At Quantis, our north star is helping companies find opportunities within their own operations and supply chains to drive the transformation needed to stay within planetary boundaries. But our clients naturally wish to understand the full spectrum of business and financial models that can help drive this transformation. Among these options is the purchase of carbon credits to use as offsets. Our clients often have questions to gain a better understanding of how they work, and the challenges they pose. Since carbon credit projects are part of the larger toolbox to address climate change and nature loss, we thought it would be valuable to share our perspective more broadly, particularly considering the recent controversies reported in the press.
As we start a new year, we want to look back at a topic that loomed heavily in 2023. Carbon offsetting — is it a lifeline for the planet or a loosely governed loophole?
The answer to both questions is a qualified “maybe.” The situation is far more nuanced and complex than many media outlets make it out to be. But what is all this upset about offsets about, and more importantly, what are companies to do about it?
Amid recent controversies about offsetting schemes concerning the validity of claims and the impact of the projects underpinning them, it would be easy to dismiss the practice — and voluntary carbon credits more generally — as fundamentally bad or a failed idea. Offsetting schemes are undoubtedly flawed, but dispensing with them altogether would be shortsighted.
Most companies can’t rework their business models and operations to drive long-term emissions reductions overnight. Some changes are complex and take time because of financial, logistical, technological, or any number of other constraints. Offsetting mechanisms can enable organizations to contribute to the sustainability agenda and slow the global warming trajectory while they figure out how to reduce their own emissions. Such mechanisms include direct investment in mitigation projects (e.g., forest and wetland conservation) or financing for climate action via the purchase of voluntary offset certificates.
That is, of course, if the offset certificates they purchase are linked to verifiable, quality projects that move the needle in the right direction and deliver the results they promise. It’s clear, though, that we’re not quite there yet. Though well-intended, there are numerous examples reported in scientific journals and the mainstream press that suggest offsetting, as it exists today, isn’t quite living up to its potential.
Caught in the crossfire are business leaders who are understandably confused and are right to ask the question, “So, what now?”
What’s off about offsetting + the controversy around voluntary carbon credits
Before diving into the issues, here’s a quick refresher on what offsetting is, what it does, and why anyone would do it in the first place.
What is carbon offsetting?
Offsetting is when an organization purchases certificates (carbon credits) linked to activities that lower, avoid or sequester CO2 emissions.
These certificates represent one metric ton of carbon dioxide that’s been avoided, reduced or removed from the atmosphere, as the result of a project that mitigates climate change.
Offsetting offers a way for companies already making significant strides to reduce their impacts to mitigate emissions beyond their own value chains (what the Science Based Targets initiative terms “Beyond Value Chain Mitigation”). It serves as a means to contribute to global climate action or compensate for unavoidable (residual) emissions — emissions that remain after all reduction opportunities have been exhausted within a company’s own operations and supply chain.
Offsetting is meant to be supplemental to value chain GHG reduction measures, allowing businesses to contribute towards reaching societal net zero, which is defined as a balance between the GHGs emitted and those that are removed on a large scale. According to SBTi, companies cannot themselves reach net zero by offsetting (SBTi doesn’t count offsetting towards SBTs) — they must reduce scope 1, 2 and 3 emissions by 90-95% by 2050. But instead of using offsetting to go above and beyond, far too many companies are using it as a license to pollute while continuing business as usual. They use offsetting as a crutch and a way to make claims about their sustainability efforts rather than investing in deep decarbonization.
That alone was enough to make them controversial even before issues around the credibility of the projects underpinning offset schemes were uncovered. But even organizations who are aggressively pursuing reductions and are using offsets to go above and beyond are affected by the shortcomings of offsetting mechanisms and junk credits. Regardless of the initial motivation for purchasing offsets, it’s important to consider the risk factors at play — even if it’s unlikely to be possible to eliminate all risk.
Voluntary carbon credits promise environmental benefits that are challenging to predict.
Credible credits include “safety factors” that consider risks associated with fires or other forms of “leakage” (i.e., unintended GHG emissions). That said, if you purchase a reforestation credit today, it may take years to reap the climate benefits. That’s if those forests ever reach maturity to begin with, and if they do, it’s important to consider that long-standing forests are more effective carbon sinks. A newly planted tree can take decades to capture the level of CO2 reduction promised by a carbon credit, and it would take decades and countless forests to offset just a small fraction of global emissions — and that’s if the forests aren’t wiped out by droughts, wildfires, diseases or deforestation. While those forests are growing, and the pollution continues, the CO2 reductions will never catch up to the ongoing emissions. Also, it’s worth noting that CO2 isn’t the only GHG warming the atmosphere.
Carbon offset projects may have unintended (or unexamined) environmental consequences.
