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Considerations for effective carbon offsets
And how to fund all types of carbon removal solutions
As corporate pledges to achieve net zero pile up, carbon offsets — paying someone else to reduce GHG emissions to compensate for your own — are attracting both increased interest and scrutiny.
Unfortunately, while the voluntary carbon market is in its infancy and constantly evolving, many carbon credits today are not sufficient at offsetting emissions. Although the ability to offset emissions with low-quality credits may “satisfy” net-zero claims, they often don’t deliver the promised climate benefits, and more importantly, perpetuate continued pollution.
There's still much to learn about which carbon offset solutions and frameworks will truly be effective and economically viable at scale. That said, there are three key points that I believe need to be considered for carbon offsets:
Offsets of Scope 1 and 2 emissions should be reserved for carbon removal credits, not avoided emission credits
Companies should consider “Horizontal Bridging” of their offsets
Scope 3 emission offsets offer the best opportunity for funding many nature-based solutions
One caveat before I get any further: As has been made abundantly clear by many organizations, decarbonization of one’s supply chain is the most important step in reducing your carbon footprint and mitigating climate change. It’s usually cheaper and more efficient to stop emissions in the first place rather than paying to properly clean up the respective emissions after the fact. That said, even if effective decarbonization occurs and emissions eventually reach close to zero, there will almost certainly be residual hard-to-avoid emissions. Therefore, we will likely need to continue offsetting emissions indefinitely.
Defining Offsets and Credits
The first important step is determining what exactly constitutes an “offset.” The common understanding is that a carbon offset is a way to balance out a company’s emissions by investing in projects that either remove carbon from the atmosphere or avoid emitting it. A growing group of people disagree with the “either” portion of an offset. They distinguish between the two by saying that “carbon offsets” are only designated for paying someone else to avoid emitting carbon (and are thus largely ineffective), whereas the removal portion is separately known as “carbon removal.” This distinction makes sense given that less than 5% of the voluntary offset marketplace is currently dedicated to actual carbon removal credits.
Additionally, while all carbon offsets are carbon credits, not all carbon credits need to be offsets. Some carbon removal credits are used as offsets, while others are purely purchased for the sake of advancing the industry, as seen by Stripe, Klarna, and others. So, it can be a little confusing.
Given most carbon credits are purchased for the purpose of negating one’s emissions, I’m going to stick with “carbon offsets” as the word choice here. That said, it’s essential to distinguish between removal and avoidance for those offsets, which can be done through an agreed-upon criteria for Scope 1 and 2 emissions.
Scope 1 and 2 Offsets
As a refresher, Scope 1 emissions are those directly produced from combustion of fossil fuels in the furnaces, boilers, or vehicles owned by a company. Scope 2 emissions come from all the electricity, steam, heat, and cooling that a company purchases to run its operations, which is often first produced by combusting fossil fuels.
Given they are directly linked to burning fossil fuels, offsets of Scope 1 and 2 emissions should be truly net-zero. This means that for every ton of carbon emitted and held in the atmosphere (which can be for thousands of years), another ton must be actively removed from the atmosphere and stored for thousands of years. It needs to be 1:1. In other words, these offsets need to be carbon removal offsets.
Source: Swiss Re
Unfortunately, the vast majority of Scope 1 and 2 emissions are offset through avoided emissions that violate the 1:1 rule. For example, if one ton of CO2 is emitted into the atmosphere, not cutting down a tree does not reciprocally sequester an equivalent ton into its biomass. Also, it’s extremely difficult to prove additionality and lack of leakage, not to mention concerns of durability as climate-induced natural hazards increase over time.
For these reasons, avoided and reduced emissions should not be considered as a permissible way to offset Scope 1 and 2 emissions. For those, we need to turn to true carbon removal solutions.
