Carbon Offsets: A Critical Tool to Achieve Net Zero

The scale and pace of emissions reductions needed to reach Net Zero by 2050 and limit global warming to 1.5 degrees has spurred governments and organisations to ramp up their carbon reduction commitments, but there is a still a significant gap between where we are headed and where we need to be. Whether critics agree or not, this gap cannot be fully closed without high quality carbon offsets serving as a complementary activity to decarbonisation efforts.

In this podcast, organised together with the Consumer Goods Forum, our Director of Sustainability Solutions, James Ramsay, Grants and Stakeholder Manager of ENGIE Energy Access, Nawa Luywa, and Managing Partner of The Shared Wood Company, Clément Chenost, share their thoughts on the potential of various offsetting and nature-based solutions to mitigate the climate crisis.

Tune in to the podcast for valuable insights on the opportunities offsetting presents for meeting our Net Zero ambitions.

Observation 1: Integration Into Corporate Decarbonisation Strategies

When deployed to complement an ambitious operational and supply chain decarbonisation programme, carbon offsetting is not a license to pollute; it is a valuable way to address residual emissions while funding a range of carbon reduction projects. Given the urgency to mitigate climate change, we must use every tool available. However, the voluntary carbon market is rapidly growing and evolving to meet the scale of this challenge. To navigate this market successfully, organisations must gain knowledge and understanding and start developing supply pipelines well ahead of their target dates.

Observation 2: Critical Impact on Climate Change

Nature is part of the climate problem, as well as an important solution. Offsetting projects focusing on nature-based solutions that either prevent deforestation or remove CO₂ from the atmosphere through reforestation and forest management are critical elements of the climate equation. The impact of these projects goes far beyond carbon reduction, supporting communities and restoring biodiversity and ecosystems. While there are challenges and risks to navigate, accelerating support for these projects is critical to meeting our global climate goals.

Observation 3: Social Impact on Communities

Carbon projects don’t just involve trees. They can also deliver life-changing sustainable energy solutions to people in need. Companies can use offsetting credits to support carbon financing mechanisms that make sustainable projects affordable and accessible to some of the most vulnerable communities in the world.

Transcript Edited for Clarity

Louise: Hello and welcome to the latest episode of The CGF podcast with me, Louise Chester. If you don't know us, the Consumer Goods Forum is a CEO-led organization that brings consumer goods retailers and manufacturers together globally to help collaborate with other key stakeholders to secure consumer trust and drive positive change. Our eight coalitions of action have been designed to achieve a collective impact on critical industry issues related to environmental and social sustainability, health and wellness, end-to-end value chains, and food safety.

On our podcast, we’ll break down all these topics and more and engage in insightful conversations with leaders from in and outside the industry as they share their thoughts on the challenges facing our planet and its people.

I'm delighted to have three guests on today's episode. We'll begin by talking to ENGIE Impact’s Director of Sustainability Solutions, James Ramsay, and then Chapter Grants and Stakeholder Manager of ENGIE Energy Access, Nawa Luywa, and then the Managing Partner of the Shared Wood Company, Clément Chenost. All three joined today to share their thoughts on the potential of various offsetting in nature-based solutions to mitigate the climate crisis.

I'd like to begin today by talking quite broadly about companies setting ambitious climate change targets, as we've seen some significant momentum on that front in recent years. So, James, I'm going to start by asking you a question. What role do offsetting and the carbon market play in this?

James: Well, thank you, Louise. The backdrop here is that governments and organizations have been ramping up their climate change commitments in the face of scientific data, which tells us that we need to reduce emissions by 45% by 2030 and reach Net Zero by 2050 if we are to limit global warming to 1.5 degrees. But there is a challenge, to hit this target we have room to emit just another 400 billion tons of carbon emissions. And we are currently running at about 50 billion per annum. So, we've got about eight years of runway left at the current rate. So how are we doing? Well, there's good and bad news. The bad news is that there is a significant gap between where we are headed and where we need to be. Effectively, we started late and we're behind. But the good news is that 75% of global emissions are now covered by these ambitious organizational and country-level Net Zero targets, up from just 16% in 2019. These ambitious targets are where and why carbon offsets come into play.