Another critical issue is that many carbon credit projects sold through offsetting schemes fall victim to the “carbon tunnel vision” trap. They place a hyper focus on carbon while ignoring other sustainability concerns, such as biodiversity or land-use change. In the case of reforestation projects, in particular, there’s concern that focusing on carbon alone could create detrimental land-use changes, or adversely affect water supplies or challenge biodiversity. Failure to consider other environmental factors could promote monoculture plantations over restoration plantings of native species of trees and shrubs, particularly when these ecosystems require more diversity and greater density. Carbon removal should not mean trade-offs for biodiversity, carbon, water and soil regulation. Further, studies are increasingly showing that offset projects that deploy monoculture plantations are actually less effective at storing carbon than restoration projects.
Carbon credit projects might not actually decrease the amount of GHG emissions entering the atmosphere.
According to a study in the journal Frontiers in Forests and Global Change, which looked at hundreds of carbon offset projects, offsetting schemes tend to allow project developers to claim more climate benefits for their projects than they produce. Researchers point to poor carbon accounting practices as the problem, which include generating carbon credits based on baseline assessments that don’t align with past practices in the area in question. These various shortcomings have enabled developers to continue operating under a business-as-usual model rather than making real improvements. As a result, companies purchasing offsets to make carbon neutrality claims are painting a misleading picture of progress. A 2022 Bloomberg investigation revealed that almost 40% of the offsets purchased in 2021 were from renewable energy projects that didn’t actually reduce any emissions.
Offsetting has become a gateway to greenwashing.
Corporations that buy credits to offset and tout their commitment to sustainability, but don’t make an effort to cut back on their emissions or properly vet their offset purchases are greenwashing — point blank — and risk reputational ruin if their consumers get wise to it. Too many companies are using offsets as get-out-of-jail-free cards to continue generating the same level of GHG emissions, meaning our planetary crisis continues…or worsens. According to Bloomberg Green, “Dozens of the biggest global companies — from banks to industrial heavyweights — have made bold climate claims justified by cheap renewable-energy offsets that don’t counteract global warming.”
In response, European lawmakers will begin banning climate/carbon neutral claims based on offsetting beginning in 2026.
Offsetting lets companies throw money at a problem without fixing it.
Though not all companies are blindly purchasing offsets without making the necessary reduction efforts, there are those that do. Offsetting has created a mechanism that allows companies to appear as if they’re making headway without addressing the root of the problem. While corporate heads believe they’re compensating for contributions to the environmental crisis, they’re cultivating a dangerous false sense of security. Especially because offsets can be cheap (as cheap as $2 per ton) — far cheaper than conducting reduction measures. But you get what you pay for. It’s now clear that cheap offsets yield minimal, or no, environmental impacts.
Considering these factors, businesses have ample cause for concern. Now that its shortcomings have been brought to light, the carbon market may see some reform. In the meantime, businesses should embrace the notion that you don’t have to remove what you don’t emit in the first place. So, if the choice is between investing in emissions reductions in your own value chain vs. actions or investments outside your value chains (e.g., purchasing voluntary carbon credits), we recommend the former over the latter. If you want to do both, even better so long as the projects you choose are high quality. Offsetting should be a complement to reduction efforts, not a substitution or a shortcut.
That said, we do recognize that reducing scope 1, 2 and 3 emissions by 90-95% by 2050 is within reach for some sectors more than others. Given the slow rate of progress on scope 3 targets across the board and the level of additional funds urgently needed to fill the climate finance gap, a debate is emerging about how carbon credits can be used on the road to success more broadly.
Businesses must contend with the fact that the carbon offset system as we know it simply isn’t working and act accordingly. While not easy, there are elements in your control and risks you can mitigate.
For an effective offset strategy, focus on quality — not quantity
In light of recent events, if your business is claiming “net zero” based on offsets, there’s some risk that you’ve made a false claim, however inadvertent. It’s worth taking a hard look at the credits you’ve purchased in the past and used to make claims. If you find that the credits grossly overestimate the benefits generated by the project, you’ll need to take some corrective action. Unfortunately, that may require you to walk back a previous claim. The good news is you won’t be alone.
But it needn’t be a PR disaster either if the narrative is well-managed and transparent. Keep in mind that the entire point of your sustainability program is to make a positive impact, not a claim. Reminding your customers and the general public about your intentions and how projects fell short of them can help manage expectations. If your company is making serious strides towards reduction, even better. We cannot stress this enough: reductions are really the only way to tackle impacts and should be priority #1 for investment.
If you do decide to fill the gap by buying voluntary carbon credits while working to slash your emissions, you’re in a position to influence the voluntary carbon market for good: Armed with the right information, you can demand quality offsets and normalize a higher standard in the offsets industry, per the laws of supply and demand. Yet, it’s important to recognize that the state of the market is such that risks are bound to remain for some time even as you deploy your best efforts — an inevitable part of being a leader.
To get there, you need to know that not all carbon credit projects (or brokers) are created equal. To some degree, you get what you pay for — cheap offsets probably won’t net meaningful results. The more expensive ones? They might be high quality and impactful, but it’s still a good idea to scrutinize them.
