Carbon offsetting: taking steps in the right direction

The overarching goal as laid out in the 2015 Paris Agreement is limiting the rise of global temperatures by 2 degrees Celsius; preferably, 1.5. To do this, we need to get to net zero by 2050, and prior to that, there is the first step of halving greenhouse gases (GHGs) by 2030. There are many elements to this strategy, but one of the most popular ones is carbon offsetting.

First, strategies are needed to reduce, substitute and avoid harmful GHGs; second, carbon offsetting as a way of neutralising the emissions an organisation actually does emit. Based on the Clean Development Mechanism of the Kyoto Protocol, it is an internationally recognised method of taking responsibility for carbon emissions that are, to all intents and purposes, unavoidable. To quote Christiana Figueres, former head of the United Nations Framework Convention on Climate Change:

“Offsetting is a valid way to reduce global carbon emissions quickly and cost effectively, because it recognises that there are barriers to an immediate shift to low emission or no emissions business models.”

This comment helps focus minds on the fact that it is an incremental measure, not an immediate fix-all. However, that is not to downplay it: given that we can’t change the world overnight, and that for some companies investing in the technology needed to reduce emissions is prohibitively expensive, incremental approaches are very important in the fight against climate change. Furthermore, it sends the right message to your stakeholders.

How does it work?

Companies can buy carbon credits or permits that pertain to particular projects that are involved in carbon reduction; for example, we at Mainer Associates recently partnered with Earthly in a project in Kenya that aims to tip the scales in the right direction. Many of these types of projects will involve a variety of forms of rewilding, planting trees, protecting existing forest, and providing employment opportunities. There are two types of schemes:

·         Reduction projects, in which emissions are cut by the improvement of processes

·         Removal projects, in which GHGs are eliminated or absorbed

Deciding which of these to engage in will depend upon a business’ level of ambition.

It’s a growing concern, but there is much to be done if it is to do what is needed. As reported by Deloitte, it will need to grow

“15-fold by 2030 and 100-fold for us to achieve net zero by 2050 (even once all other emissions are avoided, reduced and substituted). Currently valued at $300 million, the market could reach $50 billion in the near future.”

A lot of work to be done, then.

As well as a second step, it can also be a useful approach when all other ways of cutting emissions have been exhausted, or, coming at from the opposite direction, it can function as an interim measure while a business works to reduce its direct emissions. It’s not just direct emissions reported for Scope 1, either; Scope 2 emissions, pertaining to indirect admissions from the generation of purchased electricity, steam, heating and cooling and Scope 3 emissions, which relate to all other indirect emissions in an organisation’s value chain, can also be offset. This is important, as for most organisations, Scope 3 emissions will form the majority of their GHG emissions.  

The challenges facing the voluntary carbon market

How healthy is the market? What might be done to strengthen it so that it supports the fight against climate change on a large scale? McKinsey said this in a piece earlier this year:

“The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) with knowledge support from McKinsey, estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth upward of $50 billion in 2030.”

The growth is being driven by a number of factors: carbon credits get private finance into projects that otherwise might never start; they support the innovation needed to lower the cost of emerging technologies; they move capital to the Global South, where there is most room for Nature-based Solutions and where they can have the greatest effect. The piece argues that

“carbon credits would come from four categories: avoided nature loss (including deforestation); nature-based sequestration, such as reforestation; avoidance or reduction of emissions such as methane from landfills; and technology-based removal of carbon dioxide from the atmosphere.”

However, the market is fragmented, with the value of some credits being questionable. Moreover, the lack of pricing data means it’s hard for a buyer to know if they’re paying a fair price, while suppliers have to manage the risk of taking on and financing a project without full knowledge of what the buyer will end up paying. In short, there’s not enough transparency. There are a number of other challenges:

·         The development of projects is not growing quickly enough

·         Projects are concentrated in a small number of countries

·         There is a long time between investment and the sale of credits

·         There is not a universal accounting and verification methodology

These challenges could be met by developing, standardising and strengthening the voluntary carbon market; in short, the creation of a central marketplace with clear oversight. The TVSCM recommends attention in six areas:

1.       Creating shared principles for defining and verifying carbon credits

2.       Developing contracts with standardised terms

3.       Establishing trading and post-trade infrastructure

4.       Creating consensus about the proper use of carbon credits

5.       Installing mechanisms to safeguard the market’s integrity

6.       Transmitting clear signals of demand

Achieving this requires the will from all stakeholders. The TVSCM invites organisations to support the work that they’re doing, so that is a useful step that can be taken. Overall, it is about ensuring that carbon credits are purchased where they’re going to do the most good. In the short term, though, as Deloitte argues, many buyers will simply be concentrating on these three factors:

• Quality: is it of good, auditable, verifiable quality? Which standard does it adhere to and has it been validated and verified by an independent third party?

• Strategic alignment: do the projects generating carbon credits fit with your core business model or responsible business priorities?

• Cost: credits can currently cost between $3 and $65 per tonne. And price is more often an indicator of disparity not quality.

Decide what your level of ambition is, and act accordingly. You won’t regret it.