Organic vs. Inorganic Storage
Carbon dioxide removal (CDR) solutions are typically categorized as either nature-based solutions (NbS) or engineered solutions. However, as Ryan Orbuch explains, there are instances where these two circles overlap. It’s more accurate to bifurcate the CDR buckets into organic and inorganic storage. Organic solutions ultimately store CO2 in biomass or biology (such as trees, soil, and kelp), whereas inorganic solutions store CO2 geologically and/or via inorganic compounds (such as in underground reservoirs or as minerals). As such, I will be using “organic” and “biological” to describe many nature-based solutions.
I’m a major proponent of nature-based solutions such as reforestation, regenerative agriculture, select afforestation, and all types of ecosystem conservation. $44 trillion of the global economy — equal to half of the world’s total GDP — is generated by nature’s services. Other studies show that ecosystem services provide $125-140 trillion in value annually. Peatland preservation projects and conservation of the Amazon are essential to maintaining biodiversity and the functioning of natural carbon sinks; financial compensation to farmers for storing carbon in their soils can support a systemic transition to regenerative agriculture practices; kelp forest restoration is important for revitalizing fish populations and marine ecosystems.
There’s a massive gap in financing NbS, to the tune of $711 billion per year. Finding ways to fund these services is imperative. However, this doesn’t necessarily mean that carbon offsets are the answer. In many cases, organic carbon storage in soils or vegetation does not provide sufficient durability, additionality, standardized methodology, and/or quality measurement, reporting, and verification (MRV) to warrant a carbon offset, particularly for the direct impact of Scope 1 and 2 fossil fuel burning.
On the other hand, there’s an increasing number of technologies that enable more permanent, durable sequestration. This is typically through inorganic geologic or mineral storage, though there are cases of high-durability organic storage as well. Examples include direct air capture and carbon storage (DACCS), ocean alkalinity enhancement (OAE), enhanced weathering and other forms of mineralization, woody biomass burial, biochar, kelp sinking, and more.
Three pathways for offsetting emissions
Today, CDR technologies are a) often very expensive and unproven, and b) limited by their low capacity to remove tons of CO2 (which inherently increases the price). As such, corporations looking to offset their emissions are left with three options:
Scenario A: Only offset the portion of Scope 1 and 2 emissions they can afford by exclusively purchasing the expensive, high-durability carbon removal offsets.
Scenario B: Offset all Scope 1 and 2 emissions by relying on lower-quality and inexpensive biological credits (both removal and avoidance).
Scenario C: Do a combination of A & B. Offset with a blend of both high-durability solutions (primarily inorganic) and shorter-term biological carbon removal solutions.
Scenario A: One could make the case for Scenario A. Unified protocols and standards can and should be put in place around what types of CDR are high-quality and eligible for a carbon offset (though this is undoubtedly much easier said than done). Companies that are willing to offset their Scope 1 and 2 emissions, or at least a portion of them, with expensive, high-quality credits will do so. The result might be that many companies are unable to offset their full GHG inventory. This is particularly true given the limited availability of these types of credits in the immediate future. And so, companies would be left with higher residual emissions on their balance sheets and couldn’t claim to be net-zero. In this situation, facing consumer and investor pressure to be net-zero, they’d need to consider the following paths (both of which are impactful):
Set an internal carbon tax and decarbonize their supply chain in order to bring total emissions down (e.g., Microsoft and Klarna). All companies should consider doing this anyway, as it lowers the total emissions one needs to offset).
Provide grant capital and/or forward-purchase carbon credits to fund RD&D to get high-durability CDR technologies to an affordable price point and production capacity for offsets (e.g., Frontier and First Movers Coalition)
Scenario B: Many companies do this, which often leads to greenwashing. Simply put, it must end.
Scenario C: I believe most companies today should pursue Scenario C. Funding early-stage durable CDR technologies is critically important since many are not yet able to remove carbon remotely at scale. However, companies simultaneously need to fund the sequestration of CO2 from the atmosphere now using existing nature-based solutions. Sequestering carbon organically today — even if it’s not as durable — is important for buying time and avoiding tipping points, not to mention the myriad ecosystem co-benefits they provide.
