What Are Carbon Offsets and How Do They Work?

Persefoni Team
By Persefoni Team
October 5, 202216 min read
November 22, 2022, 11:21 AMUpdated
October 5, 2022Updated: November 22, 2022, 11:21 AM16 min read

Carbon offsets refer to the removal or avoidance of carbon from the atmosphere to counteract emissions made elsewhere. Organizations can achieve offsetting either naturally through utilizing natural carbon sinks or technologically through carbon capture and storage, renewable energy, reforestation, or other means.

As the world races to decarbonize, carbon offsetting has become a significant part of companies' ambitious net-zero plans. Carbon offsets, especially in sectors like aviation and oil and gas that find it hard to decarbonize, have seen an increase in popularity in recent years.

However, it is not without its critics. Some claim offsets give large polluters an excuse not to reduce their carbon emissions. Since there is also no single source of truth among the international bodies verifying offset projects, some critics claim it remains unregulated.

Below, we’ll give a broad overview of what carbon offsets are, how they work, the different types, and how they can play a role in a company’s decarbonization plan.

How Do Carbon Offsets Work?

Companies can buy carbon offsets from project owners or brokers. The proceeds help fund project developers’ efforts to remove or avoid carbon emissions. Finally, the purchasers of the credits can claim and report those offsets in their carbon disclosures to reduce their reported carbon footprint.

Project owners sell carbon offset credits to help finance projects that reduce or avoid carbon emissions. This can range from projects to protect endangered forests to new technologies that can remove and store carbon in the atmosphere. Offset results are commonly measured in metric tonnes of CO2e.

Once these offset credits are available for purchase, companies can begin the process of vetting and purchasing carbon offset credits. We’ll go over the general process below.

Calculating Emissions

Organizations should first calculate their emissions to see where they can reduce emissions. Entities can then use carbon offsets to reduce remaining emissions they’re unable to lower at that time. When an organization purchases offsets, it can potentially count those toward an overall reduction in its carbon footprint. However, per the GHGP, organizations have to report the entirety of their scope 1, 2, and 3 emissions. The offsets don't count towards that balance.

Vetting Projects and Purchasing Carbon Offsets

Companies can go online and find a number of registries selling credits for carbon offsets. The United Nations (UN) Carbon Offset Platform is one example of a way to find United Nations Framework Convention on Climate Change (UNFCCC)-certified projects that remove, avoid, or reduce greenhouse gas (GHG) emissions.

There are a number of other platforms and program that use a variety of standards and verifiers to ensure they’re offering high-quality carbon offsets. Carbon offset programs can use standards like ISO 14064-2 for guidance on verification. However, some governments have their own initiatives and methods for managing carbon offsets.

For example, the Regional Greenhouse Gas Initiative for Eastern states in the U.S. uses a rigorous application process to vet projects and also has requirements for ongoing verification and monitoring. We’ll cover examples of standards, verification, and characteristics of effective projects in later sections.

In addition to finding platforms and verifying the quality of the project, businesses must also understand how their funding is used. Some platforms or brokers take a portion of the investment. Others may have a system set up to ensure money goes directly to the projects.

There are also what’s known as compliance and voluntary markets.

  • Compliance refers to carbon offsets purchased to meet federal or other regulatory requirements.

  • Voluntary refers to carbon offsets purchased by organizations or individuals who choose to do so without any mandates or requirements.

Reporting on Carbon Offsets

Once companies purchase an offset credit, they will receive documentation to validate their ownership. Companies at this point can report on these offsets in upcoming carbon disclosures or other reports. High-quality projects provide companies access to relevant project information that can augment their reporting.

What Are Characteristics of High-quality Carbon Offset Projects?

High-quality carbon offset projects have permanence, additionality, don’t double-count, don’t have leakage, and are verifiable. Companies can lean on certifications from third parties to help differentiate high-quality from low-quality projects. Organizations running these certifications typically employ scientists and have the resources to calculate and test claims. However, having a general understanding of some of these high-quality characteristics can also help when vetting carbon offset projects.

Below are a few qualities to consider when choosing a carbon offset project.

Permanence

Permanence means that the carbon removed or avoided cannot be reintroduced into the atmosphere. For example, projects that capture and store carbon are considered permanent since that carbon cannot be reintroduced back into the atmosphere. Permanence can be measured in years (10 years of permanence, 100 years of permanence, etc.).

