Six Best Practices for Carbon Offsets

As investors and companies increasingly seek to address the risks of climate change, there is growing debate about the use of carbon offsets in achieving net-zero emissions. We think there’s room for a measure of offsets to achieve carbon neutrality, provided best practices are followed.

Opinions have diverged about what contribution, if any, offsets make to net-zero emissions. Starting with the Kyoto Protocol, regional initiatives have encouraged offsets as building blocks to a standardized international marketplace for them. But some have grown concerned about “carbon indulgences,” where investors can use offsets to burnish their climate credentials without really solving the root problem.

While there are many pros and cons to offsets, we believe there is a strong case for investors and companies alike to use a modicum of offsets to achieve goals of carbon neutrality. And with the finalization of Article 6 at COP26 recently, we expect even more dialog and interest, especially surrounding offset regulation and markets.

Offsets Help “Square” the Carbon Balance Sheet

Offsets represent a small but effective weapon in the bigger war on climate change. Their purpose is to help make-up for greenhouse gases (GHG) that company or other entity produces by allowing it to buy, sponsor or fund a carbon-reduction initiative elsewhere. Generally, offsets take the form of credits—each representing a one-metric-tonne reduction of CO2—which freely trade in two distinct markets: compliance (a.k.a. “cap-and-trade”) and voluntary.

In the compliance, or mandatory market, offset credits are issued to entities that bring emissions within imposed limits to avoid hefty fines. With the rising number of net-zero emissions commitments, the compliance offset market has expanded to a wide list of credits with names conative of their respective goals (Display).

The voluntary offset market is a bit more freewheeling by comparison. It comprises offset credits tied to verifiable GHG reductions from proactive programs, like a new wind farm. Governments, companies and high net worth individuals typically “retire” voluntary credits to claim the carbon reduction. Whether due to genuine environmental concern, the desire for better optics or something else, the voluntary offsets market has grown steadily in recent years, with forestry and renewable energy credits consistently out front (Display).