Certain environmentalists are casting doubt on a tool many organisations use to achieve sustainability goals: the carbon offset. The argument is that, by buying carbon offsets, corporations are given a free pass to claim they are working toward climate targets without reducing emissions from their own operations.

However, when we look at the broader picture, financing carbon offsets may be critical in slowing climate change, especially on the short timeline needed before irreversible damage occurs. Here’s why we believe there is a growing role for them in this market.

What are carbon offsets?

Carbon offsets (or carbon credits) are environmental financial products derived from activities that avoid, reduce or remove emissions of carbon dioxide, or other greenhouse gases, that would otherwise end up in the atmosphere. Once verified, these offsets can be purchased by governments, companies or consumers, giving the rights to claim such emission reductions against one’s carbon footprint.

Used in both compliance and voluntary markets, the different types of offsets range from forestry to renewable energy to methane combustion. One ton of carbon offset represents the avoidance, reduction or removal of one metric ton of carbon dioxide equivalent (“CO2e”), or its equivalent in other greenhouse gases. An offset is essentially a body of data evidencing that an emission reduction has occurred at a particular place and time and it enables the transfer of that claim to parties that have financed that emission reduction – as opposed to being an instrument that gives a party a right to emit a metric ton of CO2e.

Why the carbon offset is an effective tool

1. Climate change is a global problem.

One of the criticisms of organisations buying carbon offsets to achieve climate goals is because the projects being financed by the offsets are often in a different location to that of the organisation. Such critics advocate that these organisations should instead be focused on reducing their own local emissions, and this should indeed be a critical part of any emission reduction strategy.

However, climate change is a global problem. While countries endeavor to meet their own targets as part of the Paris Agreement, the global average rate at which global greenhouse gas emissions are reduced is far more important than where the emissions are reduced. The critical and collective goal is to limit global warming to well below 2, preferably 1.5 degrees Celsius, as compared to pre-industrial levels.

A framework that includes carbon financing mechanisms such as carbon offsets allows corporations and governments to channel capital into projects that will reduce more greenhouse gases per dollar spent. Flagging this dynamic as being important can be controversial, but a system that produces an outcome at a lower cost tends to be a stronger system, regardless of the endeavor. As an added benefit, carbon finance is often coincident with technology transfer and other co-benefits.

2. Offsets allow all types of industries to have a positive environmental impact

While most corporate sustainability goals are voluntary, large organisations are generally under scrutiny. They need to reduce emissions not only because it’s the right thing to do, but also because stakeholders, consumers and financial institutions are demanding it. However, not all industries can achieve zero emissions, at least not immediately.

Without carbon offsets, it would be far more complicated for many types of industry to participate meaningfully in global decarbonisation efforts. While companies will continue to reduce their carbon footprint directly through energy efficiency and renewables, carbon financing through offsets allows companies to contribute beyond their own asset boundaries.

3. We have limited time to address climate change

With climate change becoming an increasingly urgent threat, a broad spectrum of entities will be under pressure to cut emissions quickly. However, it may not be feasible to upgrade certain infrastructure or technology within their current processes in the short term.

In these cases, offsets and other financial products can help entities immediately reduce their net emissions. This is a more efficient solution than putting off sustainability goals for decades. It makes sense to reduce emissions where it's easiest and cheapest to do so.

Are your carbon offsets high-quality products?

While they will continue to be an important market-based instrument in the fight against climate change, in order to truly be impactful, carbon offsets need to be of high integrity and supported by trustworthy underlying data.

Most traditional approaches for the monitoring, reporting and verifying of emission reductions use manual processes that are open to error and offer limited transparency. The end-product is often not tied to the underlying environmental data in a granular or permanent manner that can be easily traced, which can result in what is called double counting – selling the rights to the same metric ton of CO2 avoided more than once. This is one of the flaws that result in some carbon offsets being associated with greenwashing.

In order for organisations to truly reduce net emissions and accurately measure climate impact, it is critical that we have highly provenanced data tied to carbon offsets. Digital solutions can help us achieve this with real-time digital data capture that is verifiable and auditable.

Achieving climate goals

Should companies actively and increasingly reduce their own emissions? Absolutely. Are carbon offsets a cure-all? Not by a long shot. But until we’ve achieved a steady state of net-zero greenhouse gases globally or the cost for reducing emissions becomes nearly identical worldwide (currently it can vary from under US$1 per metric ton to over US$100 per metric ton), they have an important role to play in the urgent fight against climate change.

A healthy debate relating to carbon offsets should, in our view, be centered around how to optimally match capital with assets that give rise to the maximum emission reductions that are backed with verifiable and auditable data. This will ultimately help us achieve our climate-related goals faster and, we believe, will foster a greater spirit of global collaboration along the way.

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