A Guide to Carbon Offsets

Understand the costs, application, and risks of carbon offsetting and how to use offsetting as part of your corporation’s sustainability strategy.

Reading Time: 8 minutes

What is a carbon offset, and how does it work?

A carbon offset is a credit that may be purchased by an individual or organisation in order to reduce their carbon footprint. When the number of carbon offset credits earned equals the amount of carbon footprint emitted by an individual or organisation, that individual or organisation is said to be carbon-neutral. Indeed, to be carbon neutral is the gold standard but it does demand certification by a qualified body, such as to the UK BSi PAS2060. While the revenue gained from the purchase of carbon offsets is frequently invested in environmentally favourable projects, such as investments in renewable energy, this is not always the case.

Carbon offsetting, in a broader sense, refers to any reduction in greenhouse gas (GHG) emissions that is done to compensate for emissions that occur elsewhere. Carbon, or CO2, offset credits demonstrate that a company or individual has decreased their emissions. The phrase “carbon offset” refers to both the credit for carbon offsets and the act of offsetting carbon emissions.

The decrease in emissions of one metric ton of carbon dioxide is represented by a carbon offset credit. The purpose of carbon offsetting is to reduce an organisation’s carbon footprint to zero or to a small fraction of it. Bear in mind, however, that not all carbon offset projects have been certified and due diligence is an imperative.

The context of carbon offsetting

As we consume energy, whether for heating, cooling, transportation, manufacturing or otherwise, we are releasing pollutants into the atmosphere. Equally, the entire supply chain for the generation of that energy has its own carbon footprint. Carbon, or CO2, is also a convenient misnomer: when the media refer to “carbon”, they are actually referencing a collection of harmful gases as defined by the Kyoto Protocol.

Your “carbon” emissions are, thus, properly expressed in terms of CO2e, which is the equivalent amount of the tonnage of carbon released by all of these gasses. For reference, you will recognise various of the gasses, including nitrogen, methane, nitrous oxide and others.

What are carbon footprints and how do they work?

A person’s or organisation’s carbon footprint is the total quantity of carbon dioxide and other greenhouse gases (GHGs) produced by their actions. It takes into account both direct and indirect emission sources.

A direct emission is one that emanates from a source that is owned by the reporting entity. A good example is carbon dioxide created by fossil fuel combustion within the confines of a delivery vehicle owned by a firm. Despite the fact that indirect emissions are produced by the reporting business’s actions, they come from sources that the reporting entity does not own. These are referred to either upstream or downstream actions, depending on the context.

At several stages along the supply chain, the manufacturing of a T-shirt generates indirect emissions. The cotton is grown and shipped in raw materials and finished products, with the end product decomposing in a landfill after it has been decomposed in the environment. It is these indirect emissions that are a contributor to carbon footprints on the part of both the producer and the consumer.

Carbon footprint calculators are available for free on the websites of the Environmental Protection Agency (EPA) and other organizations. Individuals can use these calculators to figure out how much carbon they are emitting.

What is the procedure for carbon offsetting?

Organisations undertake carbon offsetting on their own initiative or to comply with government regulations, and the Net Zero / carbon Neutral goals of national governments is increasing the pressure.

When an individual or organization wishes to remove a portion of carbon dioxide from the atmosphere, they might pay a broker to do it in a different location, usually in another country. The consumer calculates their emissions level, and the broker then charges a fee based on the level of emissions the customer has calculated. The broker will then put a portion of the money he has received into a project that minimizes greenhouse gas emissions.

For example, an individual may decide to fly, which will result in the emission of a specific amount of greenhouse gases into the environment. The individual utilizes a tool to determine the amount of emissions released during the travel and then purchases a carbon credit from a broker to offset the amount of emissions emitted during the flight. After deducting its commission, the broker invests the remaining funds in an emissions-reducing project, such as a reforestation campaign.

Another example is the release of greenhouse gases (GHGs). An organization may use a tracking tool to keep track of greenhouse gas emissions generated by cloud computing and subsequently acquire a carbon offset in order to comply with decarbonization regulations.

The British Standards Institution’s Publicly Available Specifications 2060, for example, is an example of a policy that encourages offsetting. It explains in detail how to demonstrate carbon neutrality and how to build a carbon management plan for your organization.

The price of UK ETS allowances (the cost per tonne to emit CO2e) has risen significantly since inception of the scheme in May 2021 at £47/tonne to current levels of £78/tonne.

When a carbon offset is acquired, the individual or business receives a certificate or some other proof that they’ve done so. They can then use this as evidence that they have complied with the requirements.

Prices of carbon credits used by companies to offset their emissions are currently low, due to an excess of supply built up over several years, together with issues over whether payments for credits really result in additional reductions in carbon emissions. According to the research, titled Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance, without this surplus, prices would be around $15/tCO2e higher, compared to $3-5t/CO2e today.

This growth in demand should see carbon credit prices rise to $20-50/tCO2e by 2030, as more investment is required in projects that take carbon out of the atmosphere in the long-term. These prices are needed, for example, to incentivise landowners to forgo income from agriculture and instead preserve forests and plant trees. With a further increase in demand expected by 2040 and 2050, carbon credit prices would rise in excess of $50/tCO2e.

