Riverine communities in the Marajó Island, state of Pará, Brazil. Marajó Project

What is carbon offsetting?

What is carbon offsetting?

Offsetting is a mechanism used to finance greenhouse gas (GHG) emission reductions, removal or sequestration equivalent to the residual emissions, or beyond, of an organisation, business or territory. This financing is achieved through the purchase of carbon credits in the voluntary carbon market (VCM), facilitating a measured and verified reduction, avoidance or removal of GHG emissions elsewhere while supporting sustainable development, often in countries that need it most.

Why carbon offsetting is a vital tool in the climate change ‘toolbox’

The need for urgent climate action has never been more apparent. According to the Intergovernmental Panel on Climate Change (IPCC), the world has until 2030 to cut human-caused CO2 in half to maintain a 50% chance of avoiding the worst effects of climate change. To do this, CO2 emissions need to reach net-zero where emissions are in balance with removals by 2050. Reducing greenhouse gas (GHG) emissions is vital. There is no replacing the urgent need for emissions reductions along a trajectory aligned with limiting global warming to 1.5°C as advised by science. Any credible corporate climate strategy must prioritise this goal and urgently reduce emissions.

However, offsetting also has a key role to play alongside any emissions reduction strategy. Verified offsetting projects that compensate for residual emissions finance crucial sustainable development and preserve existing carbon sinks which are being depleted at an alarming rate. Funding for nature-based solutions is failing. The State of Finance for Nature in the G20, published in January 2022 revealed that current G20 investment in nature-based solutions is insufficient. Considering the small window of time, neither reducing emissions nor preserving natural sinks are enough on their own. Effective net-zero strategies need to pursue both, and organisations must use every tool at their disposal to tackle the climate crisis. They must take full responsibility for the emissions that are still being generated in their day-to-day activities, once all technically and economically feasible opportunities to reduce emissions in all scopes and sectors have been implemented.

Offsetting is effectively putting a price on carbon for organisations, which will push them to accelerate internal reductions, including supply chain emissions, justify investment into new low-carbon business models, and will ultimately demonstrate that business as usual is no longer an option.

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Examples of carbon offsetting

Forestry and conservation

These projects preserve or regenerate natural carbon sinks (e.g., tree planting, protection of existing forests at high risk of deforestation, etc.). These projects also offer many benefits besides carbon reduction, such as the protection of ecosystems and biodiversity, and wider social and economic benefits, such as local job creation and health care for local communities.

Renewable energy

These projects avoid GHG emissions by moving from fossil fuel derived energy to renewable energy (e.g., solar, wind, biomass, etc.). They provide communities and regions with access to renewable technology while also creating jobs locally.

Waste to energy

These projects use urban, industrial, or agricultural waste as raw material and turn it into a useable form of energy, which reduces emissions from burning fossil fuels and/or deforesting land (e.g., capturing methane and converting it into electricity), providing local communities with access to clean and affordable energy while also avoiding the air pollution caused by burning solid fuels, such as firewood.

It is key to support offsetting projects that deliver both environmental and social benefits for people, aligned with the United Nations’ 17 Sustainable Development Goals (SDGs), which includes objectives like reducing poverty in all its forms, providing clean water and sanitation for all, achieving gender equality and empowering all women and girls, etc. Beyond climate protection, offsetting projects should focus on achieving tangible and measurable benefits to the communities in which they operate, empowering them to have ownership of a more sustainable future.

For example, EcoAct’s award-winning Sudan Low Smoke Cookstoves project, the first to be developed in a conflict zone, is delivering health and economic benefits to Sudanese families, with particular focus on female empowerment.

The Hifadhi-Livelihoods Cleaner Cookstoves project (financed by The Livelihood Fund and developed in partnership with EcoAct) is training local artisans and project officers to manage the distribution of better and cleaner cookstoves in rural Kenya, which has positive impacts on families, communities and the environment.

 

What is Carbon Offsetting Mangrove Planters Myanmar

Planters in Myanmar at the Deraytaw Myanmar Mangroves Project

Yucatán Peninsula, Mexico, where EcoAct is developing a mangrove restoration project with local partners

What are the benefits of offsetting projects?

As a global society, we need to implement multiple ways of tackling the climate crisis. This includes urgently counteracting deforestation, supporting reforestation and financing renewable technologies and the infrastructure needed to expand their reach. Offsetting projects are financing all these activities.

