Carbon offsets are one strategy in a larger decarbonization plan. With a global perspective from Inogen Alliance, a network of over 5,000 EHS and Sustainability consultants, we explain some of the benefits and limitations for companies looking to implement carbon offsets into their strategies.
Benefits of Carbon Offsets
Carbon offsets send a direct market signal by putting economic value on a commodity that has historically not been priced. The goal of carbon offsets is to price GHG emittance on their social and economic impacts. This is called the social cost of carbon.
A project must pass additionality before moving forward to check for methodology specific requirements outlined by registries. Additionality tests the project to determine if its “additional”. The test determines if the project contributes additionally to the reduction and avoidance of GHG emissions. The most important additionality test is an investment analysis. Meaning, would the project have occurred without the financial incentive of selling carbon offsets? If so, the project will not be approved. This provides assurances that the environmental benefits purchased by an end-user of a carbon offset contributed to the reduction of GHG emissions that would not have occurred without that financing.
Projects that are issued offset allowances to trade on the voluntary market have to meet the registry’s rules and requirements, follow specific third-party approved methodologies, monitor emission reductions and avoidances, and be validated/verified by third parties. It is recommended that companies seeking offsets procure offsets that were issued under the top registries. The top registries are: The Voluntary Carbon Standard, The Gold Standard, American Carbon Registry, and The Climate Action Reserve.
Carbon offsets have a diverse plethora of project types that can aid a company in not only reducing its emissions but also build a narrative. Certain projects have associated co-benefits such as: ecosystem preservation, gender equality, improving impoverished communities, safe drinking water, etc.
Offsets are an easy tool to reduce a company’s emissions and build narrative but must be used properly. Certainly, only using offsets to meet-zero will create a lot of scrutiny. It is recommended to use offsets to reduce unavoidable scope 1 emissions and scope 3 (value chain) emissions. This should occur in tandem with stakeholder engagements and operational changes.
Limitations of Carbon Offsets
The main issue with carbon offsets is that they are not a fix-all solution. They are one tool for decarbonization that must be used responsibly. Secondly, offsets are essentially a cost. Other strategies such as solar installations, energy efficiencies, and downsizing will generate a return-on-investment over time for companies and should be recommended first or used in tandem with offsets. It is likely that the cost of offsetting will be passed down to the end consumer, however the opposite can be argued. Putting a price on carbon has a direct market effect. If consumers have to pay more for GHG intensive products, they are likely to switch to alternative products that have lower prices and lower GHG intensities.
The other limitations of offsets concern target setting. The Science-Based-Target Initiatives (SBTi) does not allow offsets to count towards scope 2 targets, and only allows them once operational changes are implemented for scope 1 emissions. Offsets are certainly allowed for internal strategies and can be marketed for carbon-neutral, but when utilized for SBTi targets, must meet those requirements. However, renewable energy certificates can be used to offset scope 2 emissions per the SBTi.
There have been many controversies involving businesses that pollute unnecessarily and buy offsets instead of increasing their own energy efficiency, so it is recommended that businesses protect their reputation by ensuring their organization views the purchase of offsets as a tool to offset emissions in tandem with operational changes, to reduce unavoidable emissions, for internal target setting strategies, and offsetting historical emissions.
Check out the full blog including our list of pros and cons from Inogen Alliance, a global network of over 5,000 Environment, Health & Safety and Sustainability consultants with projects completed in over 150 countries.
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