First, getting to zero emissions, and getting there quickly is just not possible. So, at the base of every company, Net Zero commitment will be a requirement for carbon credits. Put simply, everybody who has a Net Zero commitment will be offsetting.

Secondly, reducing emissions in line with the 1.5 degrees target is in essence, the very minimum that a corporate or an organization is required to do. It's a licensed operating position, and of course, reducing emissions takes time. Even if you do have an ambitious decarbonization target, what do you do with the emissions you generate as you decarbonize — do you just ignore them? Well, if you're an organization with a leading climate position, I suggest that carbon markets provide a way for you to address this challenge and deal with what we term unavoidable and residual emissions. And it works by finding and financing emission reduction or removal opportunities outside your company boundary and taking credit for those, and that is the role of the carbon markets. With this concept in mind, companies have been doing this and have been voluntarily offsetting for about 20 years. Whilst it's been the target of much lively debate and criticism, the carbon markets can play a valuable climate role by doing two broad things.

1. The first is funding a smorgasbord of no regrets, low cost and often very high-impact projects that reduce emissions — such as providing and subsidizing clean energy to some of the two billion-plus households that still use traditional and carbon-intensive fuels to cook. It could also include protecting and restoring our forests, noting that deforestation accounts for up to 30% of global emissions. So, addressing these two things does combat climate change.
2. The second is that they provide a route to seed and accelerate development in frontier solutions. The sorts of frontier solutions that are needed to remove the billions of tons of carbon emissions we need to be removing by 2050, while also addressing some of the hard-to-decarbonize areas of the global economy.

Carbon markets provide solutions in these areas from the negative emission technologies. You might have heard of direct air capture. To technologies focused on enabling and supporting the production of green commodities, green cement, green hydrogen, sustainable aviation fuel, and so on. None of these are commercially feasible without the extra funding — a problem that carbon markets can solve. Offsetting and carbon markets can be fantastic complementary tools to corporate reduction. Done right they enable climate leadership and, put simply, given the challenge we face we need to use every tool in the armory. The final point here is, the climate doesn't discriminate against where emission reductions come from. It just needs lots of them.

Louise: Thanks, James, for setting the scene so nicely for us there. So, your reference that carbon offsetting has attracted quite a lively debate. Could you shed some more light on this and perhaps tell us what organizations should do to navigate the offsetting space?

James: There is a lot of noise around voluntary offsetting but, when you boil it down, I see two primary challenges. I label these a challenge around principle and a challenge around projects.

Let's take the first one, the challenge around the principle. The argument here is that offsetting is a distraction, which simply allows organizations to carry on omitting or draws capacity away from internal decarbonization activities. This distraction argument proposes that in effect, offsetting organizations can buy their way out of their climate obligations, and it gives them a license to pollute. In some circles, this has been challenged as a climate indulgence. Now, my response to this is straightforward. It is absolutely and fundamentally key that offsetting is a complimentary activity. Anyone using carbon credits to offset their emissions must be reducing their emissions, at least in line with a science-based target. So put simply, offsetting is an and, and not an all. To solve the climate challenge, organizations must invest in the transition. They must scale and support new low- or no-carbon technology. They must evolve and develop new business models, which ensembles to dramatically address the flow of emissions into the atmosphere. But, I would also add that offsetting puts a cost on the price of carbon. By putting a price on the carbon, it costs to emit carbon. And with carbon credit prices forecast to rise to $100 a ton by 2030, offsetting really will be no free meal.

