Carbon Offsets and Credits, Explained

Figure 1: The Carbon Credit Ecosystem, by the Paia Team

The urgency of our planet’s rising temperatures cannot be understated, and more and more companies and governments have announced net-zero goals.

But as companies and governments conceptualise their net-zero roadmaps, they will unavoidably continue to generate emissions in the short-term. To offset these emissions, companies have turned their attention to the promise of carbon offsets and carbon credits, weaving them into their wider decarbonisation strategies.

So what are carbon offsets? What are carbon credits? And how do they work?

This article is part of a new explanatory series by the Paia team, where we will break down everything you need to know about the most current topics. Stay tuned for more.

 

What are carbon offsets?

Every carbon offset represents 1 tonne of reduced CO2 or its greenhouse gas (GHG) equivalent, that compensates for emissions made elsewhere.

By purchasing carbon offsets, anyone can finance a certified climate action project, and bring about a real reduction in emissions elsewhere in the world. After all, GHGs are released into the global atmosphere, so no matter where the reduction happens, the same positive benefit is achieved.

Carbon offsets are an exciting way to channel capital to much-needed causes, while we look for the solutions and technology we need for hard-to-reduce emissions.

 

“Imagine how expensive it is for an already state-of-the-art factory to reduce its emissions by 30% versus a dirty coal plant in the Ukraine to reduce a similar amount of emissions by installing upgraded, new equipment. Carbon offsets enable capital to reduce emissions in the most efficient manner possible. Carbon offsets support technology transfer, international development, jobs and exports for developed countries and so forth.” From Carbonfund.org[i]

 

Are carbon credits and carbon offsets the same thing?

Yes, and no. Every carbon credit, like every carbon offset, also represents one tonne of emissions reduction, so both terms tend to be used interchangeably. Think of it this way – carbon credits are verified certificates for a unit of emissions reduction or carbon removal, enabling carbon offsets to be bought and sold in a carbon marketplace^[ii].

Carbon credits are referred to as tradeable instruments, and are certified by independent certification bodies. Every carbon credit is traceable and finite; once used to offset any organisation’s emissions, they are retired forever, and cannot be sold again.

 

What types of carbon offsets are there?

There are generally two types of carbon offsets – those that reduce emissions from existing or future operations (carbon avoidance), and those that remove existing carbon in the atmosphere (carbon removal).

Carbon avoidance projects commonly include renewable energy projects that enable the replacement of carbon-intensive fuel burning processes, such as wind farms, biomass energy, hydro electric dams, or biogas digesters.

 

Sichuan Rural Poor-Household Biogas Development Programme

In the province of Sichuan, coal and firewood burners in low-income households are being replaced with biogas digesters that recover methane from animal manure, as well as smoke-free cookstoves. By avoiding both the methane released by livestock, and carbon emissions from burning coal and firewood, this programme has the potential to save up to half of Switzerland’s annual emissions within its 28-year lifetime[iii].

Carbon removal projects include both nature-based solutions such as mangrove restoration, where new trees planted sequester carbon from the surrounding air, and technological solutions such as enhanced mineralisation and direct air capture.

 

How are carbon offsets and credits audited?

Carbon offset programs issue, transfer, and retire carbon credits, so they act as standard setters for carbon credit quality[iv]. On platforms such as Verra, Gold Standard, and the Clean Development Mechanism (CDM), project developers must undergo a strict registration process, involving rigorous auditing processes.

To verify that offsets projects indeed result in real emissions reduction, these offsets programs require the help of independent auditors. These auditors rely on science-based calculations to estimate carbon stocks and flows.

Before registration, project developers must engage auditors to validate their project methodology. Once the project has begun operating, auditors must be engaged to routinely monitor, report, and verify (MRF) the emissions reductions once again.

 

What makes a reliable carbon offset and credit?

What should you consider before you buy a carbon offset, or finance an offsets project?