Forestry projects are a common example of carbon offsets that may not have permanence. If forests aren’t truly protected from natural and non-natural threats, like forest fires or logging, then carbon may be released back into the atmosphere.

Additionality

Additionality means that the reduction wouldn’t have happened without investment in that carbon offset credit. For example, a company can fund carbon removal technology that otherwise wouldn’t have been funded.

A project doesn’t have additionality if the removal or avoidance could have occurred without carbon offset sales. For example, companies can purchase carbon offsets to protect forests and stop deforestation. That project may not have true additionality if the forest was never in danger to begin with. Another example is if a project would have happened anyway if it was required by the law, such as legislation requiring specific industries to switch to renewable energy.

No Double-counting

No double-counting means that multiple entities shouldn’t be able to claim and own the same carbon offsets from the same project. Double-counting can result in erroneous carbon accounting and lead to entities with false carbon emissions claims. Organizations like Gold Standard have evolved their double-counting guidelines to mitigate instances of this.

No Leakage

No leakage means that carbon offsets in one area won’t result in increased emissions somewhere else.

For example, projects protecting forests can potentially introduce carbon leakage. A company can pay for a carbon offset credit that protects a forest from deforestation. If logging companies instead cut down trees elsewhere with less stringent policies, then the carbon offset project has leakage.

Verifiable

Verifiable means that any legitimate third-party entity should be able to verify carbon reduction or avoidance claims made by carbon offset projects. This is accomplished by site visits and monitoring. Projects should have transparency with methodologies and calculations used to make any emissions claims.

What Are Two Main Types of Carbon Offset Projects?

Natural and technological carbon offsets are the two main types of carbon offset projects. Natural carbon offsets focus on protecting or enhancing the natural processes that offset carbon, while technological offsets offer innovations that mechanically absorb carbon from the atmosphere or directly from industrial processes and store CO2.

Both types of offsets offer their own sets of pros and cons. We’ll give a general overview of each type below.

Natural Offsets

In addition to well-known natural offsets with forestry, these types of projects can also involve biochar, enhanced mineralization, and ocean fertilization. One benefit of natural offsets is that we can act now to continue protecting these natural processes.

A nature-based solution to carbon offsets is also sometimes preferred because of the co-benefits of protecting natural carbon sinks or rewilding nature through land-use change and reforestation. Co-benefits include increasing biodiversity and promoting resiliency for humans and nature to adapt to a changing climate.

However, natural carbon removal methods alone will need to work alongside technological offsets to remove and reduce the excess carbon humans have and continue to produce.

Technological Offsets

We now know it is not enough to decarbonize only through implementing renewable energies and energy efficiencies. We will also have to remove carbon from the atmosphere to keep global warming below 1.5 degrees Celsius. In addition to removing them with natural offsets, we’ll also need to use new technologies to remove and reduce carbon.

The Intergovernmental Panel on Climate Change (IPCC) lists technological methods of carbon removal in almost all of their pathways to net-zero by 2050. Methods of offsetting carbon mechanically include techniques such as bioenergy with carbon capture and storage and direct air capture.

Although technological offsets will play a role in carbon offsetting, many technologies are still in their infancy and are not yet fully mature. It’s also difficult to scale carbon capture due to the cost and energy to make an impact.

However, one major benefit of a technological solution is the immediate impact. A technological solution like direct air capture can begin removing carbon immediately, whereas there is a significant time lag with nature-based solutions. For example, a new forest may take decades to remove carbon effectively.

What Are Some Carbon Offset Project Examples?

Some broad carbon offset examples include projects that develop renewable energy and ones that focus on any aspect of carbon capture, utilization, and storage (CCUS).

Although not an exhaustive list, you can learn more about a few examples of carbon offset projects below:

  • Biomass projects can include initiatives using organic materials for things like carbon sequestration and storage. For example, Levitree sequesters carbon by injecting wood chips underground.

  • Forestry projects can include initiatives for reforestation, afforestation, deforestation protection, or improved forest management. This helps as trees can naturally store carbon. For example, the Inner Mongolia Keiyhe Improved Forest Management (IFM) project focuses on protecting this forest against logging.

  • Mineralization projects can include initiatives that turn carbon into a solid mineral, then use that mineral for other projects. For example, the CarbonCure Concrete Mineralization project sequesters carbon dioxide into cement mixtures to permanently store carbon dioxide.

  • Ocean projects can include initiatives for carbon sequestration in the ocean. For example, Running Tide’s Kelp Sequestration project focuses on generating more kelp to accelerate the natural process of absorbing carbon dioxide in the ocean.

