Companies are under growing pressure to reduce their environmental impact. Some of the pressure comes from internal sources – shareholders wanting their investments to be “green”, “sustainable” or “responsible,” for example. Other pressures are external. Think of customers who want lower carbon emissions from their suppliers’ products. Governments and regulators are requiring climate-related disclosures to be included in financial statements.
Some companies have responded to these pressures by committing to the Science Based Targets initiative (SBTi). This initiative provides organizations with a step-by-step process to progressively reduce their carbon emissions.
SBTi is founded on the scientific consensus that lessening the risks of climate warming requires carbon dioxide (CO2) emissions to come to an end by 2050. This is the SBTi “Net-Zero Standard.” Organizations that commit to that standard will reduce their emissions 90 per cent by 2050 using energy efficiency improvements, electrification and green power purchases.
Organizations may be able to reduce emissions by 90 per cent. They may not have a viable means to reduce the remaining 10 per cent, so they may look to carbon offsets to play a role.
Purchasing carbon offsets essentially pays someone else to take actions that lower CO2 emissions
However, not all carbon offsets are equal. Trustworthy carbon offsets must meet five criteria:
- Additional: The carbon reduction project must depend on selling the offset. If the carbon reduction would occur anyway, without the sale of the offset, the carbon reductions are not considered “additional.”
- Conservative: A conservative estimate risks understating, rather than overstating, the carbon emissions reduction. Where there is uncertainty, estimates resulting in fewer emissions reductions should be used.
- Permanent: Any emissions removed must be permanently removed, not temporarily stored.
- Exclusive: Carbon offsets can only be sold once. Just one entity can claim the credit for the carbon reduction.
- Harmless: Credits cannot be associated with projects that cause social, environmental, or legal harm.
Even within these criteria, there is a wide variety and quality to projects. For example, while forestry projects have long been considered permanent, their compliance with that criterion is being called into question as the number and breadth of wildfires increases due to hotter temperatures and widespread drought. Oregon’s Bootleg Fire burned large portions of the Green Diamond carbon offset project, releasing the emissions that had, in theory, been permanently stored there.
Another big question is whether the estimates around carbon offsets are being calculated conservatively.
Recent investigations into the Verified Carbon Standard certifier concluded that 90 per cent of its rainforest carbon credits were “phantom” and largely worthless. A 2022 Cambridge University study of the Verified Carbon Standard database suggested that the risk of deforestation was overstated by an average of 400 per cent.
The best credits to consider
The credits to consider are ones which directly measure or conservatively understate the emissions reduced. Companies going into the carbon offsets market should only purchase projects with minimal risk of emissions leakage or storage reversal. Carbon offsets should not only limit harm but provide broader economic and social benefits such as cleaner air, improved biodiversity, or employment opportunities.
To minimize the risk of purchasing worthless credits, buyers should review project documentation, including any third-party verification. They can interview the credit vendor and/or project team, and should pay attention to external project risk classifications.
Lower-risk projects tend to involve technical solutions. Examples are projects that: use CO2 as an input; capture, store, utilize or destroy methane; improve energy efficiency; or deploy small-scale renewable energy.
Agriculture and forestry projects, while common, end up being higher risk due to concerns about reduction estimates and permanence. Large-scale renewable projects also tend to be higher risk as viable offsets because of the difficulty of proving additionality.
Assessing carbon offsets requires time, money, and expertise
A company that lacks one or more of these resources can still confidently invest in carbon offsets using the assistance of a trusted advisor to provide an impartial third-party assessment of potential projects. Buyers can confidently make prudent decisions in their quest to reach net-zero emissions if they work with a reputable consultant who can evaluate the quality, risk, and price of the credits.