Carbon offsetting: What is it good for? Absolutely something!
…say it again! 🎵
I’ll admit, sometimes I go a bit overboard on my titles… but for those of you who get this week’s reference, I hope you’re jamming out to some Edwin Starr to kick the week off right!
Given the amount of press surrounding carbon offsetting as of late, including Apple’s recent reforestation commitment, I thought this week’s Musing would be perfect to help discern between the signal and the noise when it comes to carbon offsets. Are they greenwashing grown-up? Or a vital part of decarbonizing the world?
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So… what the heck is this carbon offsetting thing? 🤷♂️
Let’s start with the basics, and for good reason. Carbon offsetting is a surprisingly nuanced topic with potential pitfalls around every corner.
There are 4 key questions to answer when it comes to understanding carbon offsets – what is a carbon offset, what type of offsets exist, what differentiates each type, and who are the stakeholders involved in carbon offsetting. Let’s dig in.
What is a carbon offset?
A carbon offset is an indirect means of lowering one’s net carbon footprint — specifically, by paying someone else to either remove carbon from the atmosphere or avoid emitting carbon that otherwise would have been emitted.
To illustrate with an example: If I wanted to mitigate my personal carbon footprint, I could either drive my car less (burning less gasoline), or pay someone to plant a bunch of trees that capture carbon as they grow and thus, indirectly lower my footprint.
What type of offsets are out there?
With such a broad definition, we are left with a rather intricate landscape. There are thousands of different ways to remove carbon or avoid emitting carbon, so to simplify the landscape, let’s talk about the offsets that account for ~95% of the conversation — and specifically, the project types and regions in which they are developed.
As far as project types go, the main approaches include:
🌳Afforestation / reforestation (planting trees)
🔒Avoided deforestation a.k.a. REDD+ (not cutting / burning down trees)
☀️Renewable energy (as opposed to building fossil fuel plants)
🏭Methane / fugitive emissions (capturing leaks from industrial, waste, or agricultural facilities)
🌱Bio-based (biomass power generation, bio-fuels, bio-oil)
💨Carbon capture (point source from smoke stacks, direct air CO2 capture)
Again — there are many other approaches. Improving forest management, switching coal-burning cookstoves to electric, installing lower-weight parts in cars… and more! But if you remember the above project types you’ll be set for most conversations.
As for regionality, there’s no real special sauce. We find that country and project type are often correlated — for example, most avoided deforestation projects are in South America to prevent burning of the Amazon rainforest. Additionally, projects in high-income countries tend to cost more and be more closely monitored.
What differentiates these offset types?
If you remember one thing from this Musing, remember this:
Carbon offsets are not a commodity.
One type of offset is by no means equivalent to another (unlike an ounce of gold, which is equal to any other ounce).
What differentiates quality from crap? 💩
Permanence: can you guarantee that the offset carbon will stay that way for 100s of years? Particularly relevant for “natural solutions”, for example: will the trees you planted burn down? Will the forest you protected be cut down next year?
Additionality: would the offset project you paid for be done anyways? This factor is why renewable energy offsets are going away — if solar and wind are cheaper than fossil fuels as they are in many regions, then they are not additional.
Verifiable: can you prove to me that you removed or avoided CO2? This topic is often discussed with carbon capture projects where you can literally measure the carbon that came out of the atmosphere (as opposed to planting trees)
Co-benefits: does your offset do more good for the world than just mitigating carbon? For example, planting a forest can improve biodiversity and switching to renewables improves air quality.
Development requirements: what is the inherent cost of developing your carbon offset? And how long does it take to capture said carbon? For example, it takes a tree 10-20 years to reach full growth, and that growth requires expenses such as seedlings, nurturing the trees, and protecting them from disease and fire risk.
💰 Quality carbon offsets beget a premium price.
The above factors cause a wide range of prices for offsets (over 2 orders of magnitude). For example, renewable energy offsets cost $1-3/t-CO2, REDD+ offsets $3-7/t-CO2, reforestation offsets range from $10-20/t-CO2, point source carbon capture somewhere between $50-100/t-CO2, and direct air capture projects between $300-800/t-CO2.
And which stakeholders are involved?
The last piece of the puzzle — carbon offsetting requires several participants:
Project developers: build and operate projects (e.g., plant trees)
Certifiers / verifiers: prove that what you paid for took place
Offset market providers: facilitate the sale of offsets
Buyers: the entity paying for the project (e.g., Delta, Google, Microsoft)
Yeah but… why should I care about them? 💁♂️
If you made it this far, you may be asking why you care… fair question!
