What is Carbon Offset? How do Carbon Offset Work?

What is Carbon Offset? How do Carbon Offset Work?

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In response to the issue of climate change, net zero by 2050 has become a global goal. However, human activities will generate additional GHG emissions, thus carbon offset is needed to mitigate the impact of GHG emissions on climate change and achieve net zero.

The article will elaborate on the definition of carbon offset and carbon footprint, explaining why corporations need to engage in carbon offsetting and precisely how it is conducted.

What is Carbon offset?

What is Carbon offset?

A carbon offset is a means of offsetting GHG emissions generated by human activity. The rationale behind the concept is that carbon emissions in one location can be offset by carbon reductions in another location, resulting in a balanced carbon cycle on Earth. To achieve the objective of carbon reduction, people will implement actions such as direct air carbon capture and storage (DACCS) and afforestation. If corporations wish to neutralize the carbon emissions of their organizations or products via carbon offsetting, they may obtain carbon credits equivalent to the carbon reduction performance of the projects by sponsoring these projects, and eventually, they can claim to have attained carbon neutrality. The following article will explain this concept using corporate carbon offsets as an example.

Many credible international organizations can assist verifying the carbon reduction quotas of these carbon reduction projects, carbon credits of the equivalent amount can be purchased by those corporations. Examples include Clean Development Mechanism (CDM), Verified Carbon Standard (VCS; now renamed Verra), and Gold Standard (GS).

What is Carbon footprint?

Carbon footprint refers to GHG emissions generated by something during a specific time such as taking a flight, someone’s daily life, the Coca-Cola we hold in our hands, etc. We can calculate the respective carbon footprint of these activities. In particular, ISO has set standards for organizations (ISO14064-1) and products (ISO14067) to assess the overall life cycle assessment of products and calculate their total carbon emissions in various stages including the obtaining of raw materials, production, use, and disposal. This is to ensure that a clear set of regulations is applied when calculating those carbon footprints. After determining the carbon footprint, a carbon reduction plan can be formulated, where the irreducible carbon footprint will be mitigated through carbon offset.

Carbon Footprint Label,

Carbon Footprint Label, left issued by the Taiwan government, right issued by the Japanese government, image source: Taiwan Environmental Protection Administration, Japan Ministry of the Environment.

Why carbon offset

During its business processes, a corporation will generate a certain amount of GHG emissions despite its efforts in carbon reduction. For a factory manufacturing products, if ISO 14067 is applied to check its carbon footprint, one will discover that items such as electricity, water, packaging materials, transportation fuel, and consumables including masks and gloves will inevitably generate GHG emissions despite current developments in renewable energy, automation, and EV. Corporations do not have to wait for developments in these external factors to achieve carbon neutrality, they may offset the irreducible carbon emissions through PAS 2060-compliant carbon offset methods, the process to demonstrate carbon neutrality include declare carbon neutrality boundary, implement carbon emissions management, assessment of GHG emissions, reduction GHG emissions, offsetting of excess emissions, documentation and verification through public disclosure.

How do carbon offset work?

How do carbon offset work?

To perform carbon offset, one must first acquire carbon credits, which come from artificial carbon sinks or carbon reduction achievements. At present, there are several approaches approved by institutions with international credibility such as:

  • Reduce emissions from deforestation and forest degradation in developing countries (REDD+)
  • providing impoverished regions with infrastructure such as clean water
  • renewable energy
  • cookstoves to minimize logging and burning wood.

After a project is planned and executed, the amount of emissions that can be reduced compared to the original baseline emissions (GHG emissions before the project is implemented) is calculated to determine the number of carbon credits that can be generated for carbon offset purposes. The carbon credits can be transferred to the corporations that require them through transactions to carry out carbon offset.

