Carbon Offset

Last Updated:
February 14, 2024
Carbon Offset explained
The transition to a low carbon economy is on every CEO's agenda nowadays. The impacts of climate change and responses to it will transform every business sector in the coming decades. Although Climate change will affect a majority of companies, all will be expected to contribute to its solution.
Nevertheless, it is challenging for most companies to devise and implement a credible decarbonisation strategy. The transition requires new ways of doing business, including new ways of displaying capabilities and resources and new ways of thinking. But despite the challenges, companies around the world are scaling up their decarbonisation commitments.
We can see this trend with the number of companies committing to reducing emissions. More than 2000 companies have confirmed emissions reduction targets under the Science Based Target initiative (SBTi). Additionally, more than 370 have committed to The Climate Pledge, pledging to achieve net zero emissions by mid-century or sooner.
For most companies and investors, carbon credits play a crucial role in their Net-Zero strategy. They allow companies to make earlier and more ambitious commitments. Credits allow companies to reduce their current emissions through offsets, while taking cost-effective steps to reduce future emissions through asset rotation and business model development. In the long term, credits can play an essential role in offsetting difficult-to-avoid emissions from products for which no low- or zero-emission options exist.
The growing interest in recent years is also reflected in the Voluntary Carbon Market (VCM), which organises the pledging and trading of carbon credits. In 2022, the demand for carbon credits is at its peak. Prices have increased by more than 140% since 2021 and forecasts assume that demand for credits will increase 15-fold by 2030, to $50 billion per year.
But the voluntary carbon market has a problem. It cannot cope with demand. Access, which plays a crucial role in the global effort to combat climate change, is often limited to large organisations and is characterised by opaque pricing and market inefficiencies. Furthermore, due to a lack of transparency and credibility, it has faced a number of problems in recent years.
This report examines the key role for on-chain carbon credits as part of net zero strategies and the VCM. It was prepared by senken to help business decision makers identify and understand the best use of credits for their business.

What is a Carbon Offset?

A carbon offset represents a reduction in greenhouse gas emissions (GHGs), achieved either through carbon avoidance or carbon removal. Carbon avoidance refers to preventing emissions from entering the atmosphere, like investing in renewable energy or forest conservation. Carbon removal, on the other hand, involves actively removing CO2 from the atmosphere, such as through reforestation or direct air capture technologies.

The Difference Between a Carbon Offset and a Carbon Credit

While often used interchangeably, there's a key distinction between carbon offsets and carbon credits. A carbon credit represents one tonne of CO2 or CO2e that has been removed or avoided. Carbon credits can only be considered a carbon offset when purchased with the sole intention of compensating for emissions.

Why Offsets Do Not Fit Into a Net Zero Strategy

Since offsets can include both removal projects and avoidance projects, it is critical to make a clear distinction between the two. Offsets originating from carbon avoidance projects do not inherently contribute towards a Net Zero strategy. A Net Zero approach requires an actual decrease in atmospheric carbon levels, meaning that the prevention of future emissions is insufficient to achieve this. This is why it is crucial to incorporate removal credits into a Net Zero strategy.

Mitigation Hierarchy
A good decarbonisation strategy should prioritise avoidance and reduction first, with offsetting reserved for unavoidable emissions.

Importance of Focusing on Removals

The Oxford Principles for Net Zero Aligned Carbon Offsetting highlights the importance of cutting emissions and using high quality offsets (which includes avoidance/reduction projects), with a focus on transitioning towards carbon removals in order to stay in-line with the Paris Agreement goals.

Removal projects provide a direct route towards Net Zero, as they actively contribute towards the reduction of atmospheric CO2 levels. This is not to say that carbon avoidance should be neglected; it remains an integral part of a comprehensive social and climate strategy. However, the balance must shift towards removals to genuinely move towards a sustainable and carbon-neutral future.