Within a robust climate strategy, carbon offsetting:

  • Is not, and should not be, only about trading carbon
  • Provides organisations with an additional tool to advance climate action
  • Puts a price on emitting carbon that motivates the emitter to reduce or stop the underlying emitting activities
  • Provides vital finance to protect and restore precious carbon sinks and natural habitats that are being lost at an alarming rate
  • Drives capital and low-carbon technology to local economies
  • Delivers wider environmental, social, and economic benefits, such as protection of ecosystems and endangered species, job creation, education, and healthcare to support equitable sustainable development. It is vitally important that offsetting projects add value beyond compensating GHG emissions

What is carbon offsetting?

According to the international standard for certifying carbon emissions reductions, the Verified Carbon Standard (VCS) or VERRA, by the end of 2019, the VCM had achieved over 608 million tonnes of CO2e in emission reductions or removals, which is the equivalent of more than 131 million cars taken off the road for a year.

What is the voluntary carbon market (VCM)?

Carbon markets can be both mandatory (compliance) schemes and voluntary programmes. The voluntary carbon market (VCM) operates outside the mandatory markets but in parallel, allowing companies, governments, NGOs and individuals to purchase carbon offsets voluntarily.

The VCM is playing a key role in raising corporate climate ambition. However, to ensure a material contribution to global decarbonisation efforts, organisations such as the International Carbon Reduction & Offset Alliance (ICROA) and the different certification bodies are working to make the VCM more robust, standardised, and transparent.

Project developers can apply to private entities and international standards to certify their projects and prove the amount of carbon emissions reduced, avoided, or removed. As a result of this certification, developers obtain voluntary carbon credits. These are stored at a personalised account in a registry owned or retained by the standard that certified the project.

Project developers can sell their credits directly to organisations, sell their credits through a broker or an exchange, or sell to a retailer who then resells the credits to organisations.

What is carbon offsetting?

What is a carbon credit?

One carbon credit is equivalent to one metric tonne of reduced, avoided or removed CO2 or equivalent CO2. Once purchased, the credit is then retired through publicly accessible emission registries held by international standards and global exchanges. When a credit is used for offsetting, it becomes an offset, and the credit is permanently retired so it cannot be reused (for transparency and accountability, carbon credits are assigned serial numbers).

Riverine communities in the Marajó Island, state of Pará, Brazil. Marajó Project

Wind turbines, Aegean Wind Project, Turkey

Why is there such variation in price of carbon credits?

The carbon market like any other market is driven by supply and demand, competition, and competitive pricing. In addition, market dynamics mean that project developers adjust their pricing to reflect market demand.

The voluntary carbon market encompasses many different project types in many different locations. As well as a range of co-benefits (such as employment opportunities for local communities or education programmes), each project has a unique scope that impacts the cost structure. This has a direct effect on operational cost and is among the reasons why voluntary carbon credits vary in price.

Beyond operational costs, the geography of the project, delivery time and the different types of projects, the price of a carbon credit is also influenced by:

  • Volume of credits purchased at a time – as in any other market, the higher the volume the lower the price.
  • Credit vintage – the vintage of a carbon offset refers to the year that its associated credits were issued. Generally, carbon credits are issued once they complete a third-party verification. The older the vintage the cheaper the price. Usually, organisations seek out carbon offsets with vintages around the same timeframe as the residual emissions that they are looking to offset.

It is important to always consider that the price of a carbon credit must account for the costs of setting up a project, its ongoing monitoring, and the cost of gaining verification. Most importantly, it must enable its long-term viability.

How do we ensure emission reductions and other social and economic benefits are taking place?

Only credits from third-party accredited projects, adhering to internationally recognised standards should be considered. Verified carbon offsetting projects ensure that the credits are high-quality and offer measured emissions reductions, which have been subject to a rigorous auditing process. They also ensure that the projects provide additional and measured value to the communities in which they operate, and that these do not negatively impact the ability of local communities to earn their livelihoods, as well as protect local and indigenous people’s rights.

The Verified Carbon Standard (VCS) or VERRA also requires projects to establish mechanisms for communication with local stakeholders during project design and implementation, so concerns can be raised about any potential negative impacts and must demonstrate to the auditor at validation and every verification that it has taken due account of all, and any input received.

