March 21, 2022
Carbon Offsets 101: A Guide for Going Climate Neutral
14 Min Read
Three hundred years ago, over half of all habitable land on earth was covered by forests. Today, forests cover just 31% of global land area, only half of which are relatively intact. Agricultural expansion and growing demand for fossil fuels have been major drivers of forest loss. Why does this matter? Deforestation underpins many present-day challenges we face such as climate change, drought, extreme weather, pollution, drought, poverty, the spread of disease and more. According to the latest Intergovernmental Panel on Climate Change (IPCC) report, “Current unsustainable development patterns are increasing exposure of ecosystems and people to climate hazards… [and] maintaining the resilience of biodiversity and ecosystem services at a global scale depends on equitable conservation of approximately 30% to 50% of Earth’s land, freshwater, and ocean areas…” But how can businesses help? Carbon offsets provide an exciting opportunity for companies to not only mitigate their own emissions but also be part of the solution.
Download the whitepaper to learn more about setting corporate climate goals.
Protecting forests for future generations through offsets
The United Nations proclaimed March 21 as the International Day of Forests a decade ago. It is a day to celebrate the importance of all types of forests and the benefits they bring such as fresh water, food, shelter, medicine, improved health, and more. Protecting forests is essential to the well-being of current and future generations, but we continue to lose forests at an alarming rate: approximately 10 million hectares a year (the size of Iceland). Carbon offset programs offer a ray of hope by bringing finance to natural resources through voluntary carbon offset markets. These markets have experienced strong growth, particularly in the last three years. According to the most recent Ecosystem Marketplace’s State of the Voluntary Carbon Markets, new offset issuances were 20% higher in 2021 than the previous year, and forest carbon offsets grew by 88%.
In honor of International Forests Day, I sat down with Andrea Warburton, Senior Climate Action Expert at Planetly by OneTrust, to learn more about carbon offsets, how they work, and how they can help companies go climate neutral.
1 – How did you end up in the carbon offsetting field and what does a typical day look like?
I manage our offsetting operations which includes everything from sourcing high quality carbon offset projects to working with project developers around the world to advising our clients. Prior to joining Planetly, I worked as a retail buyer for designer brands in London and Berlin, but I really wanted to pursue a career in sustainability and climate change mitigation. After completing the Business Sustainability Management course through the University of Cambridge, I came across a sourcing role opportunity at Planetly which felt like a great fit for my experience and interest in climate action. Now that Planetly is part of OneTrust, I’m excited to see how we scale and create even greater impact.
2 – What is a carbon offset?
A carbon offset represents a reduction or removal of greenhouse gas (GHG) emissions from the atmosphere through a carbon offset project. These projects can be anything from a solar farm in India to an afforestation project in Costa Rica. One carbon offset certificate, or carbon offset credit, represents one metric ton of carbon dioxide (CO2) or its equivalent greenhouse gas (CO2e) that is removed. Carbon offset credits can be exchanged between parties to offset emissions. By purchasing carbon offsets, companies can further reduce their emissions and move toward climate neutrality. But offsetting really needs to happen in conjunction with reduction: it should not be a free pass to just continue emitting.
Calculate your carbon footprint with accuracy: Carbon Accounting (Scope 1, 2, 3)
3 – How have offsets evolved over the past 20 years? What is the difference between the compliance and voluntary carbon markets?
To provide some context, there are two distinct carbon markets – the compliance and voluntary carbon market. Compliance markets started with the 1997 Kyoto Protocol, an international treaty that set national limits and target reductions on carbon emissions. To help countries meet these targets, the protocol implemented the Clean Development Mechanism (CDM), which allows developed countries to offset their carbon emissions by funding GHG emissions reducing projects in developing countries. The CDM also provides offset project assessment tools, as well as validating and monitoring the projects to ensure they produce authentic results. The Kyoto Protocol has since been superseded by the Paris Agreement, which established Nationally Determined Contributions (NDCs), or emissions reduction targets, for each participating country.
Global Emissions Covered by Compliance Market 1990 – 2021
The share of global emissions covered by regulation (compliance carbon market) has grown steadily since the 2015 Paris Agreement. It jumped from 5% in 2010 to 22% globally in 2021. (Source: JP Morgan)
Voluntary carbon markets really emerged after the compliance market as a way for individuals and companies to voluntarily offset their carbon emissions. To ensure that offset projects meet quality standards, voluntary offset markets have adopted the CDM certification system. The industry has also seen the rise of other verification standards such as the Gold Standard or Verified Carbon Standard (VCS). These certification systems have put stringent criteria in place to verify that offset projects not only achieve the stated emissions reductions but also do not negatively impact the local environment. Prior to these benchmarks, there were cases where projects had detrimental impacts even though they achieved emissions reductions. Today, the certification process helps avoid challenges like these by making sure the local community is engaged and biodiversity aspects are monitored and protected.
