As the climate crisis increasingly hits the headlines and becomes a significant challenge for businesses and investors, carbon offsetting is getting more attention. Carbon offsetting is often portrayed as either a popular and almost miraculous way for companies to reduce their carbon footprint or as a controversial corporate tool that gets in the way of addressing the heart of the problem.

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Truth be told, carbon offsetting mostly sits in a grey area. Some people and companies have used carbon offsets as an opportunity only to make more profits or to hide their environmental-destructive practices. Meanwhile, some companies are trying to make a difference by developing carbon offsets, making substantial positive impacts on the climate and nature-regeneration.

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In this Academy article, we will dive into what carbon offsets really are, how carbon offsetting works, and how to use it correctly for businesses.

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What is carbon offsetting

Carbon offsetting refers to removing carbon dioxide from the atmosphere through numerous methods (e.g., tree planting and carbon sequestration) to compensate for the carbon emissions released by a given activity. Carbon dioxide has the same warming effect on the atmosphere regardless of where it is emitted. So, if a ton of carbon dioxide can be removed from the atmosphere in one area of the world, a ton of carbon emitted in another area of the world should be canceled out.

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So, in theory, businesses can reduce their contribution to global warming by investing in projects that actively contribute to capturing carbon dioxide from the atmosphere. Famous carbon offsetting methods include tree planting and forest regeneration. Still, carbon offsetting can take the form of credit purchases that fund climate-positive projects, such as wind farms, destruction of industrial pollutants, or energy-cogeneration projects. So generally, carbon offsets can take two main forms:

• Removal offsets: capture greenhouse gas from the atmosphere through nature-based solutions (e.g., forests, oceans, or wetlands) or mechanical removal.
• Avoidance offsets: contribute to developing activities that reduce the amount of carbon emissions released in the atmosphere for a given activity (e.g., electricity generation or recycling).

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Incredibly diverse, carbon credits have been regulated and financialized to create carbon offset markets. They are believed to incentivize companies to reduce their carbon footprint while helping accelerate the energy transition process. The results of such policies are that 61 carbon pricing initiatives are now in place globally, including both carbon-offsets trading schemes and carbon-tax.

On the other hand, opponents argue that they slow the transition to a sustainable economy by allowing large corporations to offload responsibility for their polluting activities. In addition, we have seen many examples of "legitimate" carbon offsets, traded on markets and used by companies to proclaim themselves "green", that have failed to deliver on their promises (e.g., tree planting projects that introduce invasive species and end-up releasing more GHG in the atmosphere).

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Why do businesses need carbon offsets

To achieve a net zero world, emissions must decline dramatically. There is no doubt that to stay below the 1.5°C temperature increase threshold, carbon removal (both natural and mechanical) will need to be massively expanded. Nevertheless, it would be dangerous to consider carbon offsetting as the ultimate solution to the climate crisis. Climate science is far too complex to be treated as an accounting system. That is why carbon offsets should be seen as a complement to a company's efforts to reduce its carbon emissions in the first place.

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Before considering the purchase of carbon offsets, companies must conduct a thorough analysis of their carbon footprint. Unlike what most large companies have done to date, companies must identify emissions from Scope 1, Scope 2, and Scope 3 (where on average, 98% of company emissions are found). Subsequently, businesses can understand the nature of their carbon footprint and identify emissions hotspots. Through this analysis, companies should be able to create an engaging reduction plan with a science-based target to reduce its carbon emissions. Finally, companies can use carbon offsets to compensate for incompressible emissions, which cannot be decreased without ultimate financial risk or because of other actors in their supply chain. This is the final stage to reaching Net-Zero.

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Let's summarize what steps come first before companies should consider offsetting their carbon footprint:

• Measuring their carbon emissions: This is the first step in a company’s sustainability journey. Emissions should be measured across Scope 1, Scope 2, and Scope 3;
• Identifying emission hotspots: Through a deep analysis of their carbon footprint, businesses can pinpoint major greenhouse gas emissions sources;
• Reducing their carbon footprint: The top priority of businesses should be reducing their emissions as much as possible by implementing radical climate actions, redesigning their business models, and investing in energy-efficient equipment;
• Offsetting remaining emissions: Temporarily, emissions that cannot be reduced should be compensated through carbon offsetting.

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How to find effective carbon offsets

Carbon offsetting has been possible since the Clean Development Mechanism (CDM) through the Kyoto Protocol. Since then, many things have changed, and carbon offsets markets have multiplied. In some areas of the world, fossil fuel and polluting industries are required to offset their emissions through a regulated carbon market, like the European Union ETS, which covers around 45% of the EU’s greenhouse gas emissions. However, most companies do not fall under these regulations and rely on voluntary carbon offsets trading schemes to compensate for their remaining carbon emissions.

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Critics of carbon offsetting report the lack of transparency in the industry,  questioning if some offsetting programs are capturing as much greenhouse gas as they pretend to. Some carbon offsetting projects even end up releasing more carbon into the atmosphere through a lack of experience and a purely profitability-based approach. For instance, tree planting projects are sometimes labeled as “carbon offsets” while relying on invasive, exotic, and fast-growing trees that quickly die of diseases, burn, or negatively impact biodiversity. A forest isn’t just a bunch of random trees planted next to each other.

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Now, how do you find an effective way to offset your emissions? One approach we recommend at Coolset for SMEs to offset their carbon footprint is to prefer small organizations that do not manage carbon offsetting in an industrial manner. Moreover, carbon offsetting through nature-based solutions, like tree planting, usually relies on more than one factor to be successful (i.e., the number of trees planted): species of the trees, type of soil, tree-planting method, consideration of the local community, biodiversity, etc. That’s why we’ve partnered with Regreener; we recommend you check out their carbon offsetting programs. Rewilding is also an effective way to restore nature and biodiversity while offsetting your emissions.

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Find out how your small business can actively contribute to the fight against climate change.