Carbon offsets refer to removing atmospheric CO2 to compensate for GHG emissions elsewhere. Offsets are particularly useful for Net Zero commitments – by increasing the carbon captured. Offsets can be achieved through over 200 types of projects in renewable energy, methane reduction, reforestation, energy efficiency, and carbon-neutral or carbon-negative fuels. Together with carbon credits (below), they are a key environmental stabilization policy that can help especially economies with lower carbon prices.
What are Offsets?
Carbon offsets are monetized through the carbon credits system, which certifies the quantity of carbon removed and markets them on compliance or voluntary markets (more in next article). The growing prevalence of offset projects comes from international instruments such as the Kyoto Protocol and the Paris Agreement, which have set net-zero targets for most developed economies (a.k.a. Annex I countries in the Kyoto Protocol) within 2030-2050. This system is backed by the United Nations’ Clean Development Mechanism (CDM), which allows Annex I countries to fund GHG reduction in developing economies (a.k.a. Non-Annex I countries) in exchange for accounting for the emissions reduced as part of their inventory.
It is reasoned that as the demand for offset projects increases, the price of carbon will also increase. Further, regulatory pressures, including local, national, and international instruments, would progressively increase the need for offsets, thereby further increasing demand (and consequently the price of carbon), which offset developers in Non-Annex I countries can benefit. This would, in turn, improve the cost-effectiveness of emissions mitigation and removal in Annex I countries and could theoretically help reduce ‘carbon leakage,’ i.e., the outsourcing/relocation of carbon-intensive activities such as manufacturing, from Annex I to Non-Annex I countries, as a reaction to regulations in Annex I countries. It also serves as a technology transfer highway through which Non-Annex I countries can adopt cleaner technologies easier. Yet, it is clear that leakage depends on how the ‘business-as-usual’ or baseline scenario is defined. Thus, the current approach itself allows for some leakage already.
Types of Projects
The most popular project types often come under reforestation (viz. forestry, mangroves, and ecosystems restoration), renewable energy (viz. wind, solar, biomass, biogas, or even hydroelectric power), and energy efficiency (viz., cookstoves), while other types including industrial/agricultural pollutant removal and landfill reclamation/methane capture are gaining popularity. Offsets can be done on a personal or organizational level. While administrative offsets are increasingly common, personal offsets are gaining traction. Individuals and families can opt for a combination of emission reduction and offsets to reduce their carbon footprint. This space is also growing in scale, with many organizations growing in the niche. Offsets are measured by Carbon credits (below), which is 1 MTCO2e (a metric ton of CO2 equivalent). Carbon credits can be considered the ‘SI units’ of the amount of carbon offset used to quantify the offset. The following article in this series on Carbon Credits offers more information.
Many organizational buyers of credits from offset projects often crowd-source the price of carbon. This can be seen in air travel, where many airline companies offer offsets to reduce the emissions calculated according to travel route, airplane type, and seating class. These ‘personal offsets’, which, similar to VAT, are obtained from the customer and not from company revenue, are often ambiguous to whom the offsets are assigned. While it is true that since the company purchases offsets in bulk, and thus the customer pays lesser per credit, in most cases, it is the company that can claim the offsets. Yet, many see this as an altruistic way to ‘pay forward’ for the reduction of consumer impact on the environment. Carbon financing is also growing as an option for organizations to purchase carbon offsets steadily. This takes the form of annual payments to a designated project partner, including NGOs and private & public offset developers, to fund future emission reductions created once the project is fully operational. This gives developers financial and material advantages, such as an additional revenue source, increased license to operate, scope to expand the project, and increased budget for technology and expertise transfer. Due to favorable currency conversions from Annex I to most Non-Annex I countries, the license to operate often grows considerably when financed by organizations from Annex I countries.
There are many criticisms of offsets, including what is seen as a gross oversimplification of net emissions. While the framework of ‘carbon equivalence’, i.e., a ton (of GHG reductions) equals a ton (of GHG emissions), is applied for inventorization and accounting, it does not take into account the effects of the emitted ton across the time difference between emitting and reducing. Further, since inventorization is equalized for all GHGs, the emission and the reduction rarely match in GHG composition. For instance, while 1 ton each of CO2 and CH4 emitted equals 85 MTCO2e, the removal through (say) forestry methods may focus on eliminating more CO2 than CH4, which can lead to different atmospheric effects which we may not be able to account for. This is because the MTCO2e terminology is seen more from a temperature target perspective rather than a systemic view where cause and effect are traced. Further, fossil fuel consumption releases long-sequestered carbon, which, even when captured, can easily leak back into the atmosphere due to forest fires, increased soil oxidation, and other phenomena. This means that the accounting system does not differentiate between the less volatile long-term sequestration and the more-volatile active carbon cycle. This means that organizations can get away with introducing volatility into the carbon cycle without replenishing long-term carbon sinks. Moreover, if purchasing offsets becomes cheaper than fossil fuels, organizations can ‘shoot first, beg for forgiveness later’, which poses a threat to the stability of the carbon cycle and thus to the climatic regime as well.
Author’s Take | While offsets are indeed an important tool to reduce GHG emissions, they are not and must not be the only method to achieve Net-Zero. A strong ESG ethos, backed by offsets and committed long-term decarbonization strategies and activities, is absolutely crucial to achieving Net-Zero. It is also highly unlikely that there will be any regulation to limit the amount organizations can offset; that organizations take up this commitment towards active decarbonization is paramount.
About the author Krishnakumar Ramachandran | Krishna is a Biosystems Engineer and Biotechnologist with a background in sustainability, biobased transition, bioplastics and biofuels, energy, agribusiness, and natural resources. Having worked in R&D and having started up, he ‘transitioned’ to sustainability to make a tangible impact to people and the environment. As a freelancer, he works with sustainability consultancies in ESG, GHG accounting, carbon offsets and credits, and tech-advisory. He writes articles on sustainability strategy, corporate sustainability, energy transition risks.