To avoid climate breakdown, countries and companies should be planning to halve their emissions of greenhouse gases (GHGs) by 2030 and attain net zero by 2050. For a company, what does this mean?

‘Net zero’ means that any carbon or other GHG emissions produced are balanced – or offset – by equivalent emissions being reduced, avoided or removed elsewhere, on the company’s behalf.

The terms ‘offsets’ and ‘credits’ are sometimes used interchangeably, but ‘carbon offsets’ usually arise from projects that take GHGs from the atmosphere, such as by reforestation. Subject to certain requirements, the benefits can be transferred to organisations wanting to compensate for their own emissions.

Meanwhile, ‘carbon credits’ are financial instruments, certified by a government or other independent body, usually recognising projects that are reducing emissions. These can be bought or sold as units (such as ACCUs or NZUs), each representing the reduction, avoidance or removal from the atmosphere of one tonne of carbon dioxide or its equivalent (CO₂e). In some situations, organisations emitting less carbon than currently permitted can sell their surplus credits.

To be valid, a project needs to meet the test of additionality. It must be clear that the benefits would not happen if the project did not exist. Protecting a forest or wetland, for example, is a valid project only if these would not otherwise be protected.

Transfers can take place in either a carbon compliance market (with government or regulatory oversight) or a voluntary market. Units purchased in a voluntary carbon market might have lower integrity and credibility.

Offsets should be cancelled (or ‘retired’) when used, to avoid the possibility of double-counting the benefits claimed.

Weighing up the pros and cons of carbon offsets

Together with mitigating climate impacts, well-planned offsets can provide a range of other advantages (sometimes called co-benefits). They can involve nature-based solutions, protecting habitat and endangered species, and can help to build community wellbeing and resilience. Examples include supporting indigenous groups to protect their forests, or supplying communities with solar cook-stoves, reducing deforestation and respiratory diseases.

Yet offsets might not always deliver the benefits hoped for. The carbon in fossil fuels has been held underground for millions of years. Burning this puts it straight into the atmosphere. Some emissions could be sequestered by trees, for example, but if the forest is lost – to fire, drought, storm damage or disease – the benefits are rapidly lost, too. Massive fires on several continents recently have highlighted the danger. The risks will increase as temperatures rise.

There are other risks in arranging offsets. There can be difficulties in quantifying the potential benefits. In low-integrity projects, commitments might not be honoured. Badly planned projects might impact negatively on local communities. Biodiversity might suffer from monocultural forestry schemes.

The biggest risk is that offsets could do more harm than good. Their existence might reduce the pressure on a company to cut emissions. But if the offsets fail, the emissions increase and the atmosphere will suffer.

Nicki Hutley, speaking for Australia’s Climate Council, says, “Verified credits have a role to play in the short term for transitioning enterprises, particularly those in hard-to-abate sectors like cement and steel… Unfortunately, some companies are using carbon credits as a means to avoid transitioning to cleaner renewable energy.”

Likewise, Liz Morison at The Australia Institute’s Climate & Energy Program believes many companies use offsets as a form of greenwashing – that is, using offsets to make claims that they are carbon neutral, net zero, or that they are making climate progress, when they are contributing to climate change.

“For example, Australian oil and gas company Woodside uses offsets to underpin their net zero strategy, while significantly increasing gas production,” she says.

The best way forward

Companies will be pushed to cut emissions as climate impacts accelerate and pressures from governments, banks, investors and customers increase. Quality offsets might buy time while better solutions are found, and their use alongside ambitious reductions could help protect biodiversity and support innovation.

The New Zealand Climate Leaders Coalition asks companies to adopt “short- and-long-term gross absolute science-aligned targets for scope 1, 2, and 3 emissions” consistent with limiting future warming to 1.5 degrees Celsius, and to use offsets with high integrity only as a last resort.

The first priority must be to avoid fossil fuels and other sources of GHGs as early as possible. Second, where that is not yet feasible, companies should at least reduce their use of these. The third choice is to offset any unavoidable emissions. This final option, though, might be less reliable, less convincing, and ultimately more costly.

Your carbon accounting questions answered

To assist members engaging in carbon accounting, CA ANZ has created a list of frequently asked questions that are arising in this rapidly evolving space, along with links to practical resources.

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