SOURCE: WSP
DESCRIPTION:
Offsetting – the practice of compensating for carbon dioxide or other greenhouse gas emissions by reducing emissions elsewhere – is not new. Over the past 30 years, the market allowing organizations and individuals to voluntarily purchase “carbon credits” has grown rapidly. But while there are some well-reputed schemes, the offsetting industry is often criticised for being confusing and lacking in transparency. Failure to regulate it has led to wild price inconsistencies, questionable projects, the risk of double counting and, in the worst instances, fraud. Some argue that offsetting is a flawed approach, simply a licence to continue polluting as usual.
With so many segments of society now starting out on the journey to net zero – and many more yet to take their first steps – what role will offsetting have in our decarbonization efforts? Is it a get-out-of-jail-free card or a legitimate piece of the net zero puzzle?
A genuine contributor
The need to cut carbon emissions is unequivocal. It is also recognized that after more than a century of hydrocarbon dependence, decarbonizing society could take decades. To date, some 1,500 companies have made net zero pledges, and many of them are starting to question if and how to include offsetting in their long-term decarbonization targets.
Tim Morrison, WSP UK aviation sector director, is in no doubt that, while reducing consumption has to be the overriding objective, offsetting is going to be crucial in achieving net zero. “We are a society that loves to know that it’s all sorted and been taken care of, but we simply do not have all the solutions right now. We need the public to understand that these things progress over time – we're talking about a 30-year horizon for net zero. Many things will happen and emerge in that time, but in the meantime, it's crucial that we have a cocktail of solutions, and offsetting is a genuine contributor to the decarbonization challenge.”
Difficulties arise, however, when it comes to accurately defining and quantifying offsetting, and the criteria for using such schemes. Even a cursory look at the array of offsetting projects and providers, and the huge price differentials between them, raises more questions than answers. What sort of offset project should you choose? How much of your carbon emissions can you offset? How much will it cost? How do you know the carbon credits are credible and high quality? Carbon credits sold to plant trees that are not maintained or protected over their lifetime do not offer a meaningful offset. Neither do credits invested in renewables projects that are now so financially attractive that their economic viability was never in question: companies need to demonstrate “additionality”, that is, to prove that a project would not have come to fruition without offsets, which can be notoriously difficult.
It's crucial that we have a cocktail of solutions, and offsetting is a genuine contributor to the decarbonization challenge
Tim Morrison
Aviation Senior Director, WSP in the UK
Carbon avoidance vs carbon removal
Perhaps the most pertinent question is, what exactly is offsetting? For most people, tree-planting will be the first thing that comes to mind. In fact, there are two distinct categories: carbon avoidance projects, which lead to a reduction in carbon emitted to the atmosphere, for example through funding the use of lower-carbon fuels or renewable energy; and carbon removal projects, leading to the direct removal of carbon from the atmosphere, most commonly through nature-based solutions such as sequestration in trees, but also emerging “direct air capture” technologies. It’s a distinction easily missed but one that is fundamental in the global debate around decarbonization.
Ambiguities also stem from the absence of a global standard for “net zero” as distinct from “carbon neutrality”, with formalized boundaries, mitigation strategies and time-frames. As it stands, a carbon neutral target can be met using any level or type of carbon offsetting. “A company can purchase carbon credits to offset all of its current emissions and call itself carbon neutral right now,” says George Bailey, a senior consultant in WSP’s UK sustainability advisory service. Conversely, the emerging consensus on net zero is that strategies should eliminate all emissions that are technically feasible within the timescale set out in the Paris Agreement. “At that point, any residual emissions which cannot be abated can be offset through carbon removals – that is, physically removing that amount of carbon emissions from the atmosphere – so at net zero you're removing as much as you are emitting. So while carbon avoidance projects are an important means of reducing the amount that enters the atmosphere, from a carbon accounting perspective, atmospheric carbon must be removed to be a negative emissions source in a net zero strategy.”
The expectation is that the general adoption of this definition of net zero is imminent, along with guidance on the use of offsetting, likely to be based on The Oxford Offsetting Principles, launched by the University of Oxford in 2020. This should ensure that offsetting is no longer perceived as a carte blanche for polluters, but rather sends a clear price signal of the cost of generating carbon.
While carbon avoidance projects are an important means of reducing the amount that enters the atmosphere, from a carbon accounting perspective, atmospheric carbon must be removed to be a negative emissions source in a net zero strategy
George Bailey,
Senior consultant, WSP in the UK
Quantifying ‘residual’ emissions
One of the key terms here is “residual emissions”, but what does that mean in practical terms? Mel de Jager, national director, climate change, resilience & sustainability for WSP in Canada, explains: “As companies decarbonize, it is likely that at some point they will hit a ceiling where there are no more efficiencies or reductions to be found across their mechanisms — that’s the ‘residual’ piece. Removal offsets can form a bridge to net zero by balancing those residual emissions.”
That point will vary from company to company, depending on what they do and where they are operating, but some sectors undoubtedly face bigger challenges than others. Not least of these is aviation, which has been grappling with the issue for over a decade, but is likely to see its share of global emissions rise as other sectors decarbonize. Aviation is currently responsible for around 3% of global emissions, of which around 80% is linked to long-haul flights. “As yet, there are no viable alternative forms of transport to the other side of the world,” says WSP’s Morrison. “Unlike land and maritime transport, adding a battery or hydrogen engine to an aircraft isn’t an easy option, and sustainable aviation fuels (SAFs) represent a fraction of aviation fuel required. Given the projected growth in demand for air travel, this sector’s share of global emissions could be in the order of 25% by 2050.”
