Reduce or Offset? Do Both. Here’s How.

Article | Read Time 6 min
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James Ramsay Director, Sustainability Solutions - EMEAI
Malavika Bambawale Managing Director, Sustainability Solutions - APAC
Melanie Wilneder Manager, Sustainability Solutions - LATAM
Net Zero Strategy
Decarbonization
Carbon Offsets

Carbon offsetting is a polarizing, frequently misunderstood concept. Some are highly skeptical of the practice, viewing it as an opportunity for polluters to continue their irresponsible ways without reducing their carbon emissions. Others see it simply as a short-term tactic for jump-starting the transition to Net Zero.

In truth, offsetting is a valid strategic tool for companies that are serious and committed to the Race to Zero. It certainly can unlock ambitious, near-term action. But it is even more important as a lever in a longer-term decarbonization strategy.

There is a scientific consensus that supports using high-quality carbon offsets, avoidance and removals to neutralize residual emissions that have not yet been reduced by other means. That’s one reason the global market for carbon offsets is primed to grow strongly, from $6 billion in 2019 to $200 billion by 2050.

How does carbon offsetting work?

But realizing the full potential of offsetting – and speeding your transition to Net Zero – requires a disciplined, strategic approach. In particular, there are three areas you need to focus on and get right:

  1. Timing: It's important to determine when to integrate offsets into your Net Zero strategy. In general, you want to follow the mitigation hierarchy that prioritizes or does not compromise internal reductions.
  2. Quality: To avoid reputational risk, it’s advantageous to utilize high-quality avoided emissions and removals in your carbon neutrality strategy.
  3. Procurement Strategy: Recognize that offsetting is not a tactical credit purchase; it’s a strategic approach that is aligned with your corporate vision and values.

Timing

Integrate Offsets with Other Levers of Decarbonization at the Right Time

As we said, timing is critical. You can introduce offsets immediately, while launching your decarbonization efforts. Or, you can phase them in after establishing your decarbonization process. Either way, you should not delay in determining the right time to deploy offsets. Make that decision early, while you are setting your Net Zero strategy. Consider two basic timing options:

1. Offset Immediately

This enables you to address today’s emissions immediately, rather than letting them continue to build up in the atmosphere. At the same time, you can be working to displace offsets by ramping up internal decarbonization measures.

The visual below illustrates the strategy of a company in the food and consumer sector. Having relatively light manufacturing emissions, the company chose to mitigate its emissions immediately by investing in the regeneration of natural ecosystems. Realizing that perfection is the enemy of progress, the company took swift action in several areas, including transitioning to green power and increasing efficiency across its value chain.

Food and Consumer Goods Company Offsets Immediately

Food and Consumer Goods Company Offsets Immediately

2. Transform, Then Phase-in Offsets

Phasing-in allows you to incorporate high-quality offsets after you’ve initiated significant operational changes within your organization.

The graph below depicts an initiative by an emissions-intensive industrial manufacturer. Because its Scope 1 and Scope 2 emissions are high, the company has started down the path of ambitious transformation to decarbonize internally while also reducing its Scope 3 emissions through collaboration with suppliers and clients. It will later utilize offsets as a temporary lever to address residual emissions and achieve carbon neutrality in perpetuity, aligned with science-based and national Net Zero targets.

Industrial Manufacturer Phases in Offsets over time

Industrial Manufacturer Phases in Offsets over time

Quality

Utilize Both Avoided Emissions and Removal Credits

Whether you deploy offsets immediately or a few years into your decarbonization journey, it’s very important that you purchase quality credits. As long as the credits are high quality, you can utilize both types of carbon credits – the simpler, less expensive avoidance credits and the more costly carbon removal credits.

It’s true that carbon avoidance credits have become commoditized and are less expensive than removal credits. However, large organizations with bigger budgets have the opportunity to seed the market for removal credits, scaling them to make them more widely accessible and, in the case of technological removals, more cost effective over time.

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Even if offsets from carbon removal projects are more costly, it’s very likely that you’ll need to utilize them. Interim guidance from the Science-Based Targets Initiative (SBTi) suggests that purchasing these offsets - whether they are nature-based or technology projects that remove carbon from the atmosphere - will be necessary to achieve Net Zero in the target year.

How can you determine and validate the quality of the carbon offsets you purchase?

The highest quality offsets meet the following standards and are recognized by a credible program such as the Verified Carbon Standard:

  1. Measurable. That is, emissions are quantifiable using recognized measurement tools against a credible baseline.
  2. Additional. This means the project would not be possible without the addition of carbon finance.
  3. Independently audited, assured by an independent third-party.
  4. Permanent, meaning the benefits from reductions are not reversible.
  5. Avoid leakage. That is, the project will not cause higher emissions outside its boundary.
  6. Unique, and only can be used once.
  7. Has no adverse effect on the environment, including biodiversity, water quality and local livelihoods.
  8. Produce socio-economic benefits for local communities.

Procurement

Shift From Tactical Credit Purchases to a Strategic Investment

In procuring offsets, it’s important to adopt a strategic approach. That means you might need to shift from a volume-based, price-driven “spot” purchasing approach to a multi-year offset strategy that is aligned with your overall Net Zero strategy and supports additional goals your company may have, such as bio-diversity protection, job creation, or female empowerment.

Certainly, your approach will be science-based, but it should also allow your company to adapt to changing market trends, regulations, or requirements from different climate standards that you choose to follow.

Align your procurement approach and investments with your strategic intent. A more strategic approach typically anchors on longer-term investments, in which the company has a greater stake in and control over projects.

You can either buy or generate offsets by choosing from these four options: Trade, Purchase, Develop and Fund. Offsets can always be bought in the secondary market or from a project owner. But the more strategic approach is to generate projects yourself through financial arrangements like joint ventures or Special Purpose Vehicles (SPVs), or by investing capital in partnership with other companies. Companies that are developing or funding their own projects are more likely to maximize economic, social and environmental value in the long term.

Build a Trustworthy Global Market for Carbon Offsets

There is no single path to Net Zero and the journey will be different across industries. That said, most companies could accelerate their pathway by temporarily utilizing high-quality offsets. As you align stakeholders around your Net Zero strategy and principles, make sure you also secure agreement on an offset strategy that is based on your emissions profile, decarbonization levers and business strategy. Get this right and you will move faster toward Net Zero. Beyond that, you will also be contributing toward building a more trustworthy market for offsets, helping to accelerate the world’s transition to Net Zero.

The authors would like to thank Clemence Fischer and Kim Carnahan for their valuable input in developing this article.


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