Bridging the Durability Gap
Durability is one of the most challenging issues weighing on carbon offset frameworks. In other words, how do the climate benefits of carbon storage that might only last decades (or less) compare to storage designed to last thousands of years? Relying too much on the short-term solutions that are widely available today means we are likely just delaying emissions rather than fully offsetting them. At the same time, we obviously can’t wait until more durable storage is available at scale before catalyzing sequestration efforts.
One way to effectively fund short-term carbon sequestration solutions, while also promoting the more permanent carbon removal solutions we need in the future, is Carbon Direct’s “Bridging” strategy. This is very similar to the approach Shopify is taking with its Sustainability Fund. Bridging entails purchasing shorter-term, lower-durability credits that are actively sequestering carbon today (e.g., reforestation, etc.), while simultaneously paying the high price on advanced commitments for high-durability solutions (such as direct air capture and corresponding geologic storage). As those short-term credits’ duration runs out, the idea is that higher-durability solutions will be deployed and be effectively sequestering CO2, resulting in a continuous offsetting of emissions.
This strategy achieves the win-win of sequestering emissions today and tomorrow; over time, the more durable offsets will transition from being advanced commitments (ex-ante) to delivered and retired credits (ex-post). As the supply of higher-durability solutions increases and their respective price per ton declines, the portfolio of carbon offset funding should shift to a higher allocation of those respective solutions.
In the immediate future, the portfolio allocation will likely lean toward shorter-term organic storage opportunities. As such, the biological CDR solutions that are used to offset for Scope 1 and 2 emissions must fit rigorous third-party standards, such as those crafted by Carbon Direct for Microsoft. They should also consider incorporating an expansive version of buffer pools to provide insurance against any reversals (carbon dioxide being released back into the atmosphere due to elements like extreme heat, wildfire, disease, and more).
What to do about Scope 3 Offsets
Many biological removal credits (such as soil and afforestation) shouldn’t qualify for Scope 1 or 2 offsets because of varying concerns over durability, additionality, and/or shortcomings in monitoring, reporting, and verification (MRV). However, there is an important funding opportunity for nature-based solutions in Scope 3 emissions.
Scope 3 emissions are the indirect upstream and downstream emissions associated with a company’s supply chain. Scope 3 on average accounts for 70% of a company’s total emissions, though it fluctuates across sectors. As an example, a yogurt maker’s Scope 3 would include the emissions of the dairy farmers who provide the milk, the materials companies that create the packaging, the 3rd-party logistics that handle transportation of the ingredients and raw materials to the production facility, and the delivery of the yogurt to the grocery store (plus many other parties in the cradle-to-grave supply chain).
Properly accounting for all those emissions requires the company to ask every party along its supply chain to accurately track and share reports of their emissions. This is why Scope 3 emissions are notoriously difficult for a company to accurately quantify.
The MRV Conundrum
In any carbon offset framework, accurate MRV is critical. Especially so for biological solutions given the concerns outlined above. Unfortunately, perfect accuracy at scale remains difficult to accomplish for many organic carbon credits using today’s variety of methods. How do we ensure that we’re not letting the perfect be the enemy of the good?
Given the 1) accounting difficulties of Scope 3 emissions and 2) their indirect nature, I’d make the case that monitoring, reporting, and verification (MRV) for their corresponding sequestration need not be 100% air-tight (though of course we want it as close as possible).
Insisting on having perfect measurement of the rate of CO2 being stored or re-entering the atmospheric carbon cycle would outright prevent a variety of critical nature-based solutions from being funded. My view is that we should still enable high-quality Scope 3 credits to exist, as a feature on top of — not in place of — emission reductions and decarbonization.
We still need to ensure fundamental criteria and measurement around additionality, transparency, and aligned incentives. This is especially the case for avoided emissions, and is all the more reason we need removal as the foundation of carbon offsets.
I continuously go back and forth on this tradeoff, but despite some shortcomings in MRV technologies today, the additional value in co-benefits from nature-based solutions is overwhelming. Most notably, these include increased biodiversity, food security, job creation, and adaptation. Biological carbon credits are a missing piece to capitalizing key elements of the broader carbon ecosystem in many parts of the world. Nearly 75% of nature-based solutions rely partially on grant funding, and almost half are entirely dependent on it.