  • Soil projects can include initiatives to improve soil management for improved carbon storage. For example, the Grassroots Carbon Regenerative Grazing project focuses on improving land management to improve soil quality and increase the amount of carbon stored.

  • Renewable projects can include initiatives to create and maintain renewable energy sources. For example, the Turkey Duzce Aksu Province Hydroelectric Power project focuses on building and operating a hydropower plant on the Aksu River in Duzce Province, Turkey.

  • Clean water projects can include initiatives that avoid emissions related to boiling water or traveling to clean water sources. For example, Nazava Water Filters reduce the need to burn fossil fuels to boil water for safe drinking.

  • Gas capture projects can include initiatives to capture and convert gasses into energy. For example, Methane Recovery Project Aben collects a livestock farm’s animal waste and converts it to biogas, then uses it to power pumps and generators.

  • Energy efficiency projects can include initiatives to improve electrification, reduce energy usage, and even deliver energy-efficient technology to communities. For example, the Nepal High Efficiency Cookstoves project focuses on bringing improved cooking stoves to Dalits and the Janajati people in central Tarai to reduce wood fuel usage and minimize air pollution.

Carbon offset projects can be physically far away from a company’s headquarters, but removing carbon from any part of the world is helpful since all greenhouse gasses eventually mix into the atmosphere.

Carbon Removal vs. Carbon Avoidance

Carbon removal projects take carbon out of the atmosphere, while carbon avoidance projects focus on ways to avoid generating carbon.

Carbon removal offset projects can include funding carbon capture initiatives, like Vesta’s Coastal Carbon Capture project. Removing carbon from the atmosphere can help with reducing the greenhouse effect on the planet while the world finds ways to generate fewer carbon emissions. Removal can lead to permanently storing carbon in the earth or elsewhere.

Carbon avoidance projects can include efforts to protect natural carbon sinks that naturally absorb carbon, like the work that the Natural Capital Exchange does. Projects supporting renewable energy can also be considered carbon avoidance since investing in renewable energy avoids the use of fossil fuels.

Other Frequently Asked Questions

Below, we'll go over a few more common carbon offset questions that professionals may have.

Do Carbon Offsets Work?

Effective carbon offset projects may work to remove carbon from the atmosphere and to avoid carbon emissions. However, it cannot be the sole solution to combat climate change.

There are many positive outcomes from funding carbon offset projects. This includes funding initiatives that otherwise wouldn’t get financed, corporations directing money toward these initiatives rather than elsewhere, organizations developing carbon capture and other technology, and businesses having an additional flexible route to offset their carbon emissions.

However, some believe carbon offsetting maintains the status quo. Some critics say offsetting allows large polluting companies to greenwash their emissions through creative accounting with dubious unverified offsets.

There are many questions still hanging over the validity of carbon offsetting. For example, how can offsets be guaranteed to be permanent? How can forest offsets be protected from logging and wildfires? How can we ensure additionality? Was this forest never going to be cut down, and is now being sold as credits?

Since there isn’t a single governing entity or global standardization for these projects, there can be a lack of accountability with development and implementation. Mission-driven companies are attempting to change offset doubts and answer any lingering questions of offset validity. They’re also beginning to move into the offset space to ensure high-quality carbon credits are being traded and to provide accurate third-party verifications to ensure the validity of offsets.

While carbon offsets play an important role in our quest for net-zero emissions, they cannot be used as a substitute for decarbonizing and energy efficiencies.

Offsets must work in tandem with accurate measurements of carbon, then pick off the “low-hanging fruit” (like switching to renewable energy and using energy efficiencies) before utilizing carbon offsets to mitigate the rest of their emissions.

How Are Carbon Offset Projects Verified?

Those interested in carbon offset projects can look to industry-recognized third parties and standards to verify the legitimacy of prospective offset projects. Corporations should confirm a project’s verification methods when vetting carbon offset projects. Although not globally standardized, these principles and standards provide guidance on what qualifies as an effective offset project.

Below are a few examples of carbon offset standards and verification projects:

  • Established in 2001, the Climate Action Reserve oversees independent third-party verifying organizations, creates standards for projects, and tracks carbon offset credits in a publicly-accessible system.

  • Established in 2003, the Gold Standard ensures carbon reduction projects contribute to sustainable progress and are held to high levels of environmental integrity.