Although the spotlight is already on this sector, he adds, “the heat is going to get a lot more intense during the next 30 years”. It’s a warning echoed by de Jager: “Organizations are being scrutinized and held accountable for their emissions. They will find themselves under immense pressure to demonstrate how they will achieve science-based net zero compatible reductions. Reputational and investment risk is going to be a big motivator.”
So how does aviation, or any other carbon-intensive sector, mitigate this risk? Amy Bann, strategy director for environment & materials at Boeing, says that while innovation is crucial, there really is no alternative to offsetting in the short term. “The sector prefers, and prioritizes, direct emissions reduction through aircraft technology, operations, renewable fuels and alternative propulsion whenever possible. But while we are continuously pursuing innovations to increase the amount of in-sector solutions deployed, offsetting has a gap-filling role in the aviation sector’s strategy to address emissions that cannot yet be directly abated. Across our own facilities, we’re reducing emissions, increasing renewable energy procurement and purchasing offsets for the remaining estimated emissions. But we do expect to offset less in future as we make more progress on direct reductions.”
Organizations are being scrutinized and held accountable for their emissions. They will find themselves under immense pressure to demonstrate how they will achieve science-based net zero compatible reductions
Mel de Jager
National director, WSP in Canada
Restoring credibility to offsetting
Even in lower-emitting sectors, there is a recognition that few corporations will be able to get all the way to net zero without some level of offsetting to address those residual emissions. And that is going to drive a surge in demand for credible offsets, putting the voluntary carbon market centre stage.
This emerged about 30 years ago to enable private investors, NGOs, individuals and businesses to offset by purchasing carbon credits. However, a historic lack of regulation has, in the eyes of many, undermined its credibility.
It’s a reality that prompted the Institute of International Finance to convene the Taskforce on Scaling the Voluntary Carbon Market (TSVCM) late last year. Launched by Mark Carney, special envoy on climate action and finance to the UN, the private sector-led initiative is working to develop an effective and efficient market, in turn allowing a global price for carbon to emerge and providing companies with the tools and incentives to reduce emissions at lowest cost.
As pressure on companies to cut emissions grows, and investors demand clear, credible transition plans, as unequivocally stipulated in BlackRock boss Larry Fink’s 2021 letter to CEOs, “a well-functioning voluntary carbon market will be critical to reaching net zero and net negative goals,” the taskforce states. It predicts that the current market will need to scale at least 15-fold, and potentially 160-fold, to meet growing demand.
Boeing is one of the 40 members from across the carbon market value chain that contributed to setting up the TSVCM. Bann welcomes the initiative as an opportunity to craft new global carbon frameworks for the private sector: “The taskforce is seeking to bring some of the rigour and lessons from the compliance markets to the voluntary side. With the increase in corporate commitments driving momentum in voluntary offset purchasing, market standards can help to provide more clarity to buyers on required criteria, and bring down transaction costs.”
German industrial giant Siemens is also contributing to TSVCM with a view to creating a more trustworthy offsetting framework. Sustainability manager Volker Hessel agrees that offsets should come only after following rigorous emission reduction pathways, such as those set out by the STBi. But having already secured the “low hanging fruit”, he is under no illusion that further reductions will become harder and harder to find. There are three core concerns, in Hessel’s view, that will inform Siemen’s offset purchasing strategy: credibility, price transparency, and a link to wider sustainability goals.
Of these, the most important is credibility. “There are 1,000 different ways to offset but not all of them are credible. As corporate buyers, credibility is paramount because our reputation is tied to the quality of the credits we purchase. We’re less concerned about price or brokering the cheapest deal, although given the pricing differences in the marketplace, we’d welcome greater transparency to help us make the best decisions.”
Hessel views carbon offsets as “far more than just a commodity”, arguing that they make little sense without considering wider sustainable development goals in a given area, such as community development or biodiversity. “We’re looking into the projects to understand how they work and if they align with Siemens’ overall approach. That will make the credits we buy more compelling to our employees and key stakeholders.”
There are 1,000 different ways to offset but not all of them are credible. As corporate buyers, credibility is paramount because our reputation is tied to the quality of the credits we purchase
Volker Hessel
Sustainability manager, Siemens
The wider potential benefits of credible offsetting do not end there. If, as McKinsey estimates, the value of a reliable voluntary carbon market reaches US$50bn within a decade, this in itself could boost our chances of averting climatic disaster. It is increasingly clear that addressing our legacy and residual emissions will require a huge and costly innovation effort. New technologies that could fast-track our progress to net zero, such as hydrogen fuel cells, battery storage and direct air capture and storage (DACS) are rapidly evolving, but much of modern life remains grounded in carbon-intensive products and activities, ranging from transport to agriculture, for which we have yet to find low-carbon alternatives. Could voluntary carbon markets help to secure the investment needed to drive those breakthrough technologies? That really would make offsetting part of the net zero solution.
KEYWORDS: TSX:WSP, WSP, Net Zero, carbon offsets
