Market insight

What is a carbon offset?

March 1, 2022


If you’re confused about carbon offsetting, you’re not alone. Misinformation and strong opinions about offsets abound, and it can be hard to know whether offsetting is the best (or the worst) action you can take for your net zero strategy and the planet.

But as COP27 confirmed, offsets are here to stay — and Sylvera is here to help you understand how they work and how to use them most effectively to help the planet.

This is our ultimate guide to carbon offsetting, and it has everything you need to get started. 

What is carbon offsetting?

To understand carbon offsetting, it helps to first understand carbon footprints.

Everything you do releases carbon into the atmosphere — whether it’s a Zoom meeting, buying the team lunch, or traveling to an industry event. A carbon footprint is how many tons of carbon dioxide your lifestyle (or, in the corporate sense, your business’s operations) puts into the atmosphere.

On the flip side, carbon offsets act like the reverse of a carbon footprint. These projects help to remove carbon from the atmosphere or avoid additional carbon entering the atmosphere in the future. Individuals, companies, and governments can purchase carbon offsets to compensate for the impact of their carbon footprints: for every metric ton of carbon emitted, they can purchase an equivalent ton of carbon removed or avoided.

Credits vs. offsets

The terms carbon credits and carbon offsets are often used interchangeably, but they’re not quite the same thing.

A carbon credit represents one metric ton of carbon dioxide (CO2) avoided or removed from Earth’s atmosphere; that’s where the ‘carbon’ in carbon offsetting comes from. It can also represent an equivalent amount of another greenhouse gas (GHG), measured in carbon dioxide equivalent (CO2e).

A carbon credit is not necessarily a carbon offset. A carbon credit only becomes a carbon offset when used for carbon offsetting, in other words, when it is retired to compensate for a company or individual’s greenhouse gas emissions (GHGs). But carbon credits have uses other than carbon offsetting.

Carbon credits are tradeable units sold by project developers that have been created with the purpose of reducing, avoiding, or removing GHGs in the Earth’s atmosphere. Each carbon credit is measured as one metric ton of carbon dioxide (CO2) or an equivalent GHG that is or will be avoided or removed from the atmosphere. 

How does carbon offsetting work?

If you’re trying to achieve carbon neutrality, then your carbon offsetting process will work like this:

  1. Carbon footprint is calculated: The greenhouse gas emissions of an organization, product, service etc. are measured (usually over that calendar year). Ideally, all emissions from across operations and the value chain (scopes 1, 2 and 3) will be considered here, but this is not always the case.
  1. The credits are purchased: For each metric tons of CO2e, the organization purchases one carbon credit.
  1. The credits are retired: The organization then “retires” or “cancels” the credits with the registry. This means that the credits cannot be traded again or claimed by anyone else, so the organization retiring the credits has the sole and permanent claim to the metric tons of  CO2e associated with those credits.

If you’re trying to achieve net zero, then your offsetting process will work like this:

  1. Calculate carbon footprint (as above).
  1. Aggressively reduce emissions within your operations and supply chains (usually with a goal to reduce by 90% or more by 2050 or another set date).
  1. In the near term, purchase high quality credits to compensate for any residual emissions (as above, but only on the small number of absolutely unavoidable emissions still being generated by your business operations).
  2. Retire credits (as above).

Types of carbon offsets

There are many ways to remove carbon from the atmosphere and avoid more carbon entering the atmosphere, so carbon offsets fall into different categories and types.

Carbon project categories

Broadly, carbon credit projects fall into two categories: avoidance and reduction projects, and removals projects. Avoidance projects fund activities that prevent GHG emissions that would have otherwise been emitted, such as protecting a forest that was slated for deforestation, or building a solar farm to add renewable energy to the grid.

There is an ongoing debate about whether avoidance or removals projects are more effective, but in reality, both are essential in the fight against climate change. Currently, removals credits make up 3% of the market and non-removal nature-based solutions make up 45%.

Carbon project types

There are a number of project types in the VCMs. They all fundamentally serve to either avoid, reduce or remove emissions, but may also have additional benefits.

Nature-based solutions

REDD+ (Reduce Emissions from Deforestation and forest Degradation): these projects protect existing forests from both planned and unplanned deforestation

ARR (Afforestation, Reforestation and Revegetation): these projects increase carbon stocks by planting or assisting the natural regeneration of woody biomass

IFM (Improved Forest Management): these projects increase net carbon stocks or reduce GHG gas emissions through changes in existing, or business as usual (BAU), forest management practices

Jurisdictional and Nested REDD+: these are REDD+ projects that consider all the forest in a national (i.e. whole country) or subnational (e.g. state or province) jurisdiction must be considered when setting a baseline and monitoring deforestation

Regenerative agriculture: these projects implement farming principles that help to restore and revive surrounding ecosystems

Blue carbon projects: these projects protect and revive coastal and marine ecosystems

Technology-based solutions

Renewables: these projects add renewable energy to the grid, such as wind and solar

Direct air capture: projects that remove carbon directly from the atmosphere through technology

What are some examples of carbon offsets?

Here are a few well-known carbon offsetting projects around the world.

Katingan Peatlands

The Katingan Peatland Restoration and Conservation Project is a popular and high-quality APD project in Indonesia. This ecosystem restoration initiative is focused on a peat swamp forest in Central Kalimantan and is managed by Indonesian company PT. Rimba Makmur Utama.

Without carbon credit funding, Katingan peatlands might not exist today, as the project area was under threat of conversion before project implementation. But thanks to the conservation project, a new forest patrol and observation team have been introduced in order to monitor the project and implement ecosystem restoration activities.

