Over the last few months, carbon offsets have drawn a wave of scepticism and controversy following a series of studies conducted on their effectiveness. Carbon offsets allow companies to pay sums of money in exchange for removing carbon from their balance sheets by funding action elsewhere in the world, such as tree planting in South America. This has amassed corporate interest for a bid to go “carbon neutral”, including interest from fossil fuel giants Shell, which have set aside $450 million for investment, Italian luxury brand Gucci, and investment banking giant Credit Suisse AG, amongst hundreds of others.
The increasing popularity of offsetting has sparked debate amongst researchers, raising concerns that financial transactions are acting as a shield for polluters who can afford to pay a hefty price. By offsetting their emissions, critics are concerned that rather than reducing their greenhouse gas emissions (GHG) proactively, they function as an “accounting manoeuvre” rather than instigating any real change to reduce the GHG intensity of their operations.
A Bloomberg Green analysis of more than 215,000 offset transactions revealed that airlines, online retailers, industrial firms and energy producers are relying more heavily on the cheapest and most suspect types of offsets – those tied to renewable energy projects. Or rather, low quality credits which could not be verified. But how can one be sure of quality credits?
In a recent study conducted by the British newspaper The Guardian, German weekly Die Zeit and source material, a non-profit investigative journalism organisation, revealed sobering realities about offsets. Their recent report highlighted that some 90 percent of the credits offered by the world’s leading provider, Verra, are likely “phantom credits” which do not represent genuine reductions. Another analysis conducted by the University of Cambridge highlighted that the threat to forests had been overstated by 400 percent on average for Verra projects.
However, offsets pose a separate risk that is more existential and systemic. Human rights violations have been reported during site visits in flagship projects in Peru, demonstrating videos of residents’ homes being destroyed by chainsaws, forced evictions, and escalating tensions between park rangers, residents and police. Evidence has also surfaced of rare and ancient trees being cut down to make room for replanting projects.
Further, food security may also be a rising concern with increasing adoption of offsetting practices. When considering land management, a study conducted by Oxfam highlighted that offsetting projects could result in substantial food price inflation, (as much as 80 percent) as land used to grow crops competes with afforestation efforts for the carbon market. The depletion of trading arable land for crop farming can result in avoidable loss of wildlife and a failure to create the habitats and nature corridors required for biodiversity in a warming world.
Indeed, protecting forests is crucial as a response to climate change. The UN has been discussing the idea of paying to protect forests since at least 2005. This concept was formalised in a collection of policies called Reducing Emissions from Deforestation and Degradation (REDD), later REDD+ to fund conservation projects in developing countries as a response to mitigate climate change. When considering how a straightforward solution can unearth such devastating consequences, the answer is quite simple: the exchange is little too easy, and much of it is a guessing game with scarce legal overheads.
The regulatory landscape for offsets is murky — there is no current enforcement mechanism. Indeed, like any unregulated market, it bides by any standards for quality and provenance entirely to the discretion of the companies who purchase them to remove GHG emissions from their books.
In addition to concerns of reliability and transparency, there are other potent issues such as double counting. The carbon offset market relies on the use of carbon credits, which can be bought and sold multiple times; fundamentally, this is problematic as it can lead to double counting of emissions reductions, and moreover, an overestimation of the overall impact of the offsetting project. Despite the immediate “on the books” impact that offsetting holds, it may endanger an organisation’s reputation as using offsetting as a vessel for greenwashing. However, more meaningful practices to target emission reductions, as a whole, exist.
Carbon insetting, on the other hand, refers to the practice of reducing emissions within an organisation or industry by implementing more sustainable practices, models and technologies. These interventions are designed to generate positive impacts for communities and ecosystems by way of nature-based solutions (i.e., renewable energy, agroforestry, etc) within a company’s supply chain to re-establish global carbon sinks (i.e., forests, soil, oceans). The distinction is that insetting proactively addresses the root cause of emissions and can also yield benefits, such as improved reputation, greater supply chain control and cost savings.
Historically, carbon insetting initiatives have seen success, despite challenges in implementation across widespread global value chains. Consumer goods giant, Unilever, has implemented several initiatives across their portfolio, ranging from investing in renewable energy projects to targeting to source 100 percent of its agricultural raw materials sustainably by 2020, reducing their emissions by 38 percent. Undergoing similar initiatives, Nestle saw an overall reduction of their greenhouse gas emissions by 35 percent from 2005 to 2020 by investing in renewable energy, improving energy efficiency and reducing transport-related emissions. Financing options are also a possibility for those who want to expand their portfolios outwards; Levis partnered with the International Finance Corporation to assist factories and mills reduce energy and water use, emphasising the importance of sustainable procurement practices.
Fundamentally, insetting is a much more compelling argument for net zero plans for larger enterprises as they avoid the pitfalls that offsetting does not address. Firstly, Scope 1, 2 and 3 emissions can be targeted through an insetting approach that collaborates closely with an organisation’s value chain, particularly their suppliers. This proves more necessary, than helpful, to build up a foundation of knowledge around the elusive and increasingly complicated Scope 3 dilemma. Secondly, an insetting approach does not downplay the significance of an overall reduction of greenhouse gases beyond carbon, allowing for capacity building across supply chain verticals.
Indeed, it seems insetting offers an incentive for organisations to focus on empirical evidence which calls for a holistic approach to emission reduction, rather than carbon tunnel vision. In this way, there are several reasons why it may be a preferable option that can yield several commercial and reputational benefits.
Carbon insetting offers a path forward for organisations to reduce their emissions, having a direct impact within their own supply chains, rather than simply funding emission reductions elsewhere. In relation to finance, insetting offers an alternative to spending large sums of money — rather, it encompasses cost savings, and access to otherwise inaccessible finance to reduce costs in the long-run, and build better supply chains. These practices can also ensure business continuity to allow organisations to become more resilient to future climate change-related risks, and ultimately, create a culture of innovation through the implementation of new technologies and partnerships. In relation to compliance, it may assist firms in complying with regulations, green business accreditations and meet higher standards of operation.
Unless the requirements for standardisation, third party monitoring, regulatory compliance, community acceptance and full transparency are met, the carbon offset space may soon be unveiled as a questionable investment into a shadowed market. For organisations that can afford to absolve their guilt by paying to pollute, they can work towards acknowledging that offsets do not work in a vacuum as an accounting hat-trick. Their existence, despite their efficacy, have a broader impact on ecosystems, indigenous communities and society at large.
By Rana Hajirasouli
Founder of The Surpluss
Climate tech innovator