The second one, and this is the argument around projects, is that these projects don't work. They over-report their impact and might even have happened anyway. My response as a practitioner and an advisor in this market is to onboard this. It is a nice market, and one in which standards and quality continue to evolve. Despite being a fan, I recognize that not all carbon credits are created equally. Therefore, corporate buyers must understand what they are buying as they would do for any other input. And really, this requires two things:

1. Corporate buyers who are engaging the space need to be able to determine quality, navigate the world of international carbon standards, and check that projects are additional and that they are dependent on climate finance — they wouldn't have happened anyway — and that the emission reductions are real and independently audited. That the emission reductions and removals are permanent. And, where there is a risk of reversal, for example, in nature-based projects, this is understood, accounted for, and mitigatory actions are put in place. And then finally, from a non-carbon point of view, they need to be able to ensure that the projects work with communities and engage with communities and not against them.
2. And this is where my second point comes in. Buyers should factor in that these projects do much more than save carbon. Indeed, the beauty and the majesty of the carbon markets is that many of these kinds of projects go way beyond carbon by restoring nature, addressing the biodiversity crisis, improving agricultural yields, and making a material impact on livelihoods, health outcomes and gender issues — often in vulnerable communities who are in parts of the world where climate change is already having a significant impact. What is interesting is that these sorts of outcomes are generally aligned with many organizational purpose statements. Indeed, the sorts of things that many consumer goods companies focus on, will appeal to, and resonate with their consumers and their products, and their employees too. So, to sum it up, navigate the voluntary carbon markets well, and navigate that this is part of a comprehensive decarbonization program. Companies can demonstrate how stakeholder capitalism works to the advantage of people, the planet, and profit.

Louise: Thank you, James, you have an absolute wealth of knowledge to share on the topic, I feel we could dedicate a whole episode just to this. But in the interest of time, I'm going to move us on and Clément I'm going to target you next. So, we know that nature-based projects are seen as an area with a lot of potential. Could you tell us more about how this works, and maybe give us an example of a project that you've worked on and its outcomes?

Clément: Nature-based projects they've got potential because nature is part of the problem. As James rightly said, 30% of CO₂ emissions are due to changes in land use. On the other side, nature is also part of the solution. As of today, roughly 50% of global CO₂ emissions are absorbed by ecosystems. So, there are ways and projects to optimize these positive climate benefits. I will try to list the different kinds of projects that companies can encounter. We're talking about removal projects and avoidance projects on the other side. So, removal projects are about absorbing and pumping CO₂ out of the atmosphere and storing the CO₂ in ecosystems in trees or sources. On the other side, avoidance projects target avoiding CO₂ emissions, especially due to forest degradation and deforestation, which are responsible for massive CO₂ emissions.

So to give you more details regarding removals, you've got three main types of projects.

1. The first one is afforestation, reforestation, and restoration projects. Basically, that's when you create a new forest, you recreate a forest from degraded land, from agricultural land. Through these new trees we store carbon that you can turn into credit. So that's the first technology.
2. The second type of project is improved forest management (IFM). There are different ways to manage a forest and there are ways to optimize its carbon storage. So how do you do that? By extending tree rotation, by harvesting less, and thanks to this kind of management, you can prove that you store more carbon in comparison to a forest that is managed on a conventional basis.
3. The third type of removal project is by developing agroecological practices, you can store more carbon in soils, but also you can introduce trees within farms. So that's what it's called agroforestry, it is a combination of forestry with agricultural activities, so you can also store carbon through this technology.

That's the two types of removal projects. So now let's talk about avoidance. You might have heard about the acronym RED. That stand for Reducing Emissions from Deforestation and forest degradation. This is about preserving these forests that are also carbon stocks. So how do you do that through conservation? The protection of forests is not enough. Because to reduce emissions, you must tackle the driver of deforestation, which are the development of agriculture and the end of poverty. Because, in the end, we have farmers that, to sustain their livelihood and feed their communities, are clearing forests. Alternatively, those kinds of projects must develop sustainable agroecological value chains to increase the revenues of the farmers that will not have to clear the additional surface of the forest. So, tackling deforestation is about bringing positive outcomes for the communities. To give you a concrete example of a project, our most recent project has been developed with ENGIE projects in France. European forests are threatened by climate change, we saw super fires last year, diseases, storms, and droughts that are affecting the European forests. We've launched an ambitious program to restore 3,000 hectares. In France, the western part of France was affected by fire this summer. So, we have launched an ambitious program to restore the degraded forest and store additional carbon. And also using new species that will be better at adapting to climate change in the future.

