In the race to reduce emissions, carbon offset programmes are gaining worldwide attention. Whether organisations are doing it by choice or because they’re forced to by legislation - more and more companies are looking for ways to reduce their carbon emissions and are even claiming to be partially or even wholly carbon-neutral. However, investors and campaigners are increasingly scrutinising the use of carbon offsetting in order to achieve decarbonisation targets. It would, of course, be preferable to aim for zero emissions across each corporate’s operations and many organisations are working hard to reduce operational emissions, however there are currently a number of hard-to abate sectors and Scope 3 emissions which they may not have direct control over. The solution to full decarbonisation will not appear overnight and we don’t have time to wait for one.

Global carbon trading markets reached a record high value of €229bn in 2020, a figure more than five times greater than levels recorded in 2017. It is predicted that corporate targets alongside countries nationally determined contributions (NDCs), and bold new initiatives such as the Institute of International Finance (IIF)’s Taskforce on Scaling Voluntary Carbon Markets, will continue to drive dramatic demand increase for carbon credits in the coming years. But it is key that organisations use carbon credits in a very considered way. 

Understanding what constitutes good offsetting for different objectives, is key to defining a future proof strategy that has the greatest carbon impact as well as mitigating the potential reputational risks associated with using offsetting.

When assessing the use of carbon credits in your organisation, consider the following attributes that will impact the quality and price of a carbon credit:

- Additionality – does the carbon finance provided by the offset reduce emissions over and above business as usual?

- Impact – does the offset project have wider socioeconomic benefits to communities?

- Leakage – does the emissions reduction activity cause emissions increases somewhere else?

- Permanence – will the carbon be removed from the atmosphere for a significant length of time?

- Removal vs reduction – does the project remove or reduce carbon from the atmosphere?

- Vintage - does the offset result in a reduction in the same period in which the emission was generated?

The expectations around the use of carbon credits is evolving and ensuring the quality of a carbon credit is critical to defining a futureproof offsetting strategy.

Investor groups are stepping up their game on tackling climate change and are increasingly scrutinising companies’ decarbonisation plans. ‘These Trees Are Not What They Seem’ – the media is full of headlines like this calling out some of the world’s largest businesses for inflated claims on the impact of their carbon credits. If the credits being bought represent no actual carbon reduction, it’s a setback the planet cannot afford and presents significant reputational risk for corporations. This is encouraging more active participation across the offset lifecycle from corporates, with several multinational corporations playing a part in offset project development. 

At the same time, market expectations around good practice in offsetting are constantly evolving. For example, the Science Based Target initiative has released a consultation for developing the first global standard for net-zero business, which states companies must neutralise all unabated value chain emissions through permanent carbon removal, not reduction, in order to be considered net zero. In this context, carbon reduction offsets would only be used by corporates with a Net Zero target [when meeting a net zero target ahead of a Science Based trajectory]. This is aligned to other groups including Oxford Principles for Net Zero Aligned Carbon Offsetting and the Taskforce for Scaling Voluntary Carbon Markets, who are also advocating a focus on carbon removals, especially as technology continues to develop.

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Carbon offsetting might not be the long-term solution, but it can help to bridge the gap for those where the resources and technologies to achieve zero emissions are not yet there, while critically helping reduce and remove carbon from our atmosphere. 

KPMG can help businesses ensure they are integrating carbon offsetting into their wider decarbonisation objectives in the most effective and futureproof way. We have experience assessing the participation options for large multinational companies across a wide range of sectors and geographies, ensuring they understand the key risks and opportunities associated with each market and aligning the options to their strategic objectives.