What are carbon offsets?

5 November 2024

Authors

Alice Gomstyn

IBM Content Contributor

Alexandra Jonker

Editorial Content Lead

What are carbon offsets?

Carbon offsets are mechanisms through which buyers fund efforts that remove or avoid greenhouse gas (GHG) emissions in one place to “offset” GHG emissions elsewhere on Earth. They help corporations compensate for their carbon footprints and meet their environmental objectives.

Companies can invest in carbon offsets by purchasing mechanisms known as carbon offset credits. Purchases of the credits, which take place through voluntary carbon markets, fund emissions reductions projects such as tree planting and forestry initiatives, carbon sequestration in agriculture and renewable energy generation.

Demand for carbon offsets reached a new high in 2023, with 163.6 million offsets claimed, according to a report by BloombergNEF.1 But concerns about greenwashing have prompted predictions that demand might level off. In response, private organizations and governments have launched programs to support the development of high-quality carbon credits. Software tools can help companies track and manage their emissions reduction efforts, including carbon offset investments.

How does a carbon offset work?

Also referred to as voluntary emission reduction (VER), a carbon offset represents the avoidance, destruction, reduction or sequestering of the equivalent of one tonne (or metric ton) of greenhouse gas. The actions can take place through various means, from nature-based methods such as tree planting to technology-powered practices, such as methane capture.

Companies invest in offset projects by buying carbon offset credits from voluntary carbon markets. Such carbon credit purchases can help companies compensate for both their own carbon emissions and other greenhouse gas emissions. This strategy can help them meet environmental, social and governance (ESG) goals and science-based targets for scope 1, 2 and 3 emissions, in alignment with global efforts on climate change mitigation.

What is a carbon offset credit?

A carbon offset credit is a transferable instrument certified by a government or independent certification body. It allows the purchaser to “retire” the credit by claiming the underlying reduction toward their emissions reduction goals.

The rules for certification require that the offset credited is real, permanent and verifiable, and is in addition to a business-as-usual scenario. In other words, the destruction or avoidance of a particular amount of carbon dioxide (or other greenhouse gas) emissions wouldn’t have occurred without the offset purchase. This concept is known as additionality.

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What role do carbon offsets play in global climate actions?

The growth of the voluntary carbon markets and use of those markets by the private sector complements the development of emissions trading by nations. The 1998 Kyoto Protocol established “clean development mechanisms,” which the United Nations cites as the first global, environmental investment and credit scheme of its kind.2 The instruments they established allowed protocol signatories to earn credits toward their own emissions reduction goals by investing in emissions reduction projects in developing countries.

In 2021, members of the United Nations Framework Convention on Climate Change agreed on international carbon trading rules detailed in the Paris Agreement. These rules would allow countries to transfer carbon credits to each other to meet climate targets. As of late 2023, there were three deals signed under the Paris Agreement crediting system, while more than 100 others have been proposed, according to the International Institute for Sustainable Development.3

What are some examples of carbon offsets?

Types of carbon offset projects include:

Supporting forests as carbon sinks

Forests store between 10 and more than 1,000 tons of carbon per hectare, according to an MIT report.4 This makes tree planting and forestry initiatives—such as reforestation, improved forest management (IFI) and avoiding deforestation—attractive avenues for carbon reduction projects. Such nature-based initiatives also have co-benefits, including protecting or enhancing biodiversity. These benefits help make them the most popular types of projects.

Carbon sequestration in agriculture

Some projects manage farmland to improve the carbon storage capacity of soil. Techniques such as crop rotation and planting cover crops—plants that help prevent soil erosion, moderate moisture levels and provide other benefits—improve soil health to facilitate greater carbon sequestration.

Waste management and methane destruction

Carbon offset projects focused on waste management address emissions in several ways. At landfills, the decomposition of waste materials produces methane, a powerful greenhouse gas that ranks second to carbon dioxide in contributing to global warming. Methane on landfills can be captured and destroyed or converted to a power source.

On farms, meanwhile, manure is a major source of methane emissions. When manure is treated through an anaerobic digestion system, however, the waste is broken down to produce biogas, a fuel with a lower carbon footprint than methane.

Renewable energy generation

Companies can purchase carbon credits that support renewable energy projects such as solar arrays, wind farms and hydropower facilities. This category of offset projects is the second-most popular after forestry, according to a 2023 report.5

It is important to differentiate between renewable energy carbon offsets and renewable energy certificates (RECs). Carbon offsets are measured by tonne of carbon (or carbon dioxide equivalent); RECs represent one megawatt-hour (MWh) of electricity generated from a renewable energy source. As renewable electricity displaces electricity that otherwise would have come from fossil fuels, companies can count RECs toward reducing their Scope 2 emissions. Unlike carbon offsets, RECs shouldn’t be used to compensate for other emissions.

Cleaner equipment for households

In developing countries, people burn fossil fuels during household activities, from cooking over open flames to burning wood to boil water. Some carbon offset projects bring cleaner, more efficient appliances to households and local communities, such as cookstoves powered by liquified petroleum gas. Upgrading household systems not only reduces emissions but also improves indoor air quality.

