Many organizations have embraced carbon offsets as a valuable tool in the drive toward net zero, and they are increasingly being relied on in decarbonization plans.¹ This article provides background on carbon offsets and explores their potential strengths and the challenges they may pose in practice.

What Are Carbon Offsets?

At its core, carbon offsetting involves avoiding, removing or reducing carbon emissions in one place to balance out carbon emitted elsewhere.^2,3 Typically, carbon offsets are purchased on a trading market by companies, individuals or governments that want to offset the carbon they emit.

For example, a factory that emits 100 tons of CO₂ (carbon dioxide, a gas associated with global heating) could purchase 100 tons of CO₂e (carbon dioxide equivalent) offsets on a market to effectively reduce the factory’s net emissions to zero.

While there has been long-term growth in compliance markets such as those in the European Union and California, voluntary markets have experienced significant growth in recent years, offering companies additional avenues to purchase offsets.

Generally, carbon offsets are sold by programs and businesses that generate carbon savings. For example, a project that converts landfill gas into a source of energy could create carbon offsets based on the CO₂ it avoided emitting by using its waste gas. Similarly, a reforestation project could sell carbon offsets based on the CO₂ it stores by planting trees, which absorb CO₂ as they grow.⁴

While there are markets for various greenhouse gases, including methane, sulfur hexafluoride and others, the market for carbon is the largest. The carbon market is supported by various third-party organizations that certify CO₂ reduction or removal projects and verify the amount of CO₂ they offset.⁵

Carbon Offsets Use Case

Carbon offsets have grown in large part due to corporate net zero pledges and emissions reduction planning. Perhaps most importantly, for businesses that have limited scope to reduce their own emissions, offsets can be a core part of a net zero strategy.⁶

Consider, for example, ocean shipping. While there are ways to make ships more energy efficient, currently it is not technologically feasible to reduce ship emissions to zero — transoceanic cargo ships cannot safely be made electric or powered by renewable sources. Carbon offsets can help compensate for the necessity of shipping emissions by reducing emissions elsewhere in the economy.

In this way, net zero emissions at the global level may be achieved even while some necessary industries continue to emit greenhouse gases. This “whole economy approach” is arguably key to a smooth climate transition, making global net zero a more realistic and less disruptive goal.

Another advantage of offsetting is that it may help finance the growth of beneficial projects and technologies that may not otherwise receive funding. Green energy startups, reforestation projects and carbon-reducing community-based initiatives like biofuel replacement could all benefit from selling carbon offsets to raise much-needed capital.

Carbon Offset Controversy

Despite its advantages, carbon offsetting has been controversial at times. In large part, this is because while the basic idea is sound, in practice, the industry has several core problems.

Credible Certification

Multiple investigations have found that many so-called “certified” CO₂ reduction projects do not, in fact, successfully reduce, avoid or eliminate emissions. The carbon certification industry has been criticized for relying on imperfect measurement methodologies and having a lack of transparency around the criteria used to certify projects. This lack of credibility is exacerbated by an absence of robust global or national standards for measuring and verifying CO₂ savings.⁷ Along with the booming carbon credit market, many argue the carbon credit industry is faced with a moral hazard in the process of verifying new carbon offset projects.

Effectiveness

A more fundamental issue is that some scientists believe the whole economy approach does not work in practice. They argue that the “ton is a ton” approach used in CO₂ markets (tons of CO₂ are considered equivalent and fungible) is problematic because it does not account for the variable environmental impacts of different forms  of carbon. In other words, reducing one type of carbon by, say, replacing wood-burning stoves in an equatorial region may not actually offset the climate impact of a ton of carbon gas emitted in the far north.

Similarly, many climate scientists point out that some carbon offset projects may not work as planned. For example, many projects plant trees to sequester atmospheric CO₂. However, the carbon stored in trees may not stay locked in — forests can be felled or burned, thereby undoing their CO₂ reduction benefits.⁸

Glenmede Climate Change Investment Specialist Melanie Fornes explains that to be truly effective, carbon offsets must meet exacting standards. Specifically, they must be:

• Real: Their reductions must be accurately measurable using scientifically based protocols.
• Additional: Their reductions must be additional to what would have happened if the project was not carried out (counterfactual emissions removal).
• Verifiable: Their reductions must be independently verified by an accredited third party and subject to extensive data collection and review before credit generation.
• Enforceable: There must be undisputed ownership of the reductions and no double counting of offsets.
• Permanent: Any net reversal in reductions must be accounted for and compensated by the applicable registry through buffer reserves.

Offsets that fail to meet these standards do not truly support the goal of net zero emissions.

Impact on Emerging and Frontier Markets

Many observers also argue that carbon offsetting may exacerbate global inequalities. This is because, in general, emerging and frontier markets are paid to offset carbon through initiatives like reforestation, while developed economies continue emitting carbon as part of their resource-intensive lifestyle.

In addition, nature-based offset projects, which are typically located in resource-rich emerging and frontier markets, can have a range of adverse effects, particularly in countries grappling with governance issues and corruption. These projects can have unintended consequences for their host nations’ economies and politics.

Insufficiency

Finally, and most importantly, some argue that carbon offsetting is simply a way for companies to avoid making tough but necessary changes to how they do business. Rather than rethinking their production and operational strategies to build a truly low-carbon economy, companies simply buy offsets, which may or may not represent real carbon reductions in practice.⁹

Many argue that offsets reinforce “business as usual” for companies when dramatic change is needed. That is why investors are increasingly asking public companies to show how they plan to slash emissions from their business model rather than relying on carbon credits.

Carbon Offsets and the Climate Investment Space

Despite growing controversy, carbon offsets are a high-growth emerging asset class. Energy company Shell expects that the voluntary carbon offset market, worth around $2 billion in 2021, will grow to be valued at $10-$40 billion by 2030.¹⁰

Therefore, companies and governments should focus on building a more robust, reliable, transparent and credible carbon offset industry and voluntary markets more broadly. This would involve the development of global and national standards for certification, improvements in third-party certifiers’ governance and a better scientific understanding of how to effectively offset emissions to increase overall quality, liquidity and availability of offsets.

Above all, however, businesses and governments should recognize that carbon offsets alone are not enough to transition into a resource-efficient, low-carbon world.