The feasibility and effectiveness of projects are a priority for EcoAct. We only engage with projects that have been certified by internationally recognised standards. These projects are subject to rigorous auditing processes that ensure that the project adheres to the following criteria:

  • Additionality: reductions in emissions achieved by the project are supplementary to what would have happened in the absence of the payments derived from the sale of carbon credits.
  • Permanence: refers to emission reductions being ‘permanent’ and representing a long-term mitigation benefit. Measures are in place to limit the risk of reversal of CO2 emission reductions to ensure their permanence.
  • No leakage: the mitigation activity does not lead to the increase of emissions outside the boundaries of the activity.
  • Measurability: net GHG emission reductions or removals by sinks are quantifiable using recognised conservative methods against a credible baseline.
  • Independent auditing: mitigation activities and their emission reductions are validated and verified by independent third-party auditing bodies. Activities and emission reductions are assessed against the applied methodologies.
  • No negative impact on local populations: mitigation activities being implemented do not lead to negative impact or harm to local communities.
  • No double counting: to ensure the environmental integrity of mitigation activities, emission reductions or units cannot be claimed or accounted more than once. The new accounting framework in Article 6.2 of the Paris Climate Agreement addresses the critical issue of accounting for internationally transferred mitigation outcomes (ITMOs) to avoid double-counting, both by the country obtaining them and the country supplying them.

To ensure the robustness of the carbon credits being sold, EcoAct also undertakes due diligence process through our EcoScore©, that rigorously assesses more than 30 criteria around seven main risks categories (political, legal, financial, communication, social, environmental and industrial). Our EcoScore© allows us to select the best projects through a risk management matrix designed in accordance with international standards on risk management, notably ISO 31000.

Cooking with a cookstove, Kumasi Stoves Project in Ghana

Forest patrol to monitor and protect against illegal logging and hunting. Anourok Cambodia Forestry Project

How can we ensure the permanence of offsetting projects?

Climate change is already having a lasting impact on global ecosystems, with rising sea levels, frequent flooding, wild fires, droughts, etc. All these risks must be better integrated not only into carbon finance but also (and above all) into all environmental projects.

As part of the certification process, carbon standards require projects to conduct a risk analysis, including forecasting climate impacts at the project level, which must be demonstrated through project documentation and feasibility studies. For example, if part of a mangrove is expected to be eroded due to sea level rise within 100 years, then the appropriate VCS certification methodology requires that this area cannot be considered in the calculations unless an adaptation measure is implemented to prevent this erosion.

This is a difficult exercise that requires foresight at project level but allows us to reflect on the importance of adaptation actions. This is an important point to consider: to have a better chance of functioning, a carbon offset project, whether restoration, reforestation, afforestation, or conservation, must imperatively implement adaptation measures and consider climate risks.

In the case of extreme weather events, malicious acts (e.g., deliberate fires), or negligence, the Verified Carbon Standard (VCS) for example, has a process in place to mitigate risks and respond to a potential carbon loss.

In short, project developers have a real interest in doing everything possible to prevent this type of event from interfering in their projects by implementing the necessary actions and measures in advance.

How is the money from carbon credits invested?

For over 16 years EcoAct has been helping organisations develop offsetting strategies that best align with their values and priorities while setting and upholding best-practice standards. We are dedicated to both supporting and developing high-quality certified carbon offsetting projects that put nature and communities at their centre.

To this end, revenue from the sale of carbon credits is utilised to protect both projects and carbon credit buyers. We facilitate a revenue stream to support the implementation of projects, but we also provide clients with staff expertise, due diligence, and risk management, along with the compliance elements of carbon credits registry management and surrender.

EcoAct’s role, therefore, goes beyond trading carbon credits. It offers a set of services and expertise needed to guarantee high-quality certified carbon offsetting projects, and so ensures the environmental and social integrity of each carbon offsetting project we develop or support.

We regularly visit and audit projects ourselves and through a detailed on-site due diligence process and framework, we verify the reality of a project’s operations on the ground and impacts in the field. We also engage with project developers and local communities to understand and verify the methodologies used to assess emissions reductions and to hear the experiences of project beneficiaries.

Funds from the sale of carbon credits is also reinvested back into the market and into our research and innovation work to advance corporate climate action. An example is the first methodology developed by our Climate Innovation & Knowledge Centre for certifying conservation and preservation measures for seagrass beds, in cooperation with Interxion, Schneider Electric France, and the Calanques National Park.

Worker at cookstove factory, Kumasi Stoves Project, Ghana

Yucatán Peninsula, Mexico, where EcoAct is developing a mangrove restoration project with local partners

What are the criticisms of offsetting?

There is a perception that offsetting enables polluters to simply pay to continue polluting. Reducing emissions should always be the primary focus of a net-zero strategy.  If organisations are merely using offsets as a means to pay to pollute without engaging in reducing their emissions, they will be subject to increasing risks to their business both from the impacts of climate change as well as the risks associated with their reputation, their ability to gain investment and the demands of upcoming legislation. These organisations will not thrive long term.

Robust carbon offsetting strategies acknowledge that offsetting is no replacement for emissions reductions. Such strategies need to also detail the scopes the offsetting accounts for, and the number of credits purchased (in tCO2e), as well as include information about the projects supported in terms of environmental and social impacts generated.