Carbon offsetting is a hot topic. Over the last couple of months, we received many questions from organizations seeking advice on if and how they should offset their greenhouse gas emissions.
With this blog we aim to answer the most common questions we received, but most importantly it should serve as a living document that we aim to update and improve frequently. If you have any additional questions, feel free to ask them in the comment section below, and we will respond as soon as possible.
*We would like to stress that Sustainalize does not sell or trade any offsetting products, enabling us to offer you non-biased insights into carbon offsetting.
By far the most frequently asked question. Offsetting is financing the reduction of expected greenhouse gas (GHG) emissions elsewhere for an amount that equals your own realized GHG emissions. Simply put, when your company has emitted a 100 ton CO2 -eq in the Netherlands last year, you can finance projects that will reduce 100 ton CO2 -eq emissions elsewhere (in the future).
No, these are two totally different things. Buying renewable energy makes you owner of the electricity that is produced by renewable sources. Simply put, if a windmill produces a 1000 kWh, you can buy (part of) this production. You can then sell the electricity that you bought or use it. With carbon offsetting you will never become owner of a product, you can only finance a project that will reduce carbon emissions.
To explain how carbon offsetting works, we need to provide you with a quick introduction to carbon markets. Bear with us! Carbon markets are, in a sense, marketplaces where emissions are traded. Countries and companies fund projects that reduce (future) GHG emissions in exchange for carbon credits. Carbon credits are tradeable permits or certificates that represent a certain reduction in GHG emissions (usually 1 permit = 1 ton CO2-eq). As these carbon credits can be deducted from a country’s or companies’ GHG emissions, carbon markets are a method for countries and companies to reach their GHG (reduction) targets.
Countries and companies often participate in different types of carbon markets. The signing of the Kyoto Protocol obliged many countries to limit their carbon emissions and introduced the concept of “emissions trading” (described above). Emissions trading makes the process of cutting emissions cost-efficient, as companies that can limit their emissions relatively cheaply are able to sell carbon credits to companies that struggle to cut theirs. The Kyoto Protocol introduced three instruments to facilitate the trading; Emission Trading Schemes (ETS), Clean Development Mechanisms (CDM), and Joint Implementations (JI). Although there are some differences between the three, all carbon markets set up with any of these three mechanisms are mandatory carbon markets, as the countries participating in them are bound by international treaties (as the Kyoto Protocol) to limit their carbon emissions.
Voluntary markets are mainly used by companies to offset their carbon emissions. These markets are voluntary because companies are not subjected to legislation forcing them to limit their carbon footprint. Instead, companies participate in voluntary carbon markets for sustainability reasons, marketing/PR purposes, or both. Because of the difference in motivation, the story behind the offset project is just as important (if not more) as the amount of CO2-eq that is being offset. Taking part in the voluntary market is always possible, even if one is already taking part in a compliance market like the EU Emission Trading System. It is possible to sell carbon credits obtained in the mandatory market on the voluntary market so that companies can use them to meet their CO2 emission ambitions.
According to UNFCC (which tracks the CDM progress), there are 3.224 registered projects that have issued credits equal to just over 2 billion tonnes CO2 -eq year to date. This is more than the total CO2 emissions of Russia in 2018, the 4th largest emitter worldwide with 4,86% of total GHG emission. VCS states that it has had over 1500 certified VCS projects, which collectively reduced or removed more than 200 million tonnes of carbon and other GHG emissions from the atmosphere. Gold Standard currently has over 800 projects in portfolio. Furthermore, Gold Standard states that 1700 projects mitigated 117 million tonnes of CO2. CDM, VCS and Gold Standard projects mostly relate to (wind) energy. Below you can find a snapshot of the type and number of projects (green) of Gold Standard and the amount of GHG related to them (grey).
If it is too good to be true it usually is. The large supply of carbon credits has pushed its price down, preventing projects to break-even without the help of governments or NGOs. For these projects the price no longer reflects 100% of the promised emission savings, but as NGOs and governments ‘waive’ these rights on these credits, the buyer still receives 100% of the credits.
Next to this, offset projects are often cheap as they entail the quick wins in climate mitigation. For example; A cookstove in Africa costs 40 dollars and can save up to 2.700 kg per year while isolating a dwelling in the Netherlands (cavity walls corner house) would cost you 2.100 euros and could save up to 1.600 kg.
