Carbon offsets are not a quick fix for net zero: companies must use them strategically

Corporate decarbonization strategies must use carbon offsetting in the right way

Carbon offsetting has often attracted attention for all the wrong reasons, tarnished by some companies accused of greenwashing their operations.

The problem isn’t with carbon offsetting itself. All companies will ultimately need to use offsets to reach net zero goals. It’s about how and when they’re being used.

While efforts have been made in recent years to define high-quality carbon offsets and create stronger markets for them, the issues of which ones to buy and how to incorporate them into decarbonization plans continue to pose a challenge.

As scrutiny of net zero plans intensifies and corporates come under pressure to turn commitments into action, many companies are, often unintentionally, getting it wrong.

Getting to grips with the basics

Carbon offsetting is a way of balancing a company’s emissions through investing in external projects. Schemes rely on credits that indicate companies are compensating for their carbon usage by funding projects outside their own value chain.

Projects can be based anywhere, as long as they’re certified and verified through a third party that monitors and measures carbon in terms of what is being put into, and taken out of, the atmosphere.

Carbon offsetting projects can be approached either as part of a net zero carbon strategy or via carbon neutrality.

The development of net zero carbon strategies has had a big impact on how offsetting is used. There’s a hierarchy of actions through which companies have to demonstrate they’re reducing the emissions within their control as much as possible, from cutting energy consumption, increasing energy efficiency and on-site renewable energy supplies to maximizing off-site renewable energy use. Any residual emissions after these actions can then be offset.

Then there’s carbon neutrality. Unlike net zero strategies, it doesn’t require companies to provide evidence of efforts to maximize efficiency or reduce emissions before resorting to carbon offsets. As a result, carbon neutrality claims are usually of less value than NZC claims.

Riding the carbon offsetting wave

The last year has seen a wave of momentum on carbon offsetting across the voluntary carbon market. In some cases, companies are planning safety nets in case they’re unable to meet their own net zero targets.

Furthermore, the World Green Building Council’s recommendations on offsetting have expanded to include embodied carbon – the emissions of a building created by its materials.

This is particularly significant as new buildings constructed between 2020 and 2050 are estimated to see roughly a 50:50 emissions split between operational and embodied carbon across their entire lifecycle.

Developers and building owners will therefore need to find creative circular economy solutions – such as more sustainable construction materials – to reduce their embodied carbon. However, when these options have been exhausted, they will need to buy carbon offsets to compensate for the rest.

Creating a successful carbon offset strategy

Many sustainability experts now believe that carbon offsetting is a viable part of achieving net zero carbon.

But there are some caveats. Offsets should be:

  • High-quality - as defined by the Oxford Offsetting Principles

  • From a verified offset scheme

  • Used as a last resort after all other means to reduce carbon emissions are exhausted

The biggest challenge for companies exploring offsetting is finding ones that are relevant and good value, both in terms of cost and impact. Companies shouldn’t rush to buy the first products they see. Instead, they need to build a wider understanding and narrative around the offsets they are procuring rather than just consider immediacy and cost.

There are two main types of offsets – emissions reduction offsets and carbon removal offsets. At present, the market is mostly the former, generally considered lower quality. It needs to move to the latter where carbon that’s already in the atmosphere is actually removed.

Some of these projects also provide social benefits in terms of supporting communities in developing countries. Others offer interesting nature-based solutions like mangrove forests or kelp farms that hugely impact their ecosystems in positive ways. 

Whichever projects are chosen, finding the funding can prove difficult. Internal carbon pricing (ICP) mechanisms can be an effective way to set up a company-specific governance system to allocate the necessary funds for offsetting projects in an accountable way.

More companies are opting for this route. British Land, for example, created its Decarbonization Transition Vehicle to help secure funds to retrofit their asset portfolio, funded through an ICP of £60/tCO2e, with a third going towards offsetting projects and two-thirds used by the transition vehicle.

Where now for carbon offsetting?

The carbon offsetting market is evolving quickly: by 2030 or 2040, it should be more around carbon removal than emissions reduction offsets.

This ties into the question of when to buy offsets. Companies don’t need to offset their emissions before their target year – buying them before can actually be counterproductive given where the market will be in just a few years, let alone in 2050.

When it’s time to buy, companies should ensure their strategies clearly link their need to balance emissions with their business goals and priorities while adhering to high-quality carbon offset criteria.

We’re not there yet, but as high-quality offsets continue to develop and there’s more clarity on carbon pricing in the coming years, offsetting will become an integral piece of the net zero carbon puzzle in the right way. 

JLL’s sustainability experts can help your business to understand how to use carbon offsetting effectively. Contact us for more information.

Matthew Christie, Sustainability Analyst, JLL