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The Pros and Cons of Carbon Offsets

What are Carbon Offsets?

On a broad level an offset is an instrument to compensate for the emissions of greenhouse gases (GHGs) at other locations. Carbon offsets are available in two varieties: the reduction of emissions, and avoided emissions. One example of a avoided emission would be converting landfill gas into fuel that can be used to burn. This eliminates the release of landfill gas into the atmosphere and also reduces emissions from sourcing fossil fuels.

One example of emission reduction would be afforestation projects that capture CO2 from the atmosphere and then store it in the biomass sink. The diversity in offset types and project types is customized to the company’s environmental as well as social governance policy and used to create narratives. In the decarbonization context, offsets for carbon are utilized to reduce the carbon footprint in order to reach a net-zero goal. But companies are also finding new ways to make use of carbon offsets for example; the offset of business travel or events, the launch of innovative product line-ups, as well as transportation of products sold.

For you to incorporate carbon offsets as part of your decarbonization strategy, it is important to be aware of the benefits and limitations of carbon offsets. That way, you can be sure you are choosing the most beneficial projects to figure out how to utilize them within the overall decarbonization strategy.

Benefits of Carbon Offsets

Carbon offsets are a direct market signal by placing the economic value on a product which has not previously been priced. The objective to offset carbon emissions is to value GHG emittance on their social and economic impacts. This is also known as the social cost of carbon.

A project has to undergo additionality tests before proceeding to determine if the methodology meets specifications set by registry organizations. Additionality test an individual project in order to establish if it’s “additional”. The test determines whether the project is contributing in the reduction and reduction from GHG emissions. The most important test for additionality is an analysis of investment. That is, would the project not have been approved without the financial incentive of carbon offsets being sold? If not, the plan is not approved. This provides assurances that the environmental benefits purchased from the end-user of the carbon offset have contributed towards the decrease of GHG emissions, which would not have occurred without that financing.

Projects who are granted offset allowances to trade on the market for voluntary transactions must to conform to the registry’s rules and requirements, follow specific third-party-approved methodologies, keep track of emission reductions and avoidances, and be verified by third-party organizations. It is strongly recommended that firms looking to offset offsets purchase offsets that were issued under the top registries. The most reputable registries are: The Voluntary Carbon Standard, The Gold Standard, American Carbon Registry, and The Climate Action Reserve.

Carbon offsets are a wide range of types of projects which can assist a business in reducing its emissions but also creating an argument. Certain projects have associated co-benefits like protection of the ecosystem and gender equality, enhancing poor communities, safe drinking water, etc. A good example would be to provide solar cook stoves for women in South America. This provides a social benefit for the women living there, reduces biomass from being burned and improves the quality of air in this part in the globe. Another example is to convert land used for cattle grazing back to its original type of land use like a rainforest. This project also has the benefits of wildlife and eco-system management.

Offsets are an effective way to lower a company’s emissions and build an image, however, they should be used appropriately. Certainly, using offsets only to meet the zero-emissions requirement will bring an abundance of scrutiny. It is suggested to use offsets in order to cut down on unavoidable scope 1 emissions and the scope 3 (value chain) emissions. This should occur in tandem with stakeholder engagements and operational changes.

Limitations of Carbon Offsets

The main problem with carbon offsets is that they are not a cure-all. They’re a tool to decarbonization and must be used wisely. Secondly, offsets are essentially a cost. Other strategies, like solar panels, energy efficiency and downsizing could generate an ROI over time for companies and are recommended to be first combined with offsets. It is possible that the cost of offsetting will be passed on to consumers at the final level, although there is a possibility of the opposite. Putting a price on carbon will have a direct effect. If consumers must pay higher prices for GHG intensive products, they are likely to switch to alternative items with lower prices and less GHG intensities.

Other limitations to offsets relate to setting targets. The Science-Based-Target Initiatives (SBTi) does not permit offsets to count towards targets in scope 2, and only once modifications to operations are made for scope 1 emissions. Offsets are definitely allowed in internal plans and strategies, and could be advertised as carbon neutral, but when they are used to achieve SBTi targets, must meet those requirements. Renewable energy certificates are able to serve as offsets for the scope 2 emissions per the SBTi.

There have been numerous controversies with businesses who pollute excessively and buy offsets instead of improving their energy efficiency. Therefore, it is recommended that businesses protect their image by making sure that their company sees the purchase of offsets as a way to offset emissions in tandem with the operational change, in order to cut down on emissions that are unavoidable, for internal target setting strategies, as well as offsets for historical emissions.

In the world’s transition to decarbonization, a lot of companies will have no choice but to access carbon credits to meet their targets of net zero, at least in the short to medium term.

Carbon Offsets as a Tool in Decarbonization Strategies

In sum, carbon offsets are a well-known option for decarbonization, due to their convenience as well as co-benefits, narrative-building, and unique use-cases, but they do have some limitations. They provide direct financing to various projects, but it is important to ensure that your organization is selecting projects which are registered with the most trusted registration agencies. There is a chance of being perceived as indulgence in the practice of polluting and using the offsets as a cover, so businesses should consider implementing offsets for narrative purposes, reducing the risk of unavoidable scope 1 emissions. Scope 3, (value-chain) emissions, historical emissions, events as well as business travel. The regulatory environment is always changing and could threaten long-term strategies focused on offsets. In this regard, Inogen Alliance recommends that carbon offsets should be considered as a single instrument in the overall strategy to reduce carbon. Carbon offsets when paired with renewable energy certificates power purchase agreements and operational changes like energy efficiency, on-site renewables down-sizing, and green product sourcing can be a powerful tool in reaching carbon-neutrality.