There are different types of carbon credits and different criteria for determining their quality, but we think there are five “must-have” attributes. (You can learn more about identifying high-quality credits and even find a free scoring tool at the Carbon Credit Quality Initiative.)
To get started, look for offsets with the following qualities. This is not an exhaustive list, but it’s a great place to start.
High-quality offsets are:
- Real: The project leads to real, avoided emissions or the sequestration of CO2 emissions — not just emissions that have been shifted from one area to another (i.e., leaked).
- Additional: CO2 emissions reductions or removals couldn’t have happened under business-as-usual conditions; the project’s activities would not have occurred without the added incentive provided by the carbon market.
- Permanent: The project keeps emissions out of the atmosphere for a reasonable length of time (the IPCC’s definition of permanence is 100 years or perpetual) and/or the risk of reversal is adequately addressed through assurance mechanisms.
- Quantifiable/Verifiable: The project’s CO2 impacts can be quantified accurately and precisely with sufficient confidence, it’s regularly monitored, and the results are verified by a third party.
- Enforceable/Unique: Credits from the project are tracked and ownership is enforced so that each credit is claimed only once, offsetting one ton of CO2 emissions — with no unacceptable double counting.
This represents the minimum, most basic criteria.
We recommend looking deeper and considering some other key factors, such as:
- Co-benefits: Does the project provide additional environmental and social benefits such as protection of biodiversity, improvement of livelihood for local communities, improved air quality, etc.?
- Scalability: Can the project meet the demands of large-scale purchasers and the volumes required for 1.5˚ C degrees pathways?
- Social and environmental risks: Does the project comply with all legal requirements in the jurisdiction where it is located? Sometimes, additional reviews and safeguards may be necessary to guard against negative outcomes unrelated to GHG emissions.
- 1.5°C contribution: Does the project type contribute to emissions avoidance or removals that are in line with what’s needed to reach 1.5˚ C targets?
- Pricing: Is it in line with the average cost per credit and range of costs typically associated with this project type? If it seems too good to be true, it most assuredly is.
In the past, misleading claims and severely limited transparency made it difficult to identify and vet legitimate carbon-reduction projects, the kind that meet these criteria. But there’s change on the horizon, including a new independent assurance body.
Independent offset vetting has arrived
The Integrity Counsel for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Initiative (VCMI) are offering direction and much-needed independent assurance in the voluntary offset market.
ICVM has delivered the Core Carbon Principles and corresponding CCP Assessment Framework, setting forth standards for governance, emissions impact, and sustainable development to help buyers identify high-integrity credit quality. Carbon-crediting programs can now apply for assessment to determine if their offsets meet CCP standards. While it’s hard to predict whether the introduction of this independent verification standard will get us closer to the 1.5˚ C goal, it’s a step in the right direction. Unfortunately, it’s not without its flaws, particularly regarding double-counting.
VCMI’s new Claims Code of Practice, “Carbon Integrity” Claims Branding and Monitoring, Reporting and Assurance (MRA) Framework builds on ICVM’s work, focusing on how carbon credits are used once purchased. It puts guardrails in place around the use of carbon credits to ensure they’re used appropriately and that claims are legitimate. Offsetting is not allowed as part of the Claims Code, which asserts that “carbon credits cannot be counted towards the achievement of within-value chain emissions reductions targets, but instead the most aspirational VCMI Claims in the Claims Code should represent a contribution to both the company’s climate goals and global efforts to mitigate climate change.”
To ensure that your sustainability program (and your investment) is meaningful, it’s in the best interest of your brand (and the environment) that you demand transparency and quality when you do use carbon offsets. How? Ask good questions, see if they meet CCP standards, and don’t be afraid to dig deep.
Your impact is greater than the sum of your offsets
As our planetary crisis continues to unfold, your business must keep pace with the solutions and challenges that will determine our course. Your stakeholders are watching to see if you’ll use the resources at your disposal to make a real impact — either way, the financial (and planetary) ramifications are enormous.
You’re poised to make the biggest impact by starting now. Though thoughtful and impactful offset projects are a critical tool in the arsenal to make the fleeting 1.5˚ C target, doing the work of eliminating GHG emissions in your value chain and protecting nature is the most assured way to drive progress.
Here’s what we suggest:
- Go looking for trouble: Conduct a thorough audit of your offsets portfolio to determine the extent of your risk exposure.
- Tell it like it is: Walk back any carbon claims you’ve made that have proven false and be transparent about why this is the case — authenticity is in.
- Ramp up your reductions: Create or revise your sustainability action plan to incorporate more emissions reductions wherever possible.
- Be discerning: Where full reductions aren’t possible, use higher–quality, verified offsets or consider insetting projects along the value chain.
- Alexi Ernstoff, Principal Expert — Land + Agriculture
- Lizzie Grobbel, Senior Sustainability Consultant