Corporate Offset Purchase Programs: A Primer, Part 1

Liz Hardee, The Climate Trust
As published by TriplePundit – May 31, 2016

Part 1: Why purchase offsets?

Companies all over the world are now using carbon offsets to meet at least a portion of their greenhouse gas reduction goals. There are many reasons these corporate entities decide to engage in the carbon offset market—with some going so far as to commit to 100% climate neutrality or being 100% renewable—but for those unfamiliar with the workings of environmental markets, a basic primer may prove useful in understanding the appeal of purchasing offsets.

What is an offset?
A carbon credit, or offset, at its most basic level, is an instrument generated when one metric ton of carbon dioxide is avoided, sequestered or removed somewhere in the world. This can happen in a variety of ways, from reforesting land, to destroying methane released by landfills and dairies, to switching from a high-carbon fuel source to a low-carbon source.

Who uses offsets?
Offsets are used by corporations, nonprofits, universities, and municipalities—essentially, any entity that wishes to reduce (or prevent an increase in) its emissions. Offsets are most widely used by companies that have set emissions reduction targets, and they have become an increasingly popular way to address indirect emissions; those resulting from actions over which the entity has no direct control (i.e. supplier emissions, or product usage by consumers). Ecosystem Marketplace reports that the typical offset buyer has a disproportionately large indirect emissions obligation—about 35 times that of a company that doesn’t purchase offsets. However, these companies also typically do more to address the emissions they can control than companies with no offsetting program, which provides evidence that offsetting programs themselves are generally indicative of broader carbon reduction strategies.

How is an offset created?
An offset credit begins as an emission reduction quantified against a baseline scenario (a.k.a. “business as usual”). Calculation methodologies, known in the carbon industry as protocols, are developed via a process of scientific and mathematic formulation, which is subject to intensive peer review and public comment by standards organizations. The Climate Trust, and other quality offset providers, work with the most well respected standards organizations in the US, including Climate Action Reserve, Verified Carbon Standard, California Air Resources Board, and American Carbon Registry.

Once quantified, offsets must be verified by an accredited third-party verifier before they may be transacted. Verification includes thorough review of a project’s monitored data, and often a visit to the project itself.

What are the benefits of offset projects?
The carbon reduction benefits of offset projects are significant. Ecosystem Marketplace has tracked carbon markets around the world since 2007 and estimates that the total carbon reductions from offset projects worldwide are just under 1 billion tons. According to the EPA, this is enough to offset the emissions from 263 coal-fired power plants for one year, or to plant over 25 billion trees.

Since 2013 alone, California’s cap and trade program, has successfully offset over 39 million tons of greenhouse gases using projects that improve the management of forests, avoid the release of methane, and destroy ozone-depleting substances (equivalent to roughly 1 billion trees planted).

Additionally, carbon offset projects have benefits far beyond their greenhouse gas reductions; referred to as co-benefits. Benefits from projects on forested lands include improved water quality and biodiversity, while livestock digester projects avoid the release of methane from manure lagoons, and may provide an additional revenue stream from the sale of biogas—an effective source of energy, and a byproduct of these systems. Carbon projects can help to finance everything from conservation of land, to more sustainable agricultural practices, to distribution of cleaner cookstoves in developing countries.

Corporations are also reaping the benefits by becoming more sustainable. In September 2014, more than a thousand companies signed up for the Carbon Pricing Leadership Coalition. The coalition’s goals include expanding the use of effective carbon pricing policies in order to maintain competitiveness, create jobs, encourage innovation, and deliver a meaningful reduction in emissions. According to Environmental Finance, a recent study looked at a sample of 1,700 leading international firms and found that money aimed at reducing greenhouse gas emissions saw an internal rate of return of 27%—a clear indication that those investments are paying off.

Do offsets let polluters off the hook?
No. The underlying principle behind quality offset projects is called additionality—if a change in practice, or a carbon reduction would have happened regardless, due to regulation, or in the course of business as usual, no offset is created. In this way, carbon markets ensure they are incentivizing, rather than simply rewarding, practices that reduce carbon. Companies that currently produce high volumes of carbon emissions are by-and-large under no obligation to reduce those emissions or to pay for their release; carbon “compliance” markets created via regulation, have in some cases been built to address this. In a compliance market, companies are required to turn in allowances that reflect their emissions for the year, and can typically use offsets produced in non-covered (or non-regulated) sectors to meet some portion of this obligation—incentivizing the creation of more carbon offset projects.

Now that we’ve established a basic definition of offsets, and an understanding of environmental markets has been built, we can dive into the key factors to consider when actually purchasing offsets.

Up Next—Part 2: Considerations for Offset Buyers.

Image credit: Flickr/Climate and Ecosystems Change Adaptation Research University Network