‍Do Carbon Offsets Work?

Businesses across North America are ramping up efforts to control their energy use and reduce their carbon emissions. Some plans are ambitious. Companies have committed to meeting net zero carbon emissions within the next decade or sooner. About a quarter of Fortune Global 500 companies have made public commitments to be carbon neutral by 2030.

Carbon offsets often play a role in these plans. But, do carbon offsets reduce carbon emissions? Do they work?

What is a Carbon Offset?

A carbon offset is an action taken to compensate for emitting CO₂ into the atmosphere from an industrial activity or operation. When it is difficult or expensive for a company to reduce CO₂ emissions under their direct control, they will pay another entity to take an action that will neutralize or “offset” those emissions. The transaction is quantified and traded as part of a commercial program.

What are examples of a Carbon Offset?

Carbon offsets can be nature-based. Companies can protect forests which absorb CO2 from the atmosphere. When done well, purchasing forest offsets can help keep the forests intact as carbon sinks.

Developing renewable energy projects can provide carbon offsets. Solar, hydro and wind power do not emit CO₂ when they generate power. These sources displace carbon emissions from burning coal in power plants.

Industrial carbon projects like carbon capture, utilization and storage provide carbon offsets. CO₂ can be captured from flue gas and permanently trapped underground or used in production processes such as making concrete.

Carbon offsets can be based on waste diversion. Such offsets keep household organic waste, commercial food production and agriculture waste from entering landfills where decomposition creates methane. Such waste could end up in a biomass boiler where it can be turned into energy for heating.

Carbon offsets can be based on energy efficiency retrofits. Using more fuel-efficient appliances, replacing incandescent lighting with LED fixtures, installing high efficiency furnaces, and increasing building energy efficiency.

What attributes must carbon offsets have?

Carbon offsets need to have additionality, permanence and certainty. They must not have leakage.

Additionality requires that the carbon offset results in additional carbon emissions reductions that would not otherwise occur. Carbon reductions that would have happened anyway are not considered additional.

Consider the case of a company paying another company that is already building a wind farm to displace a coal power plant. They may be improving the renewable energy company’s business case, but that chunk of renewable energy would have been built anyway. That renewable energy purchase doesn’t result in any additional reductions in greenhouse gases and should not be considered a carbon offset.

Determining whether a project is “additional” requires rigorous and transparent carbon emissions accounting, something that is difficult to do. Requiring “additionality” is why so many carbon offsets fail to deliver.

The Carbon Offset Guide states, “Additionality is essential for the quality of carbon offset credits – if their associated GHG reductions are not additional, then purchasing offset credits in lieu of reducing your own emissions will make climate change worse.”

Permanence recognizes that carbon emissions must be kept permanently out of the atmosphere to limit climate change. Trees and other plants take in carbon dioxide from the air and store it in their biomass as they grow. But as we’ve seen with wildfires in America, Canada, Europe, and elsewhere, the carbon stored in these forests can suddenly go up in smoke – back into the air. Trees can be a risky bet for permanent carbon storage. Carbon offset forest projects demand indefinite monitoring and protection.

Certainty ensures that once a carbon offset has been purchased, the underlying emissions reduction can’t be sold again or counted twice. As a tangible asset, the offset resides on the purchaser’s balance sheet and not elsewhere. This principle is especially important for international offsets. The purchaser must have an exclusive claim to the emission reductions they bought.

Leakage arises when actions are taken to circumvent or avoid environmental requirements. Leakage occurs for example, when an area of forest is designated for protection but it leads to increased deforestation in unprotected areas. As with additionality, controlling leakage demands rigorous accounting. But avoiding leakage also requires good governance. International carbon offset arrangements particularly require cooperation between countries.

Leakage isn’t confined to carbon. A carbon offsets program must not make another problem worse. For example, protecting a forest should not violate the rights of local or indigenous communities dependent on it. If a company, by purchasing carbon offsets, protects a primary tropical forest and secures land tenure rights for Indigenous communities, that company scores a win for both the climate and for social equity.

Do carbon offsets work?

Carbon offsets are intended to harness market forces to solve the climate warming problem. The International Energy Agency (IEA) described that “Emissions trading systems are market-based instruments that create incentives to reduce emissions where these are most cost-effective. In most trading systems, the government sets an emissions cap in one or more sectors, and the entities that are covered are allowed to trade emissions permits.”

A 2016 Analysis titled Application of Current Tools and Proposed Alternatives found that 85% of the mandatory carbon offsets put in place by the Kyoto Protocol were not decreasing CO₂ in the atmosphere. “Only 2% of the projects and 7% of potential Certified Emissions Reduction supply have a high likelihood of ensuring that emission reductions are additional and are not over-estimated,” the study concluded.

Success cannot be genuine if it is dependent on using opaque accounting measures.

Source: Sustainable Travel International

As a result of these difficulties, significant changes are underway to reform carbon offset markets. An agreement was reached at the 2021 global Climate Conference in Scotland. As noted by Wood Mackenzie, a more stringent accounting framework will reduce double counting of carbon offsets and improve the transparency, reliability and liquidity of voluntary carbon markets. “That’s good news for the pursuit of corporate net zero goals,” they conclude.

The 2021 climate agreement will make it easier to link the numerous carbon pricing systems that exist in various countries around the globe. Integrating say, the European Union cap-and-trade program with North American schemes will expand the carbon market. Allowing the international transfer of carbon credits between countries will greatly improve liquidity.

Carbon offsets trading is a global market worth US$1 billion a year. Tighter rules should give governments greater confidence in incorporating offsets into their carbon-pricing regimes. The recent international agreement will likely put strong upward pressure on carbon offset prices. One analysis suggests prices will reach US$50/tonne by 2030, compared to US$3 to US$5/tonne today.

These developments all come with huge caution. Carbon offsets should only be purchased after all other solutions have been implemented. Investment in carbon offsetting should be treated as a “last resort.”

Companies that set laudable carbon reduction goals such as net neutrality need to be encouraged. But instead of aiming simply for carbon neutrality, companies should first invest in decarbonizing their industrial and corporate processes to the best degree they can. Offsets are only used to balance the residual emissions that are released from operations that cannot be feasibly decarbonized.

Carbon offsets can work. But their role is only at the end of that process.

To learn more, listen to our podcast episode Carbon Offsets 101.