Voluntary Carbon Market Growth pre-2005 – 2021
Voluntary carbon credit trade prices and volumes by year, pre-2005 to August 2021. (Source: Forest Trends’ Ecosystem Marketplace Global Carbon Markets, 2021.)
4 – How do carbon offsets work?
Carbon offsets fund projects that reduce emissions elsewhere, such as through planting trees or generating renewable energy. Businesses that purchase offsets are contributing to one of these projects. Once a carbon offset is purchased, it is retired forever and cannot be re-sold again. To ensure emissions reductions are only counted once, a carbon offset project should only be set up under the compliance or voluntary carbon market – not both. For example, if a solar farm project in India is counting towards India’s NDC, offset credits should not also be sold to a buyer in Germany – that would be double counting. The increased stringency of offset standards helps prevent issues like this.
5 – If a nonprofit had purchased forested land in the past, could they sell offsets from that conservation project now? What is additionality?
Additionality is one of the most important criteria in offsetting. It’s a term used to describe the fact that the GHG reductions generated through an offset project would not have happened anyway. If the associated GHG reductions are not additional, then purchasing offset credits in lieu of reducing your own emissions would increase overall emissions, making climate change worse. One way to see if a project meets the additionality criteria is to compare it to a scenario where there is no revenue from the sale of carbon offsets. A developer, such as a nonprofit that owns land, must provide sufficient evidence that the project would not be possible without the support of carbon finance. Similarly, for afforestation initiatives, the developer would have to prove that trees weren’t cut down on the project area prior to implementation just to benefit from carbon finance.
6 – If a company purchases carbon credits that save 5,000 acres of forest this year, what happens next year? Retiring carbon credits.
A company emits every year, so achieving carbon neutrality depends on reducing first and then using carbon offsets to address any residual emissions. We only work with carbon offset projects that are certified to the strictest standards to ensure environmental integrity and impact, and we only sell offsets for emissions reductions that have already happened. In this scenario of a company purchasing offset credits for 5,000 acres of forest this year, those credits would be retired and cannot ever be used again. To offset emissions next year, the company would need to purchase newly issued credits (e.g., from additional carbon stored in forest growth or project expansion), or select credits issued by another offset project.
7 – Does that mean the land remains conserved even after the credit is retired?
Yes, the project area remains the same unless it is expanded, or the biomass increases. For example, it could be a standing forest, but further growth and regeneration means more carbon is sequestered. The project developer uses the finance from the sale of the carbon credits to continue operating the project and maintain the trees that have been planted.
8 – How can you confirm that the carbon removal represented by a carbon credit remains removed? What is permanence?
Nature-based projects are set up with a crediting period that can range between 20-60 years, depending on the certification body and project type. During this timeframe, biomass growth is monitored, stored carbon is calculated and verified, and carbon credits are then issued. High-quality certification standards have established rigorous criteria and mechanisms to verify the integrity and permanence of carbon offsets that are produced. Risk mitigations must be in place to protect against biomass storage loss. These can include requirements for risk assessments during the design phase, risk buffers where a percentage of credits are not sold, and frequent monitoring. Risk buffers provide insurance against any GHG reduction reversals – if reversal occurs, buffer credits are retired on behalf of the project’s buyers. Precise monitoring systems also help ensure that offset projects provide the highest quality additional and permanent emissions reductions available in carbon offset markets.
9 – Who develops carbon offset projects? Are they usually implemented by nonprofits or other organizations?
Offsetting projects can be developed by nonprofits, non-governmental organizations (NGOs), or private entities. The most important thing is ensuring the projects are certified under benchmark standards. Two of the leading standards in the voluntary carbon market are the Gold Standard and VCS. They are backed by environmental and business experts and organizations who came together to establish greater quality assurance in carbon markets. There are a few other standards that have good projects such as the American Carbon Registry in the U.S. and Plan Vivo, but we tend to work with The Gold Standard and VCS to ensure that all quality criteria are met.
10 – What are the characteristics of a high-quality carbon offset project?
We’ve already covered some of these, but high-quality carbon offset projects typically demonstrate the following characteristics:
- No double counting: The project is only operating under the voluntary carbon market and cannot be counted in compliance markets.
