The net-zero transition has a carbon offset problem. Huge volumes of low-quality, low-cost offsets – emissions reductions made elsewhere that companies can buy to compensate for their own emissions – remain in circulation, offering the unscrupulous or ill-informed a route to questionable claims of carbon neutrality. Meanwhile, many of the projects and activities needed to tackle climate change in the long run are ill-suited to current carbon markets.

In response, a growing number of environmental groups and think tanks, and a handful of corporate buyers, are beginning to rethink the role of corporate carbon offsetting to get to net zero. Rather than obsessing over carbon inventories and claims of verified emissions reductions, they say, companies looking to lead on climate change should invest in long-term solutions beyond their own carbon footprint – and forego any claims on resulting emissions reductions.

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A climate protest in London in 2019. (Photo by Diane Vucane/Shutterstock)

The NewClimate Institute, a Cologne-based think tank, has pioneered what it describes as a “climate responsibility” approach. It acknowledges that it has emissions it is unable to reduce, but rather than buy offsets, it assigns a financial value to those emissions and invests an equivalent sum in activities outside its value chain that promise to make a long-term contribution to tackling climate change. However, it does not claim ownership of any emissions reductions those activities produce, nor does it claim that its investments have made it carbon neutral.

“We are transparent about these remaining emissions and we take responsibility for them,” says Carsten Warnecke, one of the institute’s co-founders. Its investments “do not allow us to say we are climate neutral, or that we have offset them or netted them out, but it shows that we understand [the impact of] those emissions.

“We think it would be much more constructive if others would follow that example instead of claiming they have solved the problem based on very untransparent approaches and massive use of really crap offsets,” he adds.

Claims of climate neutrality

These problems are highlighted in a recent report from the NewClimate Institute and the NGO Carbon Market Watch. They analyse the transparency and integrity of climate pledges from 25 leading companies such as Amazon, Google, IKEA, Unilever and Volkswagen. As well as raising questions over the “ambiguous” and “limited” headline commitments, the report criticises corporate offsetting plans.

Claims of carbon neutrality today are often misleading,” the report states. “We identified significant credibility problems with all of the carbon neutrality claims from the companies assessed in this report, due to a combination of limited emission coverage, inconsistent messaging, or procurement of low-quality carbon credits.”

It also noted that the “concept of making a contribution to climate change mitigation beyond the company’s value chain without claiming carbon neutrality is gaining traction”.

This is an approach that conservation group the WWF has endorsed with its Beyond Science-Based Targets report, published at the end of 2020. It argued that, in addition to reducing their own emissions in line with the goals of the Paris Agreement, companies need to invest in climate strategies beyond their own value chain and in activities that are forward-looking and longer term with the potential for considerable future impact.

The case for carbon credits

“Carbon credits have their role,” says Brad Schallert, the WWF’s US-based director of carbon market governance. However, he also acknowledges that this market is “fairly limiting”, whether that is to do with the difficulty of ensuring that projects also protect nature, for example, or the requirement that carbon credits only be issued against already realised, measurable emissions reductions.

As the WWF report notes, “financial commitments freed from the constraints of quantifiable carbon impact can incentivise corporate investment in tomorrow’s transformative solutions”.

“There are certain mitigation activities that just might not fit the carbon credit model,” says Schallert, citing agricultural soil carbon initiatives, or research, development and demonstration of new atmospheric carbon removal technologies. He points to the alternate approach of the Frontier “advance market commitment” initiative, backed by the parent companies of Google and Facebook, among others, which has raised nearly $1bn to buy tonnes of carbon to be removed from the atmosphere by as yet unspecified projects.

At a much smaller scale, Swedish fintech company Klarna has invested $1m in a Climate Transformation Fund. Milkywire, a tech platform aimed at connecting donors with NGOs, launched the fund last year as “an alternative to traditional carbon offsetting solutions”. Rather than aiming to generate quantified carbon reductions that companies can count against net-zero targets, it invests in the longer-term solutions needed to meet global climate targets.

Corporate climate responsibility

Currently, the Climate Transformation Fund is targeting three areas. First, it is supporting novel carbon removal technologies by pre-purchasing currently expensive carbon removals from Heirloom, a California-based company, and Climeworks, the Switzerland-based market leader in the field.

Second, the fund is supporting solutions that protect and restore nature, such as JustDiggit, a Dutch-based foundation working in Africa to restore degraded farmland, and MASH Makes, which creates biochar from agricultural waste, which is used to increase crop yields while removing carbon. Finally, it is also supporting advocacy and policy projects that aim to catalyse large-scale emissions reductions, including the NGO Human Rights Watch, which is campaigning against the health impacts of coal-fired power plants, and the Clean Air Task Force and its work supporting clean energy in Africa.

“We are looking for great projects that can have the most long-term impact, not just focusing on how many tonnes are removed or avoided today but rather looking at what they can lead to,” says Robert Höglund, the fund’s portfolio manager.

The approach is different from climate philanthropy, says Höglund, in the way that it is financed. Milkywire encourages companies to follow the WWF’s suggestion that they price their emissions (after reducing them as much as possible) and make a corresponding financial commitment to a range of climate actions, including further internal emissions reductions, buying high-quality carbon credits and supporting “transformative solutions” outside a company’s value chain.

“The difference [to philanthropy] is that we are tying it to corporate climate responsibility and the harm that companies are doing with their emissions,” he says.

Beyond carbon offsets

“At Klarna, we saw that taking accountability for our own emissions was not enough,” said Janek Kose, the company’s head of climate, at a webinar organised by Milkywire, the WWF and the Stockholm Environment Institute (SEI) at the end of March 2022. “We decided to commit meaningful resources to positively impact the climate [funded] by imposing an internal carbon tax on ourselves.”