More info about carbon credit, please refer to “What are Carbon Offset Credits? Carbon Credits vs Carbon offset”

3 types of carbon offset

Carbon offset can be carried out by acquiring carbon credits. Currently, there are mainly three ways to obtain carbon credits:

  • Create carbon offset items in-house or purchase them from developers.
  • Purchase them from independent carbon credit brokers.
  • Purchase them on the exchanges.

Every method has its advantages and disadvantages, hence a corporation can choose the most adequate method according to its scale, budget, urgency, and regulatory compliance needs.

Carbon swap comparison table of various carbon credit acquisition methods

1. Partner with carbon offset project developers to build new projects or buy existing projects

The most direct way to obtain carbon credits is to collaborate with carbon offset project developers by proposing the corporation’s needs such as budget, implementation area, type, acquisition time, etc.

Advantages: Developers will create a suitable project or find one that has already been created. The advantage of this approach is that there is no need for an intermediary, thus the price will be lower.

Disadvantages: There is a risk that the number of carbon credit generated by the project is not as expected, and carbon credits can only be obtained after the project is officially implemented.

Suggestions: This method is only recommended for corporations with expertise in the field of carbon offset projects and a less urgent need for carbon credits because they can only be obtained several months or years down the line. As a result, this method is mainly used by firms with professional knowledge of ESG or large corporations with independent ESG departments.

2. Purchase from independent carbon credits brokers

Many carbon offset project developers will only collaborate with certain brokers. Brokers can assist firms to understand whether carbon projects are suitable for investment and charge a certain amount of commission as compensation.

Disadvantages: Due to the lack of an open market, the commission prices are unclear.

Suggestions: Corporations need to compare prices and gather information from multiple parties.

3. Purchase on the carbon credit exchanges

This is the simplest and the most common way to obtain carbon credits. Numerous exchanges for carbon credit offer several types of carbon offset projects, where the details and prices are displayed on the website.

Advantages: After selecting the project and quantity you wish to purchase, you may obtain carbon credits by making payments through a credit card or PayPal.

Disadvantages: It is more expensive and one must verify whether the platform offers unique carbon credits to make sure that they have not already been used by someone else.

Suggestions: This approach is suitable for corporations that have already calculated their carbon footprint and wish to purchase a specific number of carbon credits for their carbon offset.

Several well-known carbon credits exchanges include:

  • Gold Standard (GS)
  • UNFCC Clean Development Mechanism (CDM)
  • AirCarbon Exchange (ACX)
  • Climate Impact Partners
  • Carbon Trade eXchange (CTX)
  • Xpansiv

3 steps of carbon offset

Step1: Confirm the scope of carbon offset and verify carbon footprint

First, the corporation must confirm the scope of its carbon offset, whether it is business-related activities (such as shuttle, ship and plane transportation, a dinner), certain products (shampoo, water bottle, coffee, building), or the entire organization. After the scope has been confirmed, its carbon footprint is calculated. If the corporation wishes to claim carbon neutrality, it needs to apply ISO 14064-1 to verify its organizational carbon footprint and ISO 14067 or PAS 2050 to verify its product carbon footprints to meet the PAS 2060 standard.

Step2: Choose suitable carbon offset project

To meet the firm’s budget, corporate philosophy, and regulations, the consideration factors for choosing a carbon offset project generally include price, project details, issuer, etc. Concerning project type, the price of projects that are usually related to the natural environment or directly increase carbon sinks will be more expensive. These include afforestation, and direct air capture (capturing CO2 from the air for permanent storage). On the other hand, developing renewable energy and other carbon emission reduction measures, such as building wind farms or solar power systems, is more inexpensive.

Furthermore, if the project involves additional SDG development-related dimensions, or if it needs to be issued by credible developers such as GS or VERRA, the price will be relatively higher, depending on the needs of the corporation.