As the world strives to reduce its carbon footprint — hopefully enough to avoid 1.5 degrees Celsius of warming — we need all the tools available to us, ASAP.
When we talk 1.5C pathways, we’re talking net zero carbon footprint by 2050. As of today, practically every major corporation has made some kind of net zero commitment. From Delta and Google (already carbon neutral), to Apple / Unilever / Microsoft (by 2030), Amazon / GM (by 2040), and BP / Shell / Nike (by 2050).
Enter, pragmatic optimism.
The fact of the matter is some companies and sectors will have an easier time meeting those commitments than others. It all comes down to technology readiness and affordability within each sector.
For example, Google can switch all of its data centers over to the renewable power, and GM can start selling only electric vehicles… but long-haul electric planes don’t exist and neither does carbon free cement or steel. Moreover, options that do exist like biofuels are not affordable yet (upwards of $200-1000/t-CO2 equivalent abatement cost)
This rush to net zero is making the offset market BOOM! 💣
Growing at over at 25% per-year growth rate (CAGR for the finance nerds), the carbon offset market is expected to approach 1-2 Gt by 2030 (10-20x the size of today) and 5-10Gt by 2050 (almost 25% of today’s global emissions footprint).
Take a 10Gt market, multiply by $100/t-CO2 which is a widely regarded long-term price target… that’s a $Trn market!
Great… so why all the hubbub?
For those who haven’t followed — carbon offsets are a hotly debated topic. Opinions range from greenwashing grown-up to the golden ticket for saving our planet.
So which is it?
One man’s pragmatically optimistic perspective: carbon offsets are fundamentally a good thing for the world AND the climate if two conditions are true:
The offset is high quality (e.g., permanent, additional), and
Purchasing the offset does not detract from a company’s operational decarbonization efforts (e.g., it isn’t a one-or-the-other type decision)
How are we faring on these two conditions today?
High quality: The good news? The world is trending toward quality. Tech companies like Stripe and Shopify are purchasing high quality direct-air capture credits that move the technology forward. Additionally, there’s an increasing focus on quality when it comes to forestation and natural solutions projects.
The bad news? The current state of the market does not reflect quality… scandals have been rife, skeptics raise fair criticisms, and ~80% of credits purchased are either avoided deforestation or renewable energy at an average market price around $3-5/t-CO2. We’ve got a ways to go…
Detracting from operational improvements: There’s a fair argument to be made that any dollar spent on carbon offsetting could have gone to operational carbon reduction levers (e.g., purchasing biofuels, investing in new technology). On the other hand, some companies simply cannot afford to decarbonize with today’s technology… so doing something is better than doing nothing.
In reality, any carbon offsetting decision will be a mix of both factors. While companies can be sustainability minded, they likely also recognize that spending moderate sums on offsetting their footprint buys them social and regulatory capital before they have to tackle the really tough, expensive decarbonization levers.
I’ll let you make up your own mind — but personally, I have been supportive of quality carbon offsetting from corporations in most cases to date.
What does the future hold? 🔮
Now, if you’ve been following along… this has been one of my longer Musings. That length is representative of the overcomplexity and turbulent state of carbon offsetting and hints at an opportunity for future growth and maturity of the markets.
Allow me to offer a few expectations on how the market will evolve:
Strong push for quality: as more and more folks understand carbon offsets, they learn that quality is paramount — both for the globe and the integrity of markets. As mentioned, scandals have occurred, and it’s bad for everyone involved. As technology advances and willingness to pay increases, you will see quality offsets move into the mainstream. Microsoft’s recent purchase with full end-to-end transparency is a great example for others to follow.
Merging of compliance & voluntary markets: another nuance I didn’t delve into… some markets for offsetting are regulated (e.g., CA LCFS) and some are voluntary (e.g., corporate purchases). As carbon markets, pricing, and trading evolve in the future… you can expect the lines between these two markets to blur and strong connections to form.
Market consolidation: for the investors out there, expect that the currently hyper-fragmented market landscape of certifiers, retailors, brokers, exchanges, and carbon accounters will consolidate.
Consumers step up to the table: any corporate buying carbon offsets would LOVE if their consumers contributed as well… expect that to happen. In 3-5 years, I wouldn’t be surprised if any purchase you make online is accompanied with a button to “offset your purchase”, for a surprisingly low price (offsetting an entire plane ride is only ~$5-10!)
The market is evolving quickly… so hold on for a wild ride!
I know I hit you with A LOT today… 👊 but I hope you’re feeling informed, up-to-date, and ready-to-rock for the next time you come across carbon offsets.
Remember — quality is king, we need all the carbon mitigation we can get, and YOU TOO can offset your own personal footprint.
Until next time…