Now, I’m definitely not saying all forms of MRV should be accepted for nature-based solutions. We still need to maintain high standards, which many of the current MRV companies that exclusively rely on remote sensing do not satisfy. However, technologies and approaches that emphasize proper accounting, baselines, physical sampling, mass data collection, and local/regional variations can lead to more successful verification, and will ultimately help enable more effective Scope 3 crediting. And we’re hopeful that new technological innovations will continue developing to facilitate the right standards on a large level.
Moreover, the most accurate MRV for biological storage today, be it >30cm-1m soil sampling or measuring tree widths, typically requires labor and operating expenses to supplement remote sensing. As such, it can be beneficial for high-quality nature-based credits to represent the true cost of their inception, which, as Ryan Orbuch and Shayle Kahn point out, may include their respective costs of MRV. Even if this price increase prevents some buyers from purchasing, it would help the best biological solution providers stand out amongst a plethora of lower-quality credits, which is important to the buyers out there prioritizing quality over quantity.
Where Avoided Emissions Fit In
Avoided and reduced emissions credits are still difficult to include from an offsetting perspective, although reduction credits are more clearly justified for insetting purposes. As CTVC explains, “insetting refers to the intentional reduction of Scope 3 emissions, the upstream and downstream emissions within a company’s own supply chain. Unlike carbon offsets, inset emissions are directly avoided, reduced, or sequestered within the company's own value chain — not sold as a credit to offset another company’s emissions.”
Going back to the yogurt example, an inset could occur if the dairy farmers are feeding their cows red seaweed to reduce emissions, which results in ultimately lower upstream emissions that go into each cup of yogurt — all within the supply chain. On the flip side, should a major oil and gas company based in Europe be able to pay a dairy farmer in the Western Hemisphere to feed her cows seaweed in exchange for the opportunity to say it has offset its emissions? It doesn’t seem justified. Insetting Scope 3 emissions makes much more sense intuitively and given all the reasons above.
However, in addition to a company insetting its Scope 3 emissions, perhaps some universally agreed upon percentage of a company’s Scope 3 credits (say 1-10%?) might be permissible for allocation toward avoided nature-based emissions outside of its supply chain, known otherwise as “protection credits.”
I understand full and well there are issues with respective additionality, durability, leakage, and MRV around protection credits. And I’m not advocating for all avoided deforestation projects to be suitable as carbon credits - there are a host of infamous stories that demonstrate the gaping flaws in many of these projects. We absolutely still need to maintain high standards, and if those standards can’t be met, the projects shouldn’t be funded. But again, without the added economic incentive to choose conservation over deforestation, which carbon credits have the potential to create, land clearing and ecosystem destruction is more likely to occur. Tropical forest communities should be compensated to safeguard peatlands, Amazonian stewards to protect the rainforest, and coastal villages to maintain their mangroves.
The Bottom Line
There’s still much to figure out as voluntary carbon markets, CDR solutions, and policy regulations rapidly develop. However, we cannot afford to blindly pump out low-quality carbon offsets for the sake of abiding by ESG claims while continuing to pollute. We must focus our offsetting strategies on a range of effective carbon removal solutions, guided by a robust set of principles and criteria defined by experts and third-parties.
Some would say we need to reserve the same levels of MRV accuracy and offset criteria to Scope 3 emissions as we do Scope 1 and 2, to which avoided and reduced emissions of all kinds wouldn’t fit. And perhaps they are correct. However, I believe doing so would prevent the capital flows to nature-based solutions that we truly need. And without the role of carbon markets, we might not achieve the required conservation quickly enough.
More and more people and organizations are out there building the solutions, standards, and systems we need, which gives me confidence we’re on the right path. I look forward to seeing what’s on the horizon.
This post was updated on September 9th, 2022 to reflect changes in the versions published on Elemental Excelerator’s Discover page.
A special thank you to my colleague Saritha Peruri for her feedback and insights in putting all these thoughts together.