Step3: Obtain carbon credits for carbon offset projects and do carbon offset

After deciding on a carbon offset project, carbon credits can be acquired through developers, brokers, or open trading platforms. In terms of products and services, customers can determine whether to apply carbon offset. For example, to mitigate the carbon emissions of each passenger on each flight, airlines have purchased carbon credits for passengers to purchase. Alternatively, firms can incorporate the cost of carbon credits into the product cost directly to launch carbon-neutral products. Examples include Lenovo’s Yoga Slim 9i carbon-neutral notebook computer. Organizations that have claimed to be carbon-neutral through carbon offsets include Google.

However, carbon offsets should be complemented by concrete carbon reduction actions and goals instead of purchasing carbon credits as a means of redemption for carbon emissions. For instance, EVA Air, in the process of offering passengers carbon offsets through ClimateCare, also tries to save fuel and reduce carbon emissions by decreasing aircraft weight and optimizing operations. In 2021, the airline lowered its carbon emissions by 88,705 tons. Lenovo introduced 50% recycled aluminum in the D-side casing of its Yoga Slim 9i, and its eco-friendly packaging decreases the weight of plastic by more than 70% in order to reduce carbon emissions. Google’s data centers and offices use 100% renewable energy, and the carbon intensity per unit of income (carbon emissions generated per unit of revenue) in 2021 was lowered by 81% compared with 2011.

Are carbon offsetting effective to Reduce Climate Emissions?

Carbon offsetting is a common tool used by corporations to become carbon neutral, and a large number of carbon credit developers and projects have emerged on the market. However, can carbon offset curtail GHG emissions and mitigate climate change? Or is it just “greenwashing”, a term coined by environmental groups? renouvo believes carbon offset can genuinely facilitate climate action, but the following factors must be taken into consideration:

The key factor of carbon offset that can help climate action

 Rationality of carbon credit quota calculation

The essence of carbon credit that is used in carbon offset lies in the “additionality” of the “relative baseline”, or the difference in carbon emissions between the two (whether investments for improvement are made or not) in the same period. For example, the establishment of an anti-deforestation project under the REDD+ framework can protect the forests from ongoing deforestation, but if there were no carbon offset project, would the local residents continue to develop the forest at the same rate? Or would the government establish protected areas regardless of funding? Since it is difficult to determine whether actions have already been funded, it is not easy to calculate the number of carbon credits generated by those projects. Moreover, the calculation technique of some long-term afforestation projects that generate carbon credits takes into account the number of carbon sinks created naturally over the next several decades, yet there is no guarantee that there will not be any accidents such as fires, typhoons, or diseases, which would prevent the project from generating sufficient carbon credits to match the number of carbon credits sold at the time. Consequently, it is recommended that corporations implementing carbon offset understand how the carbon credit quota in the project is calculated and select a project with a more conservative calculation to avoid erroneous carbon credit reporting.

The local impact of the carbon offset project

Conducting a carbon offset project will impact the original way of life of the local region. Although climate change is the most important issue for people at the moment, we still need to look after local human rights and the environment. Therefore, it is advised to consider various SDGs indicators by confirming the following: economic compensation for the residents, whether environmental conducts are focused on restoring the environment to its original state, and whether the establishment of renewable energy will damage the native environment.

Examine whether the business has reduced its carbon emissions from its commercial activities.

This is the most crucial aspect of using carbon offsets. Carbon offsetting is criticized by some people because some corporations do not fulfill their duties in carbon reduction, but instead purchase carbon credits for carbon offset purposes and claim to be carbon neutral. Carbon offset should be an integral part of one’s overall carbon reduction strategy. Companies should only revert to the easier carbon offset approach when it is difficult to reduce carbon emissions due to factors such as technological bottlenecks rather than because of carbon reduction and labor cost considerations.

As an ESG consultancy, renouvo is dedicated to combating climate change and reducing carbon emissions by developing eco-friendly plant-based materials to replace plastics, so that corporations can lower their carbon emissions by minimizing plastic and waste before implementing carbon offsets, thereby fulfilling their commitment to climate action.

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