Carbon Offsets: The Transition Towards Net Zero
As companies look to decarbonize and reach their net zero initiatives, the demand for carbon offsets continues to exponentially rise.
The demand for carbon offsets is on track to outpace the current supply. This is unsurprising as companies rapidly adopt ESG principles and leverage existing tools to reach their net zero initiatives. The voluntary carbon market offers companies that are struggling to reduce their emissions an opportunity to finance a project that reduces or removes emissions from the atmosphere.
Carbon offsets should not be confused with carbon credits. Although the terms are mistakenly used interchangeably, offsets represent the removal or reduction of one metric ton of carbon while credits represent the legal capacity of a company to emit one metric ton of carbon.
In a mandatory and compliance-based marketplace, companies are delegated a certain number of credits. If a company under-emits, it can sell those remaining credits to entities that over-emit. The amount of carbon emitted is predetermined by regulatory authorities. Companies involved in the mandatory carbon market cannot use offsets to meet their required emissions quota.
The main role of carbon offsets is to further reduce emissions beyond the mandated limit. Private businesses, which are not required to comply with the mandatory market, purchase offsets as a part of their ESG strategy to meet net zero initiatives. It is estimated that the demand for offsets will be 15 times higher in 2030 and reach a financial evaluation of $50 billion.
Transparency Drives Scalability
Scaling the voluntary carbon market to meet demand will be of paramount importance in the next couple of years. The Integrity Council, the governing body of the voluntary carbon market, believes that building transparency within the market will drive scalability.
Their efforts towards improving transparency have culminated in the development of the core carbon principles (CCPs). The CCPs outline the criteria necessary for a carbon offset to be labeled of high quality. The Integrity Council will be specifically looking at the following criteria:
- Additionality—emission reductions/removals are additional, meaning that the reductions/removals cannot occur without financing
- Publicly available information on mitigation activities— transparently share information on the project
- No double counting—emission reductions/removals can only be counted once towards mitigation efforts, companies cannot claim the same carbon offset
- Permanence of removals or reductions—emission reductions/removals will permanently remain out of the atmosphere
- Program governance—robust governance policies must be in place for transparency and accountability
- Registry—offsets must be a part of a registry to properly track ownership of the offset
- Third party validation—an independent third party must verify emission reductions/removals
- Quantification of emission reductions or removals—established standards for GHG accounting must be followed to determine accurate measurements of emission reductions/removals
- Sustainable development impact—project must follow best practices to maximize sustainable development impact
- Transition towards net zero—employed practices for reductions/removals must allow for the transition towards net zero emissions.
The Integrity Council is in the process of reviewing feedback made during the public comment period. After they have thoroughly reviewed comments, they will formally announce the timeline in which the CCPs will be enforced.
Investors will greatly benefit from the adoption of the CCPs. Not only can they select a higher quality offset that will help them reach their environmental and social goals faster, but the selection and comparison process will be more efficient.
High quality carbon offsets will make a tangible impact on emissions reductions and removals. In the year 2030, the Integrity Council estimates that carbon offsets will eliminate 2 billion metric tons of carbon from the atmosphere. With the proper scaling of the voluntary carbon market, the amount of carbon removed from the atmosphere could be much greater than the estimated 2 billion metric tons.
Some reputable companies that meet the CCPs standards include Climeworks, Native Energy, 3Degrees, Terrapass, and MyClimate. Projects offered include forest management and biodiversity protection, renewable energy, community led initiatives, and direct air capture.
Demand for direct air capture is skyrocketing with the newly improved tax incentives provided under the Inflation Reduction Act. The tax credit will vary depending on the source in which the one metric ton of carbon is removed. Companies can expect up to $85 per ton in tax credits for the removal of carbon from a smokestack and up to $180 per ton if the carbon is removed directly from the air.
A major concrete manufacturer, Lehigh Hanson Inc., is in the process of building a new concrete facility that will effectively capture 95% of its carbon emissions using carbon capture technology. This will be a major milestone for the industry as it works towards net zero emissions. Without the tax incentives, the project would have never come into existence.
If we want to increase the supply of carbon offset projects, and bring into fruition projects similar to the Lehigh Hanson facility, the industry will need to be more transparent and offer higher quality offsets. The demand for offsets is projected to grow as more companies adopt ESG strategies and turn towards offsets to reach their net zero goals.Transparent policies, high quality carbon offsets, and tax incentives will advance the scalability of the voluntary carbon market.