Steps taken to reduce carbon emissions

An organization can offset its carbon emissions by taking one or more of the three measures outlined below:

  • Calculate and record emissions data for future reference. There are certain processes in place to assist businesses in doing so. For example, the GHG Protocol is an internationally accepted accounting standard that assists enterprises in measuring and managing their greenhouse gas emissions (GHG). In accordance with the convention, emissions are divided into three categories or scopes. In addition to carbon dioxide, other greenhouse gases such as methane and nitrous oxide are included in the total amount of emissions. It is recommended that organizations regularly analyze their carbon footprints and include the results in sustainability reports and other financial reporting. At least 40 countries have enacted legislation requiring some form of emissions reporting. Companies in the United States that emit 25,000 metric tons or more of carbon dioxide per year are required to report those emissions to the Environmental Protection Agency (EPA). According to the state of California, the reporting level is lower at 10,000 metric tons.
  • Reduce emissions to the greatest possible extent. A sustainability strategy can be developed once a company has measured its emissions and identified the sources of those emissions. The Science Based Target initiative (SBTi), which is aligned with the goals of the Paris Agreement, provides precise guidelines for decreasing emissions. According to the SBTi, by 2025, businesses should be using 80 percent renewable electricity. Carbon reductions can also be achieved in lesser amounts through individual action, such as adopting a more sustainable diet or moving to more environmentally friendly modes of transportation, such as electric automobiles and trains with hybrid engines.
  • Reduce the amount of emissions that are still there. Emissions that cannot be removed in their entirety can be compensated for. Carbon dioxide reduction projects are those in which carbon dioxide is absorbed or removed from the atmosphere. To be able to provide carbon credits, a project must first be certified.

The purpose of offsetting

The ultimate purpose of carbon offsetting is to reduce carbon emissions. Businesses should cut as much of their own emissions as they can before considering carbon offsets.

Once a project has been certified, third-party monitoring companies check to see if it fits certain requirements, such as the ones listed below:

  • Net-positive emission removal. To qualify for credits, the emission removal or reduction must be something that would not have happened otherwise. This necessitates the inspection and verification by monitoring organizations that a project is employing validated procedures and science in its computations.
  • Leakage-free. The creation of carbon credits must not result in the generation of greenhouse gases in other areas. For example, if one forest is protected as part of a project, it is unlikely that deforestation in another unprotected region will rise as a result of the initiative.
  • In the case of credits, they reflect emission reductions that are irreversible. For example, projects that aim to sequester carbon underground may be considered. There is a very little chance that this carbon will find its way back into the atmosphere again.

A certified offset project that generates credits meeting these criteria should be selected by organizations. In addition, they should choose initiatives that satisfy their own environmental and social objectives, such as supporting biodiversity, in order to maximize their impact.

As soon as a purchase has been made, businesses should communicate openly with all stakeholders about their offsetting strategy and the initiatives that they are supporting. Transparency is essential in order to prevent being accused of greenwashing. In marketing, greenwashing is the practice of convincing people that an organization’s products, aims, and policies are ecologically friendly without providing any evidence.

Is carbon offsetting a good solution to climate change?

Offsetting has some benefit in terms of slowing down climate change, but it is only one of several climate solutions that are required to save the planet from further destruction. Offsetting means that the carbon output continues to occur, but it is offset by someone else. The reduction, elimination, and reversal of greenhouse gas emissions is a more effective way to reducing emissions.

In contrast to encouraging polluters to stop producing greenhouse gases, offsets urge polluters to fund those companies that are doing so. Nonetheless, carbon offsets support the development of better carbon policies and the implementation of these regulations in places where there were previously none.

Carbon offsets will not be effective in combating climate change until and until the world’s largest carbon emitters commit to carbon neutrality. The development of a sustainable supply chain, as well as a commitment to the use of renewable and clean energy sources, are required.

Illustrations of carbon offsetting

There are many carbon offsetting schemes, spanning a considerable range of sectors, including:

  • The restoration of deforested areas is the goal of tree planting projects. Trees are excellent carbon sinks and storers. If they didn’t exist, the carbon would have remained in the atmosphere, aggravating global warming.
  • Farmers grow crops with the help of technologies and practices that allow them to maximize resources and minimize waste while growing crops.
  • Airline operators use artificial intelligence to optimize flight trajectories in order to reduce the formation of contrail clouds.
  • Renewable energy. These initiatives aim to replace the use of fossil fuels with clean, renewable energy sources, such as wind energy provided by a wind farm.
  • Water management. In order to reduce the need to chemically treat or boil water, projects bring clean water to communities that have dirty or otherwise tainted water.
  • Waste management. Projects are being developed to capture the methane produced in landfills as a result of garbage disposal.
  • Carbon sequestration. Carbon capture and storage projects use carbon capture and storage to store carbon in locations where it is unlikely to be released back into the environment. They remove carbon dioxide from the atmosphere and store it in soil, marshes, forests, and even rock. Carbon dioxide is a greenhouse gas.
  • Energy Efficiency. The goal of these projects is to increase the efficiency of existing infrastructure, for example, by updating building insulation.

Offsets are often regarded as a key policy instrument for preserving economic stability and enhancing long-term sustainability. As a result of climate change policy, unequal carbon prices exist in the economy, which can cause economic collateral damage if production flows to regions or industries where carbon is cheaper. This can happen unless carbon can be purchased from that area, which offsets effectively permit, thereby equalizing the price.

author avatar
Humperdinck Jackman
Leads the daily operations at ESG PRO, he specialises in matters of corporate governance. Humperdinck hails from Bermuda, has twice sailed the Atlantic solo, and recently devoted a few years to fighting poachers in Kenya. Writing about business matters, he’s a published author, and his articles have been published in The Times, The Telegraph and various business journals.


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