- Additionality: The project would not have otherwise happened without carbon finance.
- Scientific methodologies: Scientists are on-site to make sure the project is implemented correctly. For example, afforestation projects should plant native trees and have diversity in the trees being planted. Emissions reductions should also be calculated based on scientifically proven methodologies.
- Risk assessment and risk buffer: A risk assessment is included as part of the project design documentation and needs to assess all potential risks over the lifetime of the project and beyond. For example, will climate change cause wildfires, or could political instability prevent project monitoring in the future? In cases of high risk, the standard won’t approve the project. In cases of low risk, the project will still need to set aside some of the emissions reduction credits to not be sold as a risk buffer.
- Permanence: How long will the carbon removal from one offset be in place? This accounts for questions like land ownership, risk of natural disasters, etc.
- No negative impact: The project has not and will not cause adverse impacts to the local environment or community. Nature-based projects must also provide evidence that the project aligns with the Climate, Community, and Biodiversity Standards (CCBS).
- Minimal leakage: Implementing the project won’t cause emissions-producing activities to “leak” or shift elsewhere. For example, a forest conservation project leading to deforestation in another area.
- Baseline and annual monitoring: The project should be monitored annually to verify the carbon reductions produced compared to the baseline. The baseline is an estimate of how much carbon would have been removed without the project being implemented.
- Third party verification: The initial implementation and follow-up monitoring is verified by independent third parties.
11 – Do you have a favorite story where you’ve seen a carbon offset project make a real difference?
One of my personal favorites is the Borneo Rainforest REDD+ Project. Borneo has seen significant deforestation from palm oil plantations, which have also had devastating impacts on biodiversity and soil degradation. This project is saving nearly 65,000 hectares of carbon-rich peat swamp forests from being converted into palm oil plantations. It is also providing a wildlife reserve for endangered species like the orangutan. Over and above the climate and conservation benefits, it’s quite touching to work directly with the project developers and see the difference they are making on the ground. This is our best-selling project which several of our clients are supporting as part of their climate neutrality strategies: Penta, Media and Games Invest (MGI), Exasol, Speedinvest, home24, to name a few.
Borneo Rainforest REDD+ Project benefits: The project activities prevent 3.5 million metric tons of CO2 equivalent emissions each year. In addition, local communities are supported through training in sustainable agriculture, and biodiversity and wildlife habitat are protected. In total, more than 120 threatened and endangered species live in the project area, including the endangered Bornean orangutan. The project is accredited by the Voluntary Carbon Standard (VCS) and the CCBS. It is also the first forest conservation project in the world to have its own contribution to the environment, biodiversity and social SDGs independently verified under the newly created Sustainable Development Verified Impact Standard (SD VISta).
12 – What are some examples of other types of carbon offset projects?
We work with clients to help them determine what the right offset portfolio is for their needs. For some clients, project location or sustainable development aspects are important factors, while others may look for a balance of environmental and societal impact. There are many types of offset projects with different focus areas: nature (forests, blue carbon), technology (renewable energy, methane capture, carbon capture and storage), or communities (clean water access, efficient cook stoves). One of the more recent developments in the market is carbon removal technologies, and it will be exciting to see how it develops. A few players to watch in this space include Climeworks, Charm Industrial, and Carbon Cure. I believe we will start to see carbon credits from projects like these in a few years.
13 – How do climate action platforms like Planetly by OneTrust help companies achieve carbon neutrality?
The spike in demand for offsetting really shows how many companies are committing to climate action. But carbon management is not simple: there’s a lot of data involved and it’s important to ensure that you are calculating your carbon footprint accurately to align with benchmarking standards. A carbon management platform like Planetly by OneTrust streamlines the path to net-zero. Clients can calculate, track, reduce and offset their carbon emissions in a single platform, while showcasing their commitment to carbon neutrality through standards-based reporting. It makes it easier for companies to pinpoint where emissions are taking place and make more informed decisions about where to reduce.
14 – What would be your top three tips for companies thinking about implementing carbon offsets?
First and foremost, offsetting can only be a solution in conjunction with reducing emissions. Secondly, the footprint calculation must be compliant with the GHG Protocol. Finally, make sure that offset projects are certified by industry standards and come from reputable providers that carry out a strict due diligence process, such as Planetly by OneTrust.
Download the whitepaper to learn more: The Guide for Setting Corporate Climate Goals
You may also be interested in learning more about upcoming climate disclosure regulations such as the Corporate Reporting Sustainability Directive (CSRD) in Europe and proposed rules in the US for federal suppliers, companies, and investment advisors.