and verifier, have previously referred to this as a resounding success. However, there has been some contention with locals indigenous to the area, who claim that in some instances they have been displaced or some important indigenous artefacts have been destroyed. According to a report in the Guardian, more than 90% of rainforest carbon offsets by Verra could even be worthless, although the company have now pledged to replace their scheme.

What role should offsets play in net zero?

Many organisations set really ambitious net-zero targets that they can’t feasibly meet through gross emission reduction targets in the timeframe that they have set for themselves, especially in the context of 2030 targets.

This isn’t necessarily through organisational failure, but it’s simple economics: to reduce the final 30 or 40% of a company’s emissions, the cost per tonne of reduction could be enough to bankrupt a company.

Therefore, making emissions cuts early will mean lower cuts in the long run, as there are fewer cumulative emissions and so less need for offsets in the future.

To succeed, organisations need to firstly understand how much of their emissions footprint can be feasibly reduced in the context of their chosen timeframe. It is then much simpler to understand what will need to be offset in the future in order to achieve that target. It is ultimately up to the individual organisation to understand the financial and public risks associated with the volume of emissions you want to offset and maintain. Having that evidence bar will really help in the long run.

First mover advantage in offsetting markets

Critical offsets are not an unlimited tap that you can turn on and off depending on how much you need. Companies who have strategic offsetting strategies in place now as part of their broader net-zero strategies will have a much more cost-effective transition to their target.

Offsets that are credible, available and cost-effective will continue to shrink and this particularly exposes small and medium organisations to greater risk as we near 2030 and beyond. Therefore, understanding your footprint now and establishing what you can gross reduce and what you will need to offset in time for your target is really important.

Offsetting and the transport sector

Organisations should firstly prioritise gross reduction in emissions and use offsets to mop up residual emissions, particularly from sources that are hard to abate.

Transport generally has a low marginal abatement cost, so can often be seen as low-hanging fruit for organisations who can plan to switch to electric vehicles or decrease or eliminate air travel.

However, offsets will still have a really important role to play in heavy diesel, long-haul transport and shipping and aviation, where technically and economically feasible alternatives do not yet exist. There are currently some technologies such as the application of green hydrogen in this space, but these are certainly not available in a widespread way. The cost per tonne of these solutions is also significantly higher than engaging in offsets.

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