Investment in policy advocacy can be significantly more impactful that simply buying offsets. “Climate change is a systemic problem,” said Emily Thai, manager of Giving Green, a US-based initiative that aims to identify the most impactful climate action projects. “That means you have to be investing in policy change or technology change, or a combination thereof.”

“This stuff isn't always measurable [and] it might not always work,” she told the webinar. However, she said that Giving Green has undertaken “some internal cost effectiveness analyses” which found that investments in activist groups, think tanks and policymaking are “at least an order of magnitude more impactful than your best carbon avoidance or removal credits per dollar”.

The value of investing in solutions that promise to deliver long-term decarbonisation is clear. However, it does not fit with existing approaches to carbon accounting, which seek to balance actual tonnes of emissions with quantifiable – and verifiable – claims of emissions removed or avoided.

Falling out of fashion

Höglund acknowledges that the Climate Transformation Fund has nothing to offer companies looking for reductions to support a claim of carbon neutrality. “But I think this carbon neutrality approach is going out of a vogue,” he adds.

If companies introduce an internal carbon fee, he continues, they can both compensate for the environmental damage of their emissions and integrate climate risk into their business. How they then choose to invest that money – whether buying high-quality offsets or supporting longer-term initiatives such as the Climate Transformation Fund – is a second-order decision.

However, this severing of the link between corporate climate action and the claim a company can make can cause problems. “The value of carbon or climate neutrality done well – in other words, not as a substitute for internal abatement – is that it provides corporates with a claim that is understandable… by key external audiences,” says Jonathan Shopley at Climate Impact Partners, the company formed from the merger of two voluntary carbon market companies, Natural Capital Partners and ClimateCare.

“The question we need to ask as we reformulate or reshape these mechanisms is, ‘are we helping corporates extract value from what is effectively a voluntary action?’” he adds, noting that the voluntary carbon market is “driving essential private sector finance to parts of the world that need support to transition”.

Beyond value chain targets

Companies should recognise, however, that the urgency of the climate crisis means corporate leaders need to go beyond addressing their direct impacts, argues Scarlett Benson, an associate at Systemiq, a consultancy. “We know that the nationally determined contributions under Paris aren’t enough. We know that, in most sectors, it is still a small percentage of companies that set targets,” she told the webinar.

However, it will be important to ensure that companies do get some credit for investments beyond their value chains. “Particularly for consumer-facing organisations… the claim is critical,” she added. Here, there is a role for the Science Based Targets initative (SBTi) or similar organisations. In research that Systemiq undertook for the SBTi, companies said they wanted a third-party organisation to create “beyond value chain targets”, analogous to emission-reduction or climate-neutral claims, that they could sign up to and get recognition for.

“The challenge we have is distilling this down to something that is going to resonate with companies and their customers in a voluntary context,” says Derik Broekhoff, a senior scientist at the SEI. “That is the biggest question we get about the blueprint [WWF report],” says Schallert. “What is the two-worded claim [that could replace ‘climate neutral’ or ‘net zero’]?"

What price is right?

Another problematic question is how much companies should invest. The WWF report suggests several benchmarks companies could use to price their emissions, such as carbon prices in national emissions trading schemes, or a range of $100–400 per tonne (/t) of CO2 equivalent (CO2e) that some models have indicated will be necessary to meet the goals of the Paris Agreement. Other suggestions include a percentage of revenues or profits.

The approach taken and the scope of emissions covered – whether just direct emissions or those created within a company's value chain – can lead to a wide range of outcomes.

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Systemiq modelled a food and beverage company with one million tonnes of CO2e of scope 1 and 2 emissions, and 15 million tonnes of scope 3 emissions, annual revenues of $50bn and profits of $5bn. Its hypothetical contribution ranged from just $3m per year if addressing scope 1 and 2 emissions on a “tonne-for-tonne” basis (using cheap $3/t carbon offsets) to $48m if it added scope 3 emissions.

Moreover, it would need to invest $75m per year if it allocated 1.5% of its profits to finance beyond-the-value-chain emissions, and if it applied a $40/t carbon price to its emissions across all three scopes, it would need to invest $640m, or 13% of its profits, each year.

To illustrate, Klarna has based its commitment on a carbon price of $100/t for scope 1 and 2 emissions and those from business travel, and $10/t for those in its value chain.

Valuing the voluntary market

A new approach to offsetting should not lead to a wholesale rejection of the voluntary carbon market, say experts. Broekhoff at the SEI recognises the “real accountability” built into the infrastructure of the voluntary carbon market. Others note the vast need for finance to prevent emissions and the important contribution that corporate offset purchases can make to carbon removal.

Giving Green, meanwhile, notes that, despite the drawbacks with offsets, “providing more funding for activities that are verifiably reducing GHGs [greenhouse gases] in the atmosphere will almost certainly result in lower amounts of GHGs, even if it is hard to exactly quantify”. However, its advice, says Thai, is that offset purchases should be viewed by companies as a “philanthropic contribution to a pro-climate project[…], rather than a way to eliminate their contribution to climate change”.

Rather than companies taking an ‘either-or’ approach to offsetting and “climate responsibility”, Shopley says some leading companies are already pursuing both. He cites UK broadcaster Sky, which combines a claim of carbon neutrality – using offsets – with contributions it has made via its Sky Rainforest Rescue project with the WWF.

“Clients are looking at all these options and are going to ultimately decide which are the simplest to deploy and which give the greatest return,” he sums up.