Good offsets, bad offsets: A guide for the commodities sector

Cutting global emissions is urgent. High-polluting industries must reduce their carbon footprints at scale, and fast. 

Every business and financial institution in the supply chain has a role to play: from producers of carbon-intense commodities (like metals, oil, gas and agricultural products) to those who trade, source and finance them. 

This gets us to a net-zero world faster, and helps future-proof business.

The role of offsets

Many organizations are turning to carbon offsets to try and compensate for the greenhouse gas (GHG) emissions released in their operations and supply chains. Offsetting tends to be cheaper for a company than decarbonizing its own value chain. 

For example, a commodity trader might offset the emissions involved in mining and refining high-carbon metals, while working towards a decarbonization plan for their supply chain.  

What is carbon offsetting?

Carbon offsetting is the practice of paying for activities that reduce emissions outside a company's value chain, in order to compensate for emissions within a company's value chain. The financial contribution is generally via the purchase and use of carbon offset credits. These emissions reduction activities either remove GHGs from the atmosphere or avoid emissions. For example: preserving biodiversity, constructing wind farms, reforestation and carbon capture and storage.  

The GHG mitigation hierarchy

There’s a widely accepted hierarchy for climate change mitigation: 1. Avoid, 2. Reduce, 3. Compensate.

 Companies should avoid emitting, then reduce the emissions they can’t avoid, followed by offsetting residual emissions. While there’s a role for investing into climate mitigation beyond your value chain, this can’t replace actual deep, fast emissions reductions. See more guidance from Natural Climate Solutions Alliance.

The risk of bad offsets

The practice of corporate carbon offsetting has come under fire. This is largely due to issues around transparency, verification, efficacy and accuracy.

For example:

• Is the project really taking place? 
• Are emissions actually being reduced? 
• Does it reduce emissions permanently? 
• Does the project result in carbon leakage (i.e. does the project simply shift the emissions elsewhere?) 
• Are broader environmental issues and local community needs taken into account? 

4 signs of good offsets

Here are 4 essential elements of high quality and credible offsets:

1. Certification and registration

Ensure that the carbon offsets you’re buying are certified by internationally recognized offsetting standards (for example, the Gold Standard or the Verified Carbon Standards (VCS) Program) and that they have a clear chain of custody. Offsets must be clearly registered on a public registry to allow tracking of offsets’ issuance, retirements, and ownership (e.g. Verra Registry). This ensures they can only be retired (claimed against emissions) once. 

However, even these standards face criticism for a lack of transparency over their quality. So certification and registration alone aren’t enough; you also need to look for the following 3 signs to judge an offset’s quality.

2. Additionality

Seek verification that the offset project is ‘additional’. This means that the project wouldn’t exist in a business-as-usual setting without financing from companies via offsets.

So, a project that’s not additional is one that’s viable without the sale of offsets. It would have taken place anyway, for example through government funding, regulatory requirements or electricity sales. 

A company’s purchase of the offset has to be necessary for the emissions reduction. Use these questions to identify and avoid non-additional projects.

3. Broader impact

A good offset supports more of the United Nations’ Sustainable Development Goals (SDGs). For example, by improving clean water supply to local communities, creating jobs or promoting biodiversity. Seek projects that follow all local legal requirements and that have received social and environmental certifications.  See the new Voluntary Carbon Markets Integrity Initiative (VCMI) Provisional Claims Code of Practice for more information.

4. Verified baselines and permanence

Often, calculating the baseline (the counterfactual of how many GHG emissions there would be without this offsetting project) is very complicated. It’s not enough to know there’s some reduction — knowing how much is critical, since companies base their emissions limits or climate action claims on these numbers. With the race to halve global emissions by 2030 and reach net zero by 2050, over-inflated estimates are dangerous. Independent third-party verifications help ensure the reported calculations are accurate.

Relatedly, the carbon reductions from an offset project should be permanent. For types of projects particularly at risk of lack of permanence, you should ensure they have mechanisms to address these risks, as well as compensations for it. For example, a project involving carbon storage in trees is at risk of these trees being destroyed (e.g. through a wildfire, infestation or disease) and (re)releasing the carbon into the atmosphere.

How can offsetting lead to greenwashing? 

More and more companies are being publicly criticized for claiming to reach net zero through offsetting, despite continuing to emit heavily in their operations and supply chains. This is because:

• Sometimes companies aren't accounting for (so aren’t offsetting or reducing) their supply chain, which is the biggest source of most large companies’ emissions.
• Over-reliance on offsets (with no plans to significantly reduce emissions) can enable business-as-usual in high-emitting sectors.
• The quality and transparency of offsetting projects varies significantly.
• In the Science Based Targets initiative’s (SBTi) widely accepted Corporate Net Zero Standard, carbon offsets can’t substitute or delay a company’s own emissions reductions. They can only be used against residual emissions once a company has reached its long-term science-based target (which, for most companies, will be a minimum 90-95% emissions reduction).

The term ‘net zero’ is often conflated with ‘climate neutral’. ‘Climate neutral’ (or ‘carbon neutral’) should be used to refer to compensation through offsets, and should be qualified with an explanation of the use of offsets. Whereas, ‘net zero’ for a company means creating zero (or nearly zero) emissions across your value chain.

Getting your emissions calculations right

Companies need to accurately measure their scope 1-3 emissions to use offsets credibly. Miscalculations or broad-based estimates can lead to over- or under-spending on offsets, as well as misleading your customers and stakeholders about your climate impact. 

For help with your carbon accounting, get in touch with CarbonChain today. Our platform, made for the commodities sector, lets you quickly and accurately calculate your supply chain emissions from end to end.