  • Established in 2005, the Verified Carbon Standard (VCS) by Verra puts projects under rigorous assessments for verification.

  • With project verification beginning in 2007, the Carbon Offset Verification with SCS Global Services can verify projects to entities like VCS and the American Carbon Registry.

  • Established in 2019, ISO 14064-2 includes guidance at the project level to monitor, report, and quantify GHG emissions removal enhancements or reductions.

The University of Oxford also created the Oxford Offsetting Principles in 2020 to provide organizations guidance for credible net-zero aligned offsetting.

Does Planting Trees Really Offset Carbon?

Planting trees can offset carbon since forests absorb carbon through photosynthesis. Tree planting is a popular type of carbon offset project since it focuses on protecting a proven and natural method for removing carbon from the air.

To provide a bit more context, let’s quickly explain the carbon cycle. The carbon cycle is the Earth’s biogeochemical system of absorbing carbon in organic matter, water bodies, and geology and releasing it through decomposition, forest fires, and volcanic activity. Carbon offsets, like forestry projects, employ the carbon cycle and use land-use change and reforestation to absorb more carbon.

However, investing solely in reforestation or stopping deforestation isn’t a permanent solution to offset carbon. To truly work as an offset, these trees must not be cut down. Wildfires can also release carbon dioxide and other GHG emissions back into the air. There is also a finite amount of forests and spaces for trees. Major corporations and governments can’t all rely on forests to offset emissions.

Instead, focusing on a variety of carbon offset projects beyond forestation can help fund all of the other efforts to avoid and remove carbon emissions.

What’s the Difference Between Carbon Offsets and Carbon Credits?

Carbon offsets are reductions made outside of that business's operations, while a carbon credit is a tradable instrument between entities related to emissions trading.

Put simply, carbon credits are the instrument used to trade, while carbon offsets are the units of measurement from projects that offset carbon emissions through removal or avoidance.

Some use these terms interchangeably, but we’ll define them separately, as they can refer to different things. We’ll define the different usages of “carbon credits” below.

Carbon Credits as Tradable Instruments to Lower Emission Caps

Some governments and other entities have set emission limits or caps for specific industries and businesses. These limits are quantified with a limited number of “allowances” or “credits” given to each business.

Those credits are tradeable among businesses. For example, business A can sell its allowances to business B. This means that business B can emit more emissions, while business A can emit less. Businesses can sell their carbon credits if they know they can operate under a lower cap.

This process is called emissions trading, cap, and trade, or allowance trading. Emissions trading is one function that occurs when the government has a set amount of overall allowances to cap that country’s or jurisdiction’s emissions at a certain level. Trading gives companies a flexible way to manage emissions without increasing the overall emissions that an industry or set of businesses generate.

Carbon credits with this definition can be traded multiple times since the overall emissions limit for that country or jurisdiction would not change.

Carbon Credits as Tradable Instruments Representing Carbon Offsets

Some use the phrase “carbon credits” to represent the number of offset emissions from a carbon offset project. Entities can then trade or claim the credit for their own organization. Once claimed, these carbon credits cannot be traded again to avoid double-counting.

How Can Businesses Use Carbon Offsets?

Businesses can use carbon offsets as one tactic in their overall decarbonization plan. However, businesses cannot simply fund these projects without also making changes to their own emissions. The ultimate goal should be to lower an organization’s overall emissions production to become more efficient in the long term.

Offsets can be a useful tool in a company’s overall decarbonization plan as more carbon disclosure mandates require carbon measurement and reductions from companies. These investments can help offset emissions while organizations work towards improved operations that may take several years to implement.

While organizations are moving to improve the carbon offset market, it’s up to companies to do their due diligence when vetting projects before making the investment.

Although it has its detractors, the case for carbon offsets is building. Our necessity for carbon removal to reach net-zero is clear. In light of this, the carbon offset market's relevance in a net-zero world is set to grow from $1 billion in 2021 to as high as $180 billion by 2030.

Persefoni has partnered with Patch to offer commission-free offsets that maximize dollars to go toward the physical project, not fees. The Zero-Commission Carbon Offset Marketplace provides anyone access to a network of projects that were previously restricted.

If you’re interested in learning more, take a look at our carbon offsets resource page to estimate your carbon footprint and review the investments available today.

© 2022 Persefoni AI Inc. All rights reserved. This presentation is the exclusive property of Persefoni and may not be copied or distributed, in whole or in part, without the express permission of Persefoni.

Persefoni is a leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users with a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.

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