Setting a robust carbon offsetting strategy can help future-proof your net-zero transition and support your organisations wider ESG objectives. EcoAct analyst, Harry Parkin discusses the benefits and key considerations for organisations when building an offsetting strategy
Introduction
Many organisations recognise the value of carbon offsetting, and many have already built, or are in the process of developing, an offsetting programme as part of their journey to net-zero. When done effectively, offsetting successfully tackles unabatable emissions and enables effective climate action in parallel to absolute carbon reductions. Net-zero is a long-term objective, so having a robust carbon offsetting strategy can help you to make the right decisions and guide you through.
Building an offsetting strategy may seem daunting – it takes into consideration which organisation to partner with; which projects to support; effective communication of the programme; and evolving market dynamics. But done well, a strong carbon offsetting strategy can de-risk parts of an organisation’s pathway to net-zero and deliver huge benefits for climate action and other sustainable development objectives. Also, setting an internal price on carbon creates greater awareness of an organisation’s carbon footprint and can encourage additional emission reductions efforts (e.g., investment towards low carbon technologies, value chain engagement etc).
What is carbon offsetting and why is it important?
Carbon offsetting is a mechanism used to finance greenhouse gas (GHG) emission reductions often equivalent to the residual emissions of an organisation or product.
Emissions reductions are achieved by projects around the world that use carbon finance to go above-and-beyond business-as-usual scenarios to either reduce emissions that would otherwise have taken place (such as renewable energy or forest protection projects). Alternatively, projects can physically remove carbon dioxide that would have remained in the atmosphere in the absence of that project (e.g., planting new forests or restoring mangrove vegetation). In addition to delivering emission reduction outcomes, many offsetting projects also deliver positive outcomes for the UN Sustainable Development Goals, such as enabling employment opportunities or improving gender equality.
Carbon offset projects generate tradable instruments known as carbon credits. Credits have been certified by a carbon standard, and verified by multiple third parties, and can be used for voluntary purposes or for participating in compliance schemes (e.g. EU ETS, CORSIA). EcoAct recommends only financing the highest quality projects, those which have been verified by ICROA-approved standards.
Efforts to reduce an organisation’s absolute emissions should remain the priority – but in this transition, offsetting is a high-integrity way to take responsibility for today’s unavoidable emissions that would otherwise not have been possible. Indeed, the Intergovernmental Panel on Climate Change (IPCC) said in its draft AR6 report (April 2022) that “The deployment of carbon dioxide removals to counterbalance hard-to-abate residual emissions is unavoidable if net-zero…emissions are to be achieved”.
Additionally, the Science-Based Targets initiative (SBTi) states that carbon removals at the point of meeting a long-term reduction target are required if an organisation is to claim net-zero, and that ‘beyond value-chain mitigation’ efforts are best practice throughout the pathway to net-zero. This allows companies to contribute to global emissions mitigation by investing in projects beyond their value chain, therefore having a more significant impact on meeting the temperature goals of the Paris Agreement. IETA estimates that trading in carbon credits could reduce the cost of implementing countries’ Nationally Determined Contributions (NDCs) by more than half – as much as $250 billion by 2030.
OK – but why is it important to consider building our company’s offsetting approach now, surely we can buy carbon credits whenever we need them?
As a market-based mechanism, carbon offsetting is prone to the push and pull of market forces. Prices across almost all project types are rising and whilst it could be expected that higher prices will ultimately drive investment into new projects, a disadvantage of the VCM is the lag time of supply. Particularly with nature-based carbon removals, it takes time for carbon to be sequestered and credits to be issued, which means that supply pressures will remain as corporate demand continues.
Purchasing credits now can help build the skills and capacity needed to develop such projects or to design new types of projects – all of which is lacking due to insufficient project finance capital.
