By Lauren Mechak, Director, Program Development at ClimeCo 

The voluntary carbon offset market has grown rapidly over the last several years, representing over a billion USD in value in 2021. At the same time, the industry has faced scrutiny as new groups, such as the Taskforce on Scaling Voluntary Carbon Markets and Voluntary Carbon Market Integrity initiative, attempt to standardise and improve overall market integrity. For offset developers, this growth and attention is welcomed – however, it has also resulted in significant buyer confusion.

The landscape for voluntary carbon offset types today is complex, and the definition of offset quality is a moving target. Many buyers are in a state of “analysis paralysis” – remaining cautious and delaying as companies try to sort out an internal position.

Certain core principles, including conservative quantification, ensuring that offsets are additional, and addressing leakage, should always be treated thoughtfully and rigorously. But taking a step back, it can sometimes feel like we are missing the point of offsets. We need to think about the implications of a company using a carbon offset while observing the key principles that make offsetting a powerful tool.

1)  Offsets accelerate our transition to net-zero by funneling finance to sectors that otherwise have few incentives.

To completely decarbonise the economy, we need technological solutions and the incentives to deploy them. Incentives are vital because, for many companies, investing in decarbonisation can be financially or operationally risky. Further upstream, the technology provider must see a pathway to monetise their product.

Appropriate incentives are usually either a compliance requirement (the proverbial “stick”) or a financial payment (the “carrot”). Today, many highly emissive sectors face few greenhouse gas regulations in the US and globally. Moreover, regulatory bodies are slow-moving and subject to political whims.

The voluntary carbon market can provide a consistent financial incentive while also withstanding political change. As we increasingly standardise programs, carbon offsets are also becoming better understood by investors and bankers as a reliable form of income to invest in or lend money to.

Incentivising innovation is where voluntary markets really shine. Whether it be technology to incrementally increase the capture of ozone-depleting substances from refrigerant systems, or advanced systems to destroy nitrous oxide emissions, we have already seen the tremendous impact of private finance through voluntary carbon offset investment.

2)  Offsets can help contribute to sustainable development (if done correctly).

Countries throughout the world face a complex web of solutions and challenges to combat climate change, none more than developing and low-income countries. They face the conundrum of trying to grow their economies without relying on dirty energy sources or mass ecosystem destruction that were utilized by many of today’s wealthiest nations. Poor countries and communities are also less equipped to manage the impact of climate change due to a lack of funds for adaptation.

Carbon offset projects can create economic opportunities by providing employment or direct payments to these communities while creating healthy ecosystems and environments. For example, transitioning communities to clean cookstoves can improve health outcomes, while ecosystem restoration can provide direct community employment and improve local water quality, air quality, and biodiversity.

These positive “co-benefits” are predicated on a high level of community involvement from the start. Payments must be distributed equitably, and project design must not undermine a community’s ability to improve or maintain their lives. Moreover, offsetting is also not a panacea, and only represents one of many potential sustainable development solutions. If designed thoughtfully with equity and justice in mind, however, it can be a valuable tool.

3)  Offsets are a transitional tool for companies to address hard-to-abate emissions.

It says it right in the name – as they are typically used, carbon offsets will “offset” an emission elsewhere. This means that for every offset retired, we are granting a corporation the opportunity to claim a carbon reduction while still emitting. Although some companies may endeavour to be carbon negative, the majority plan on a 1:1 balance against their current emissions profile.

If offset programmes are not designed carefully and conservatively, the balance may not be 1:1. It could instead result in corporate permission to pollute without any responsibility. Highly credible offset registries, such as the Climate Action Reserve, Verra, American Carbon Registry, and Gold Standard, maintain important stringency standards and have cultivated buyer trust. Continuing to support and strengthen these standards is vital for market integrity.

Companies must also strive to internally decarbonise. Offsets can be used to account for the most hard-to-abate areas of a company’s emissions profile as they work on longer-term solutions. In this way, offsets help transition a company to net-zero while taking responsibility now for unavoidable emissions that occur during the process.

Quality and rigour should always be core to any carbon offset project. But the point of offsetting – the “why” – should also be examined closely, prioritising effectiveness and decarbonisation speed. Responsible companies hoping to get out of the “paralysis zone” should keep in mind the purpose of their decision to offset, the outcomes created from their offsets beyond just a metric ton of CO2, and the magnitude and measurability of the project. Hopefully, this coordinated effort will unlock the maximum potential of voluntary offsets and help drive the deep decarbonisation that our society needs.