Additionality

Additionality simply means that the emissions reduction or removal must be additional to, or on top of, what would have happened without the carbon offset project. If the reductions would have happened anyway, the offset cannot be considered additional.

But this is quite hard to determine in practice. For a forest conservation project to be considered additional, project developers must show that the forest would have been otherwise harvested and cut down. For a renewable energy project involving the installation of a windfarm, the project developer must show that the farm would not have been built anyway because of existing government incentives.

Therefore, it is better to ask, “How likely is the project to be additional?”

Permanence

It may sometimes be difficult to guarantee that carbon captured will be kept out of the atmosphere forever. For example, a bushfire may consume trees planted in a reforestration project, suddenly releasing the carbon stored back into the air. More permanent carbon capture technologies are still undergoing research and development.

Leakage

Offsets projects should not accidentally encourage the “leakage” of emissions elsewhere. For example, protecting one area of the forest may lead to deforestation in unprotected areas, if this risk is not accounted for in project design. Such an outcome would negate any benefits from the offsets project.

Leakage also extends beyond emissions – causing social harm would also take away from any successfully reduced emissions. Offsets projects should ideally bring about co-benefits, such as improving the livelihoods of local communities through providing new jobs. They should not inadvertently cause damage, such as violating the indigenous rights of people living around the project area.

 

Where can you buy and sell carbon credits?

Financial transactions for carbon credits, once issued, are handled on carbon exchanges, or through brokers and retailers. Through these third parties, project developers may sell issued credits to interested buyers such as companies looking to offset their unavoidable emissions.

Credit buyers may choose to engage directly with project developers, at any point from methodology development, to after credits have been issued. Getting involved at earlier project stages enables credit buyers to understand the offsets project more deeply, and skipping third parties such as brokers or retailers also gives buyers access to lower prices.

For buyers interested in a range of readily available offsets, and saving time on engaging directly with project developers, third parties may be more suitable. Carbon exchanges – such as Climate Impact X (CIX), a global carbon exchange headquartered in Singapore – allow for quick transactions and large volumes of carbon credits. Brokers offer similar benefits, while helping buyers access more project information, though at higher costs. Retailers suit buyers looking to buy credits at smaller volumes^[v].

 

How should carbon offsets fit into your decarbonisation strategy?

Companies should reduce the emissions wherever possible, and only offset unavoidable emissions.

Carbon offsets hold exciting potential to accelerate decarbonisation globally, by channelling funds to vital projects that reduce carbon and bring about co-benefits that may otherwise have lacked the resources to operate. Carbon offsets provide economic incentives to NGOs, governments, and communities to lower their GHG emissions, that may not otherwise have been present.

But carbon offsets have not always lived up to their credibility, resulting in accusations of greenwashing by buyers, and slowing progress on climate action.

So carbon offsets must be used responsibly. Companies should first have strong reduction plans, undertaking a comprehensive review of their emissions both internally and beyond their value chain. Carbon offsets should only be reserved for emissions that have high barriers to reduction, or where technology is currently lacking, and should be factored only into a company’s short-term strategy. In the long-term, a robust decarbonisation strategy should eventually result in negligible emissions, through measures such as flying less or investing in energy-efficient technology and processes.

 

References

[i] Is There a Difference Between Carbon Offsets and Carbon Credits?, Carbonfund.org – https://carbonfund.org/difference-carbon-offsets-carbon-credits/

[ii] What is a Carbon Offset?, Carbon Offset Guide – https://www.offsetguide.org/understanding-carbon-offsets/what-is-a-carbon-offset/

[iii] Sichuan Rural Poor-Household Biogas PoA, Gold Standard – https://www.goldstandard.org/projects/sichuan-rural-poor-household-biogas-poa

[iv] Carbon Offset Programs, Carbon Offset Guide – https://www.offsetguide.org/understanding-carbon-offsets/carbon-offset-programs/

[v] How to Acquire Carbon Credits, Carbon Offset Guide – https://www.offsetguide.org/understanding-carbon-offsets/how-to-acquire-carbon-offset-credits/