Louise: Great, thank you for sharing this example. I think it helps bring it to life for our listeners. So, I just wanted to dig into the challenges with you Clément, I know that projects like this are being challenged on issues such as permanence, could you elaborate on that?

Clément: There are a few challenges regarding nature-based solutions. One of them involves biological carbon. When you store this carbon in soil and in trees, as I previously said, there is a risk that this carbon might go back into the atmosphere. For example, if there is a fire and the tree is burned, the carbon will be released into the atmosphere. I believe there are no horrible solutions to tackle this issue. One of them involves developing an insurance system. When developing a project, you evaluate the risks of fire and so on. So, you will evaluate the risk that the carbon may go back into the atmosphere. It might be a risk of 10%, 30%, 50%, and you will have to put those credits into a buffer. All projects, all over the world, will put 10%, 20%, 30%, 40% of their credit into a buffer that will guarantee the integrity of the system. What is key here is to have the proper evaluation of the risk to have a buffer that is sufficient to guarantee the integrity of the whole system. There are other ways to mitigate this, but it's an example of how this issue of permanence is dealt with.

Louise: Thank you, Clément. Moving on to you Nawa. We know that carbon projects don't just involve trees. Perhaps you could share your experience on how carbon credits work as a funding mechanism.

Nawa: Indeed, carbon private projects don't just involve trees, and I'm speaking directly into the work that we do as ENGIE Energy Access. Our projects revolve around our mission to deliver life-changing, affordable, reliable, and sustainable energy solutions while putting our customers, client, or beneficiary at the center of it all. To give you just a little bit more background into who we are as ENGIE Energy Access, we operate in nine African countries, that being Benin, Cote d'Ivoire, Kenya, Mozambique, Nigeria, Rwanda, Tanzania, Uganda, and Zambia, where we have so far impacted over 8 million lives. Taking it back to the question, Africa has an energy deficit gap of over 600 million Africans that lack basic access to electricity. In doing our part, we intend to impact 20 million Africans with clean affordable energy by 2025. How do carbon credits work as a funding mechanism? Carbon credits are used by companies to compensate for their carbon emissions, by either adhering to emission allowances or contributing to sustainable projects. Stepping into ENGIE Energy Access when it comes to sustainable projects. Carbon financing particularly supports projects such as ours in a couple of ways.

Affordability, carbon financing mechanisms allow companies such as ours to reduce the cost of our products by subsidizing them because we understand that we operate in low-income countries. A practical example of our product, which cost about $150, can easily be brought down to cost $100. That $50 gap is easily covered by such funding mechanisms. We do offer financing options for our beneficiaries or our clients. We do that through support from various funding mechanisms such as carbon financing. It goes a step further in offering these financing options through our pay-as-you-go model. A customer then can procure a solar home system and pay for an extended period of about 24 months. To be honest, a company would not be profitable, or even at the very least, be able to cover its operational costs to loan out a product for 24 months. So, having support from financing mechanisms such as carbon financing allows us to go a step further for our clients. If they don't have the money to purchase a product outright, we give them that financing option that ranges from six months to eight months, 12 or even 24 months.

Lastly, carbon financing mechanisms can support projects such as ours through accessibility. Here I'm talking about last-mile distribution. Our customers typically tend to be in rural far-flung areas, so away from the grid, terrible terrain, and inaccessible roads that you cannot sometimes get to by vehicle. Through our large commission-based agent network, they're able to ensure that our products are available in those areas. They reach these people through quite tumultuous situations. It could be by foot, it could be by boat, it could be by bicycle. This just shows you the extent to which such funding mechanisms can support projects, such as ours. In practicality, our projects contribute immensely to the reduction of emissions through the various clean energy products that we provide our customers.

