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 in 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 countries’ 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).
Overview of total voluntary market:
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.
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.
To give voluntary markets credibility, 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:
- Permanence: Refers to forestry projects. Carbon is not stored indefinitely in forest biomass and soils. Therefore, credits provided by these types of projects need to have an expiry date. Each voluntary market standard treats forestry projects (and its credits) differently.
- Leakage: Leakage happens when a project aimed at decreasing GHG emissions leads to the shifting of emissions elsewhere. Leakage can happen both outside of the project (Forest planted in one area can lead to deforestation in another area, with no net emission savings as a result) and inside a project (the GHG emissions related to the construction of the solar park / planting of trees are not deducted from the issued carbon credits, meaning that the net realized savings are lower than promised).
- Additionality: The principle of additionality dictates that emission reductions must be additional to any that would occur without the project (e.g. after implementation, GHG emissions must be lower than in the Business-as-usual case).
Most offsets are checked via two certifications 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. 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.
There are two main types of problems associated with carbon offsetting. First of all, the non-transparency in the market. As the voluntary market is non-regulated it often offers fraudulent, poorly run projects that exaggerate carbon emission savings. 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.
The second type of problems are related to the very nature of carbon offsetting. First, calculations of the emissions to be offset are volatile. The UN’s Intergovernmental Panel on Climate Change found a margin of error of 10% with measuring emissions from making cement or fertilizer; 60% with the oil, gas and coal industries; and 100% with some agricultural processes.
Secondly, uncertainty reigns the calculations of the saved emissions from offset projects. The principle of permanence dictates that savings must be permanent, but it is difficult to check or assess the savings of trees and what happens with them in the long run. Additionally, in reference to clean cooking stoves; who checks whether they are actually used (sufficiently, or to the extent that was promised)?
Lastly, the principle of ‘additionally’ is very difficult to check or prove. After all, it’s hard to say what would have happened without the implementation of the project. How ‘additional’ is a project that asks organizations to pay “to prevent trees from being cut down”. Similarly, how can you prove energy-saving lightbulbs would not have been distributed by a local government anyway (to reduce pressure on the electricity grid)? Or that a renewable energy project would not have been implemented when this turns out to be cheaper than fossil fuels?
To answer this question, we look again at the principle of permanence. With projects that implement cleaner alternatives to polluting activities (e.g. clean-cooking projects and green energy projects replace fossil fuels), emission savings cannot be undone (e.g. permanent). On the other hand, carbon credits obtained from reforestation projects (should) have an expiry date, as the carbon stored in the trees is not stored there forever. Trees can burn (or be burned) down, releasing the captured CO2 in the atmosphere again. The exact expiry date of these project varies per project and per supplier.
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.
- Use the three key principles to question the offset projects you are (planning to be) involved in. Is there no leakage of carbon emission savings? Does this project really lead to permanent savings? Are these savings actually additional to what would have been saved without my investment or involvement?
- Request transparency of the operations and price of your carbon offset supplier. As voluntary carbon markets are unregulated, both the calculations of emissions savings and the prices of carbon credits within a project are volatile. Plus, permanence and additionality are not always guaranteed.
- Always ask for proof when the seller tells you they will retire the offset on your behalf. It is possible that a seller is trying to sell one offset multiple times. Carbon emissions can only be deducted when the offset is retired.
- Don’t get involved in projects that are not verified by third-party validation/verification bodies. All the projects listed with the standard bodies mentioned above, have been verified by such parties and therefore have more credibility.
- Don’t let the price be an indicator for the quality of the project; transparency should be the main focus and is the only way to check the quality properly.
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.
If your company requires an in-depth, strategic look on your carbon offsetting approach, don’t hesitate to reach out to us!