All you need to know about carbon offsetting

Carbon offset and carbon credit are terms that are often used interchangeably but have distinct meanings.

Carbon offset refers to a reduction in carbon dioxide emissions made in one location to compensate for carbon emissions produced elsewhere. The idea behind carbon offsetting is to balance an individual's or organisation's carbon footprint by funding projects that remove an equivalent amount of carbon from the atmosphere. This can be achieved by investing in nature-based projects like reforestation or peatland restoration; clean energy projects such as carbon capture and storage; or even technology solutions like clean cookstoves and biochar.

On the other hand, a carbon credit is a tradable certificate or permit that represents the right to emit one metric ton of carbon dioxide or its equivalent. Carbon credits are used in emissions trading schemes, such as the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the United States, which set caps on the total amount of greenhouse gases that can be emitted by participating companies. These companies must then either reduce their emissions or purchase carbon credits from other companies that have reduced their emissions below their allocated limit.

In that sense, carbon offsetting is a way to balance one's carbon footprint by funding projects that remove carbon from the atmosphere. In contrast, carbon credits are a way to ‘trade’ the right to emit greenhouse gases. Both concepts aim to reduce greenhouse gas emissions and mitigate the impact of climate change, but the implementation and mechanism of each is different.

Businesses are recognising that they have a responsibility to address their carbon impact and can contribute to the fight against climate change and biodiversity loss. Carbon offsetting can be a way for businesses to take accountability for their emissions, as well as to invest in projects that reduce or remove carbon from the atmosphere alongside supporting nature and local communities.

Alongside emission reduction strategies, some businesses are setting carbon neutral targets. This involves calculating the total emissions of operations or a particular activity or product, then purchasing carbon credits from verified projects that are designed to reduce or remove an equivalent amount of carbon from the atmosphere.

A net zero target involves the same process, but with a more developed reduction strategy in place and the capacity to offset other greenhouse gases in addition to carbon dioxide.

To maintain these certifications, annual carbon accounting and offsetting is required. Within these strategies, carbon credits and offsetting allows businesses to balance their emissions and work towards achieving their ESG targets.

Overall, businesses are taking a variety of approaches to carbon offsetting. The effectiveness of these approaches will depend on factors such as the types of projects being supported, the rigour of verification and monitoring, and the overall commitment of businesses to addressing their carbon impact.

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1. Reducing a carbon footprint: Carbon offsetting enables businesses to compensate for their unavoidable carbon emissions. By investing in projects that remove or reduce greenhouse gases, companies can lower their overall carbon footprint and move closer to achieving (or going beyond!) net zero targets. This is particularly useful for emissions that cannot yet be eliminated through operational changes.

2. Meeting sustainability goals: For companies with ambitious environmental targets, offsetting provides a way to bridge the gap between current emissions and desired reductions. It demonstrates a commitment to addressing climate change, satisfying investors, customers and stakeholders who increasingly prioritise environmental responsibility.

3. Supporting environmental and social projects: Many carbon offset initiatives go beyond reducing emissions. Projects like reforestation, peatland protection or agroforestry offer co-benefits such as biodiversity conservation, water management, food security and employment opportunities for local communities. By investing in these projects, businesses can make a positive impact beyond their own operations.

4. Enhancing corporate reputation and legacy: Engaging in credible carbon offset programmes can strengthen a company’s reputation. As consumers and investors increasingly favour environmentally conscious businesses, offsetting can serve as a visible indicator of sustainability efforts, fostering goodwill and competitive advantage.

While carbon offsetting is proven to be an essential tool, it should be part of a broader sustainability strategy. Experts agree that companies must prioritise reducing emissions at their source - through energy efficiency, renewable energy adoption and supply chain improvements - before turning to offsets for unavoidable emissions. The general guideline is to reduce emissions by at least 90% and use offsets only for the remainder.

Additionally, businesses should select offset projects with high standards of verification. These certifications help ensure that the projects are delivering measurable, permanent and additional emissions reductions while also considering potential co-benefits for communities and ecosystems.

Carbon offsetting can play a valuable role in achieving corporate sustainability goals, provided it is used responsibly. By investing in high-quality projects and prioritising emission reductions within their operations, businesses can balance the need for immediate action with the long-term transition to a low-carbon economy. The key is to view offsetting as a complementary measure - not a standalone solution - on the path to net zero and beyond.