The large differences in price between offset projects are caused by the cost and benefit factors included in the calculation of the price. Land and labour costs, as well as the reduction potential, differ significantly between projects, resulting in a price deviation. Moreover, carbon offset projects realize additional benefits as social and biodiversity impacts. The graph below shows these different impacts of the offset projects on (all) the SDGs. This also causes the price to deviate, of course also depending on the extent to which the buyer values these additional impacts.
It should be mentioned that price is no indicator for the quality of the carbon offset project. There are unfortunately still some caveats with offsetting, explained in more detail in Q8.
Various non-profit organizations created standard bodies to verify the quality of offset projects. They aim to verify the three key requirements of carbon offset projects. Most offsets are checked via the following two certification schemes: Verified Carbon Standard (VCS) and Gold Standard (fig. 3). A certified project by either organization should assure the buyer that a project is additional and checked continuously on actual reductions achieved. VCS and Gold standard do what they can, but it is not bullet-proof.
An investigation by The Christian Science Monitor, together with the New England Center for Investigative Reporting, has found that individuals and businesses who are feeding a $700 million global market in offsets are often buying vague promises instead of their expected reductions in greenhouse gases. Plus, a study conducted by Öko-Institut, states that 85% of the projects covered in their analysis are unlikely to result in additional, non-overstated emission savings.
It is critical that the carbon credits obtained are retired once purchased. Only then can carbon offsets be claimed. Once retired, carbon credits cannot be traded or (re)sold. The seller of the carbon credits on the voluntary market often retires the credits on behalf of the buyer. In some cases, however, it is possible to retire the bought carbon offsets yourself, and thus later, or resell them to others. Therefore, it should be discussed with the seller of the carbon offset when and how the carbon offset will be retired. Every carbon offset has a unique serial code and the seller should provide you with proof of retirement. As carbon credits represent a certain amount of CO2 (usually one tonne), carbon credits cannot be carried over to next year. To be offset, the emissions over your next reporting year will require new credits.
It is possible to set up your own project, but keep in mind that it’s a long process (see the voluntary offset cycle above). To grant the project credibility, getting it verified by a standard body as VCS or the Gold Standards is important. However, to do this, the project must have a solid methodology (of calculating saved emissions). Additionally, the project must be validated, and the saved emissions verified by the third parties (validation/verification bodies – VVBs). Considering all the above; developing a project at Gold Standard can take more than two years.
Do’s:
Don’t:
Of course, carbon offsetting is not a solution to climate change. The primary objective should always be to reduce carbon emissions, before thinking about offsetting them. With that being said, offsetting does have positive effects. Although maybe not to the extent that was promised, carbon emissions are saved.
Many factors should be considered when determining the effectiveness of carbon offsetting; there is no ‘silver bullet’. As mentioned before, this blog is just a start on the topic. To deepen our understanding of carbon offsetting, we invite you to add questions, comments and/or insights below. We’d love to work together on this with you.
Senior Consultant, Sustainalize
Consultant, Sustainalize
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Phasellus dignissim nulla tincidunt ultrices interdum. Nulla a enim ullamcorper, consectetur ligula sit amet, rutrum ante. Praesent cursus viverra urna ut sagittis. Sed nunc felis, hendrerit sit amet odio a, mattis laoreet mi. Quisque diam turpis, convallis at ultrices eu, vehicula a urna. Suspendisse potenti.
Met OV
Phasellus dignissim nulla tincidunt ultrices interdum. Nulla a enim ullamcorper, consectetur ligula sit amet, rutrum ante. Praesent cursus viverra urna ut sagittis. Sed nunc felis, hendrerit sit amet odio a, mattis laoreet mi. Quisque diam turpis, convallis at ultrices eu, vehicula a urna. Suspendisse potenti.
3 thoughts on “To offset or not to offset”
Hi Misha， Quinten and Gavin，
Your article was extremely helpful.
I’m really interested in carbon market and your knowledge are truly precious.
Would love to get on a zoom call and have some chat~
Thanks for sharing such an informative blog with us.
I really appreciate your contribution in this field as you doing very well!
Really comprehensive article. Voluntary carbon credits can have a big impact because of driving innovation, yet there are obstacles. Would love to organize a short call to discuss how certain organizations can help upscale the market.