Climate Action

Explained: Carbon offsetting, and why we can no longer ignore it

Pristine forest in the tropics. Carbon offsetting preserves rainforests.

The preservation of rainforests and replanting of trees are key ways that companies can engage in carbon offsetting. Image: Getty Images/iStockphoto

Sam Gill
President, Sylvera
Ben Rattenbury
VP Policy, Sylvera
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  • After spending years at the periphery of the climate change debate, carbon offsetting is emerging as one of the clearest ways that we can reduce emissions.
  • The key to this effort is reliable data on emissions and offsets — something not previously available, but now the technology is delivering.
  • Carbon offsetting could also be an avenue through which the promised $100bn can be transferred from the Global North to the South.

In trying to save ourselves from catastrophic climate change, we are overlooking an incredibly powerful tool: carbon offsetting.

Carbon offsetting means paying others to reduce or remove emissions in order to compensate for one’s own emissions, because it is cheaper or otherwise easier for them to do so. It has been around for decades, but almost always existed at the periphery.

Now, more than ever, we need to realise and act upon carbon offsetting's full potential.

Have you read?

The practice has had a turbulent decade. Its reputation crashed in 2011-13 — along with the prices — before staging a semi-comeback starting in 2019.

Serious concerns do remain, however. One critique is that the underlying data, relating to an offset project's true impact, is unreliable. Another is that offsetting is sometimes seen as a ‘get out of jail free’ card for companies. For these reasons and others, carbon offsetting’s role in tackling climate change has remained limited.

Reticence to lean into carbon offsetting is a mistake — most of these concerns have now been addressed.

New technology has largely solved the data problem. While there is still work to be done, the days of creative carbon accounting are numbered. Companies such as Sylvera are now capable of providing rigorous independent carbon offset credit ratings.

There is growing consensus that companies must follow the ‘mitigation hierarchy,’ meaning they prioritise reducing their own ‘in house’ emissions, then those in their supply chains and only then think about offsetting what’s left.

Prices of Certified Emissions Reductions, a type of offset credit, representing one tonne of CO2, peaked in 2008 and flatlined in 2013
Prices of Certified Emissions Reductions, a type of offset credit, representing one tonne of CO2, peaked in 2008 and flatlined in 2013 Image: Sylvera

It's time to scale up carbon offsetting

We have reached the point where offsetting can and must play a central role in our battle against climate change, rather than the ad hoc, small-scale and voluntary role it currently occupies.

For this to shift, one simple change in approach is necessary: governments, especially in the larger, wealthier economies, should communicate a strong expectation — and eventually a mandate — that their companies achieve carbon neutrality every year on their path to net-zero.

When it comes to fighting climate change, this would be a game-changer in three key ways:

1. Reducing global emissions

Emissions would be cut at scale, globally, by channelling billions of dollars of private capital towards the most cost-effective emissions reductions or removals, wherever they are. Many of these cost-efficient, high-quality, large-scale emissions reductions or removals are in nature, especially forests.

2. Incentivising businesses to reduce emissions

Especially in richer countries, introducing a de facto price on carbon would provide a material incentive for businesses to improve their carbon efficiency. Any emissions reductions that cost less than the price of an offset would become profitable, creating a clear impetus for emissions reductions ‘in house.’

3. Increase climate financing for the Global South

In many cases, carbon offsetting’s transfer of wealth would benefit the world’s poorest people, including Indigenous communities, who are usually the best safeguards of our rainforests and other ecosystems. It could also help richer countries meet their commitment to provide at least $100bn a year in climate finance a year — a target that has been hard to reach and is due to rise significantly in the coming years. Meeting this target is an important piece in the jigsaw puzzle that is the landmark Paris Agreement on climate change.

Limited offsetting is already happening. However, there is now a huge opportunity for governments to coordinate and communicate an expectation of offsetting to the private sector which could have a huge impact across these three areas.


What are voluntary carbon markets?

Challenges remain — but they are surmountable

There are, however, obstacles — but none are unsurpassable. Examining them is critical to push forward offsetting and meet global emissions targets.

Offset quality must be robust, transparent and trustworthy. The world needs to trust that offsets are doing what they say they are. The birth in 2020 of the carbon offset credit rating agencies, which provide rigorous independent offset assessments, alongside the more recent emergence of initiatives such as the Integrity Council for the Voluntary Carbon Market (IC-VCM), means we have the tools in place.

Heightened economic insecurity could make offsetting harder to implement. Many companies are dealing with multiple challenges at once, but given the climate crisis, companies must not delay — especially the biggest and most profitable, many of whom are well-positioned to pioneer the widespread adoption of carbon offsetting.

Carbon accounting is fiendishly complex, both technically and conceptually, especially for scope 3 emissions — those associated with a company’s supply chains and the end use of their products. Strides have been made in recent years, and the approaches laid out herein would assist in the development and scale-up of effective carbon accounting methods.

Potential price instability in the offset market could trigger volatility in the broader economy. Mitigating this risk involves designing a market stability mechanism and working with countries supplying the offset market to minimise sudden policy shifts.

International coordination is hard. This is true, but in moments of acute crisis, coordination can happen very fast — as it did in the 2008 financial crisis.

Ensuring that the increased carbon finance flows resulting from this policy count towards the annual goals of $100bn and beyond will require care, but could be within the OECD rules if negotiated carefully. Only the portion of offset spending that ends up in a developing country should count.

Inaction is easy. It is comfortable. But if carbon offsetting means we can reduce global emissions, incentivise businesses to reduce their own carbon footprints and improve climate funding for the Global South then the world must take it seriously.

The stakes are simply too high to ignore it.

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Trust in voluntary carbon markets has been consistently low: What needs to change?

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June 12, 2024

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