By Alan Simpson CA
1 April 2022
This article explains the use of carbon offsets as a means of achieving net zero carbon emissions.
Main points:
- Carbon offsetting is an activity that compensates for the greenhouse gas emissions generated by an entity.
- The voluntary carbon offset market allows organisations or private individuals to buy offsets on a voluntary basis.
- This enables them to compensate for the emissions they generate by investing in projects such as tree planting.
Carbon offsetting is an activity that compensates for, or balances out, greenhouse gas emissions generated by an organisation through its activities and operations. These offsets (or carbon credits) are expressed in tonnes of carbon dioxide (CO2). Each credit purports to be equivalent to the removal of one metric tonne of CO2 from the atmosphere.
Carbon offsets fall into two broad categories:
- ‘Compliance offsets’ – these are made to fulfil a legal or regulatory requirement, such as the UK Emissions Trading Scheme (ETS), and are not explored further in this particular article.
- ‘Voluntary offsets’ – which will be the focus of this article.
The voluntary carbon offset market allows companies, non-profit organisations, universities, local authorities or private individuals to buy offsets on a voluntary basis, with no intention of using them for compliance/regulatory purposes. This enables them to compensate for their own greenhouse gas emissions and make progress towards their eventual goal of achieving any net zero commitments they have made by investing in projects (often in developing countries) to reduce carbon emissions.
Examples of such projects include:
- Tree planting.
- Sinking boreholes and maintaining pumps to provide a clean drinking water supply.
- Providing renewable energy to avoid the practice of felling trees for firewood.
- Capturing methane from agricultural waste and converting it into electricity.
- Providing more efficient basic cooking stoves to reduce air pollution arising from cooking using outdoor wood-burning fires.
The voluntary carbon market is huge: it was recently said to exceed $1 billion.
Carbon credits and voluntary carbon offsets contrasted
In basic terms, a carbon credit is a financial instrument that represents ownership of one tonne of CO2 equivalent, which can then be bought, sold or traded on the voluntary carbon market to offset against emissions made by the holder.
A voluntary carbon offset generates reductions in greenhouse gases and results in the creation of a voluntary carbon credit from a project with structure, title, objectives and a plan for independent verification. They are not compulsory or made in compliance with a regulatory requirement.
Standards of verification for carbon offset schemes
Various standards exist for third party verification of voluntary carbon offsets, with the major ones being:
(a) Verified Carbon Standard: (Also known as Verra) is a non-profit organisation which develops and produces standards in voluntary carbon offsetting of greenhouse gases.
(b) Voluntary Gold Standard: The Gold Standard is a not-for-profit organisation based in Geneva which sets requirements for designing carbon offset projects to ensure maximum effectiveness in line with UN Sustainable Development Goals (SDGs).
(c) Quality Assurance Standard: (QAS) independently audits carbon offset products and programs against the highest standards world-wide.
Voluntary carbon markets
The voluntary carbon market has been changing rapidly, especially as large companies look to use credits from the voluntary carbon market to help them meet their net zero commitments.
As a result, in 2021 the Institute of International Finance (IIF) created the Task Force on Scaling Voluntary Carbon Markets (TSVCM). It was launched by Mark Carney (the former Governor of the Bank of England), the UN Special Envoy on Climate Change. The Task Force is a private sector-led initiative to standardise and scale the voluntary carbon market and produce recommendations for improving controls, transparency and governance in this market to enable it to meet the growing demand for carbon credits.
The members of the Task Force comprise representatives of buyers and sellers of carbon credits, standard setters and the financial sector.
In January 2021 the TSVCM produced its final report (blueprint) on its recommendations on how to form a large-scale voluntary carbon trading market.
In order to implement the recommendations of the TSVCM, the UK Voluntary Carbon Markets Forum was founded in April 2021. This body is chaired by Dame Clara Furse DBE (CEO of the London Stock Exchange from 2001 to 2009). The City of London Corporation provides secretarial support to the Forum.
The Voluntary Carbon Markets Integrity Initiative (VCMI)
The VCMI is a multi-stakeholder platform whose goal is to improve governance on voluntary carbon markets by developing better guidance on the claims made about projects.
The initiative is supported by the UK government’s Department of Business, Energy and Industrial Strategy (BEIS) and by the Children’s Investment Fund Foundation.
In summary, the voluntary carbon offset market provides the means for organisations to fulfil their climate change and net zero ambitions. However, to minimise the risk of greenwashing, these ambitions and commitments will need to credible and verifiable.
Find out more:
The UK Voluntary Carbon Markets Forum
The future of voluntary carbon markets
This article was first published by Chartered Accountants Ireland at the following URL: https://www.icas.com/landing/sustainability/climate-change/finance-plus-sustainability-carbon-offsets