Five considerations for developing your organisation’s offsetting strategy
1 Measuring your footprint and setting a science-based target
The first step to any climate action journey is to accurately calculate your organisation’s emissions. This requires measuring emissions using relevant emission factors in line with Greenhouse Gas Protocol (or comparable) methodologies. This exercise enables your organisation to highlight hotspot emission sources, and when publicly communicated, provides transparency for consumers and investors.
Following this, it is best practice to set a science-aligned carbon reduction target covering direct and indirect emissions and aiming to reduce your baseline emissions consistent with meeting global objectives of limiting global warming to 1.5°C. EcoAct are experts in supporting organisations’ target-setting. We have helped over 50 companies obtain validation from the SBTi, working with a diverse range of sectors supporting companies to meet the required SBT criteria and provide the documentation for submission.
2 The market is changing, are you? Improving your organisation’s understanding of the Voluntary Carbon Market and the regulatory landscape
As mentioned previously, the Voluntary Carbon Market (VCM) is growing and carbon credit prices have been continuing to experience upward pressure since an inflection point in 2020. The market is now worth $1bn. In parallel, carbon market ratings platform Sylvera noted that in 2021, “inventory of voluntary carbon credits fell by around 50%”.
Understanding market dynamics in the VCM will greatly benefit your organisation as you prepare to meet your offsetting commitments. This allows for forward planning and possible updating of net-zero strategies as prices change. Forward-thinking organisations, willing to learn about the market and commit upfront capital to project investment, or sourcing/contracting credits ahead of the curve, will have a greater impact on advancing climate action and sustainable development in the long run compared to companies who wait to purchase credits from the ‘spot’ market – ie. credits that are issued and available today. Upskilling your company’s team in this market, particularly those in procurement, finance, and within C-Suite, should be a priority when considering your climate action strategy.
Finally, it is important to recognise emerging regulatory changes (domestic or international) that could impact VCM dynamics. For example, rules relating to Article 6 of the Paris Agreement, will change the offsetting claims that can be made and the process of developing new projects.
3 Modelling your organisation’s emissions trajectory
The next step to consider when developing your offsetting strategy is modelling your ambition and defining your future need for credits. Whilst there is some level of uncertainty here, for example, emissions increases caused by inorganic growth, having a broad understanding of how many credits your organisation is likely to require over time will help roadmap your journey to net-zero and forecast expenses for the balance sheet.
The first component of this is to decide which scopes of emissions you will compensate for throughout the journey. Under the SBT criteria, residual emissions at net-zero should be removed – but using high-quality carbon credits today as a launchpad to future ambition can bring a plethora of benefits, including benefits for climate action, and engaging investors and other stakeholders. Depending on your organisation’s ambition and targets, your offsetting requirements will vary.
4 Engaging stakeholders to build a cost-effective offset programme aligned to your business operations
Before purchasing credits, or contracting for future years, organisations should think strategically about how to select the projects they will be supporting. EcoAct’s team has experience facilitating these discussions with a variety of stakeholders to define expectations from the programme and maximise value by selecting relevant projects.
Communicating your programme
Robust communication of an offset programme is critical to avoid greenwashing claims.
With organisations’ rightly receiving growing scrutiny on their climate action, and some governments limiting the claims that can be made (eg. French climate policy), overclaiming the impact of your offsetting activities, or wrongly situating offsetting in the hierarchy of ‘measure, reduce, offset’ could easily become detrimental. Efforts should be put into continually striving to communicate your programme effectively – from launching the programme, to thought leadership and beyond. Being clear on the measurable outcomes of your contributions, rather than those of other organisations, and framing sustainable development outcomes accurately without overstating, will go a long way to achieving this. Actions speak louder than words.
EcoAct’s dedicated advisory, portfolio and in-house marketing teams are well-versed in guiding organisations in identifying and supporting high-quality offsetting projects but also in developing their own projects based on their values and priorities. They can also support in communicating offsetting programmes with integrity and can help simplify the complexities of emerging changes.
Our experts remain at the forefront of climate policy and can assist throughout your organisation’s offsetting programme – from strategizing to project development.