The impact that supports such as this can have on a project like ours goes beyond giving access to energy or basic lighting. The extent to which carbon financing can support our projects has been highlighted through its impact on our affordability vertical, accessibility, and financing options. All in all, it has a tremendous transformative power and shows that access to energy projects does go beyond basic lighting and this has a domino effect on our livelihoods and the enhancement of our communities. This brings to the table, productive views. The ability for school children to be able to study after hours. The female-headed households that cannot bring an income into their home through add-on appliances that you can bring into the energy mix. I hope I have been able to lay the ground for our listeners as to how far supporting projects such as ours through various mechanisms, but particularly through carbon financing, can impact projects that we do at ENGIE Energy Access.

Louise: It's so interesting to hear the examples of the work on the ground in Africa. I would like to hear from each of you, one key takeaway or piece of advice for the audience when they're thinking about offsetting as an option for decarbonizing that organization. Perhaps we could go in the order that you spoke.

James: My key takeaway would be that carbon credits and offsetting are not a commodity that can be bought tactically in isolation from any other activity. To engage with this market, and to do it well, organizations need to take a strategic approach to ensure that the program has a credible narrative that it nests within its reduction activities and that it aligns with corporate values. For consumer goods companies, this can work incredibly well where the project's aligned with their products and their target consumer goods. For example, household projects, such as Nawa’s for companies that target household expenditure, or food and beverage, or apparel companies supporting projects relevant to their agricultural supply chain, and nature-based projects like Clément’s. Given the boom in carbon offsetting, we are witnessing an experienced evolution in project standards and prices, and what we're seeing is that there are forecasts that prices will grow to over $100 a credit by 2030. With so many climate change targets going live around 2030, my strong advice here is to navigate this market successfully, organizations need to be building capacity and understanding now, to design and build roadmaps that will manage these price quality and supply and regulatory risks for when their targets go live in 2030. This takes time, so anyone with a 2030 target should probably start mapping that out about now.

Clément: My key takeaway would be that, when we talk about offsets and the contribution of forests, sometimes we hear that it is a distraction. The point I would like to make is that, while currently forests are being destroyed at an alarming rate, we do not know what level of the primary forest will remain in 2040 or 2050 if we continue with this rate of deforestation. Likewise, we discuss the potential of the ecosystem to absorb CO₂ from the atmosphere, but that's not immediate since a tree takes time to grow. If we want to have a significant level of removal and storage by 2040 and 2050, we must restore ecosystems right now.

My key takeaway is that we have no choice but to reduce our consumption of fossil fuels. And, we must also conserve ecosystems and restore them right now. That's the key to reaching our common objectives on climate as defined by the Paris Agreement. But that's also clear for another challenge, which is the preservation of biodiversity. I hope that ambitious objectives will be defined at the next Conference of the Parties in Montreal.

Nawa: My key takeaway, and essentially my call to action, is essential to call on the industry to support the work that we're doing in our various projects that we've been able to highlight in this discussion. We are all responsible for the current global environmental crisis, but we are not all equally responsible. Particularly, with the kind of audience that we have listening in, it's important that we channel back into projects that are championing improving the status of our environment and our climate. So, my call to action is to understand what this type of funding or this type of support can do for projects such as ours, and the transformative power that it has to change communities in rural areas that are marginalized and decentralized. I will conclude by saying, please jump onto this bandwagon and read more about the work that we are doing and how we can support it through mechanisms such as carbon financing.

Louise: Thank you so much to all three of you for sharing these valuable insights today, we've got so much to dig into on this topic. We've looked at the issue from a few angles and it's been particularly interesting to hear these concrete and global examples of projects, from forests to carbon credits that bring it to life for our audience. And of course, it's been great to hear how companies in our industry can navigate this challenge and make a difference with corporate offsetting. So, thank you to all three of you for taking the time today.