Carbon capture projects

Evolving technologies remove carbon dioxide emissions at the source or directly from the atmosphere. The former, known as carbon capture and storage (CCS), entails the collection of the carbon dioxide resulting from industrial operations and power plants. The latter, direct air capture and storage (DACS) technologies, extract carbon dioxide directly from the atmosphere and use chemical reactions to filter out CO2 molecules. The captured carbon can be stored underground or used for other purposes.

Why are carbon offsets controversial?

Offsets are popular among companies because buying credits can reduce their reported emissions quickly while they invest in long-term structural changes to lower emissions. However, critics say that companies might rely too heavily on carbon offset programs while doing little to source more renewable energy, enact energy efficiency measures and take other steps toward carbon neutrality.

In addition, various studies in recent years suggest that many carbon offset projects have not been as effective as project developers had promised:

  • An investigation published by The Guardian found that, of 50 projects originating around the world, 32 didn’t meet additionality standards while 23 had exaggerated claims of emissions cuts.6
  • Another analysis of forestry carbon offsets in California found fault in project methodologies, concluding that flawed baseline assessments led to overcrediting—credit generation exceeding what would align with the projects’ real-world environmental impacts.7
  • Similarly, researchers reviewing several clean cookstove programs found that cookstove providers were issuing far more carbon credits than the projects’ actual environmental benefits could justify.8

Without more robust standards, concerns about the integrity of carbon offsets could drive down demand and prices, according to an analysis by BloombergNEF.

What measures help ensure the integrity of carbon offset projects?

In response to integrity concerns, quality controls are evolving in the carbon offsets market. Global standards groups, such as The Gold Standard and Green-e, have updated their frameworks to ensure that offset projects make measurable contributions to sustainable development. Other key organizations include ACR (formerly American Carbon Registry) and Climate Action Reserve, which run carbon credit registries, and Verra, which manages the Verified Carbon Standard (VCS) program, a prominent voluntary market.

National governments are also supporting quality controls for carbon offsets. In Australia, the federal government developed Climate Active, which publishes guidelines to help organizations purchase the right offsets. More recently, US officials announced initiatives to support the sale of high-integrity carbon credits—defined as "credits that represent real, additional, lasting, unique and independently verified emissions or removals.”9 One such initiative is a program to provide technical assistance and verification for offset projects.

Companies can also take their own measures to attain high-quality carbon offsets. They can:

  • Carefully select a vendor and not hesitate to ask for any information that is not publicly accessible on their website.
  • Make sure that the offsets they purchase are only sold once.
  • Ask their vendors to guarantee to retire the offset from the market on the company’s behalf.
  • Use a third-party, publicly accessible registry that tracks ownership of the offset throughout its lifetime.
  • Be careful to only purchase offsets that are “additional” (that is, those that would not have happened without the credit purchase).

More in-depth guidance is offered through the University of Oxford, which published an updated version of its Oxford Principles for Net Zero Aligned Carbon Offsetting in 2024.10 The guide is considered the go-to source on how to evaluate and select the right offsets.

How can software help carbon offset management?

Having the right software in place can empower companies to capture and manage all emissions-related data, including purchased offsets, in a single system of record, helping to simplify greenhouse gas accounting during the ESG reporting process. It can also enable organizations to identify and quantify emissions reduction opportunities in their portfolio.

Once emission reductions have been achieved, organizations can more accurately determine the remaining emissions per scope for offsetting and track offsets in the system. Since carbon offsets must be managed and tracked long-term and these records need to meet audit and compliance standards, sustainability software can streamline the process. The right software ensures that all data captured is linked back to the transaction, with robust audit trails for any changes subsequently made to that data.

The carbon offset market is a complex and highly scrutinized space. Equipped with the right tools, organizations can navigate that market successfully while demonstrating the effectiveness of their emissions reductions efforts to their stakeholders and investors.

 
Footnotes

(All links reside outside ibm.com.)

1Carbon Offset Demand Hits Record in 2023 Off Huge December,” Kyle Harrison, BloombergNEF, 11 January 2024.

2The Clean Development Mechanism,” United Nations Climate Change, Accessed 29 October 2024.

3 Will International Carbon Markets Finally Deliver?,” Scott Vaughan, Charles Di Leva, International Institute for Sustainable Development, 14 December 2023.

4How many new trees would we need to offset our carbon emissions?,” Andrew Moseman, MIT Climate Portal, 5 January 2024.

5 Paying for Quality: State of the Voluntary Carbon Markets 2023,” Stephen Donofrio, Alex Procton, Ecosystem Marketplace, 28 November 2023.

6Revealed: top carbon offset projects may not cut planet-heating emissions,” Nina Lakhani, The Guardian, 19 September 2023.

7Systematic over-crediting of forest offsets,” (carbon)plan, 29 April 2021.

8Can clean cookstove ride out the carbon markets storm?,” Ben Payton, Reuters, 15 February 2024.

9FACT SHEET: Biden-Harris Administration Announces New Principles for High-Integrity Voluntary Carbon Markets,” The White House, 28 May 2024.

10Oxford Principles for Net Zero Aligned Carbon Offsetting (revised 2024),” University of Oxford, February 2024.

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