Project Guatecarbon

Project Guatecarbon’s full name is Reduction of Emissions from Avoided Deforestation in the Multiple Use Zone of the Maya Biosphere Reserve in Guatemala. The Guatemalan project is valid for 30 years, during which time it plans to reduce 37 million metric tons of CO2e. It is a REDD+ project that aims to protect regional forests from unplanned deforestation by farmers and ranchers, agro-exporting companies, and oil companies.

Without Project Guatecarbon, forest resources in the area would likely have been destroyed by existing drivers of deforestation, influencing forest fires.

Orca and Mammoth, by Climeworks

The world’s leading Direct-Air Carbon Capture (DAC or DACC) company is Climeworks. Climeworks runs two carbon capture projects (Orca and Mammoth) in 

Hellisheidi, Iceland. These direct air capture plants remove carbon dioxide from the atmosphere and store it permanently underground. To date, Climeworks has multiple well-known companies investing in its carbon removal credits, including Stripe, Microsoft, PwC, Square, and H&M.

What are the voluntary carbon markets?

Carbon credits are traded on voluntary carbon markets (VCMs). Voluntary Carbon Markets are international markets that allow the sale, trade and purchase of carbon credits. Often credits are bought by emitters, including individuals and organizations, to allow them to offset their greenhouse gas (GHG) emissions. 

Is carbon offsetting regulated?

Unlike compliance carbon markets, VCMs are not currently regulated by a centralized authority, such as a government. However, stricter requirements around transparency are emerging. For example, the SEC’s draft guidance on climate-related disclosures suggests that organizations using offsetting will have to disclose a range of information about the credits they have bought and retired, as well as what other actions they are taking to mitigate their climate impacts (particularly emission reductions). This will increase public scrutiny of climate strategies, opening up reputational risks for organizations with low ambition climate strategies.

There are also an increasing number of initiatives offering guidance to organizations wanting to use offsets most effectively. Most recently, the VCMI (Voluntary Carbon Markets Integrity Initiative) published a draft code of practice outlining how to use offsetting as part of a credible climate strategy.

How do project developers put credits on the market?

To bring credits to the carbon market, project developers must select relevant methodology from carbon certification bodies such as Verra and the Gold Standard and be validated by an auditor. These methodologies also require projects to demonstrate quality parameters such as additionality. Then, the project can appear on a carbon registry, and after that, developers monitor the project’s activities to assess how many credits a project can generate once it has officially started. This monitoring report is verified by an auditor and published on the registry alongside other project documentation, and the credits are issued.

Is carbon offsetting bad?

Over the years, companies have been called out for greenwashing when using carbon offsets in place of prioritizing the more difficult task of reducing emissions from their business activities.

We have also seen examples of substandard carbon projects receiving investment from organizations, which resulted in high-profile scandals. This has given the market a reputation of being high risk, but ultimately, it highlights that, in the unregulated voluntary markets, not all carbon credits are created equal.

“The sector has had its fair share of scandal,” says Sylvera President Sam Gill, “with phantom trees left unplanted and baseline projections that create wildly inflated expectations of how much carbon could be saved via forest conservation. The lack of transparency, the use of shaky assumptions, and poor project auditing have made offsets a destination for hucksters, and everyone has suffered as a result.”

Although carbon offsets are imperfect, they’re a crucial asset in the global transition to a greener future, and for supporting the developing world at the same time. “If we’re to have a hope of preventing catastrophic global warming, offsets must be one of several tools in our arsenal,” says Sam. “While land use is currently responsible for nearly a quarter of all global emissions, with careful stewardship it could become a carbon sink—capable of removing 20 years’ worth of CO2 based on 2018 levels.”

When high-quality carbon credits are used as part of a wider climate strategy aligned with net zero pathways and the mitigation hierarchy, offsetting is a valuable tool to increase short-term climate action and accelerate global decarbonization. Offsets alone will not solve climate change, but they are a vital tool in our arsenal.

How much does it cost to offset 1 metric ton of CO2?

Voluntary carbon markets are free markets, which means that the price for a carbon credit (1 metric ton of CO2) varies widely — often in parallel with quality. Carbon credit quality refers to the level of confidence that a project actually avoids/removes the amount of carbon it says it does, and that the carbon would not have been avoided or removed without your investment in this project.

That said, the average price of carbon credits can range from a couple of cents to the thousands; generally, avoidance credits can be cheaper than removals credits. Our 2022 Carbon Credit Crunch Report revealed that the price of carbon credits is set to rise over the long term, as demand (more companies setting carbon neutral and net zero targets) outpaces supply (carbon projects take a long time and require sought-after talent to establish).

While many companies seek out lower-priced carbon credits, thinking that purchasing more for the same amount will make more impact on the planet, the reverse is more often the case. That’s why we recommend working with a partner like Sylvera to assess the quality of your carbon credits, and if necessary, invest in fewer, high-quality credits, rather than purchasing a large number of low quality credits that don’t make the impact you’re looking for (and, in a worst case scenario, might see your brand accused of greenwashing).

Where does carbon offsetting fit into corporate net-zero targets?

Offsetting has been a popular choice to help many companies achieve their climate goals, for a number of reasons. Unlike other approaches to corporate decarbonization, such as insetting, offsetting is an immediate way to make a climate contribution, and requires relatively little legwork — aside from proper due diligence to ensure you’re investing in high-quality projects. Rather than establishing their own projects, which can take years, companies can purchase carbon offsets virtually instantly through the voluntary carbon markets. 

Offsetting is also highly flexible. Companies can purchase offsets down to the individual metric ton, which offers significant opportunities for scaling up or down when required. Offsets can help companies reach their climate goals faster, or make up for existing emissions while they focus on decarbonizing for the long-term. And finally, offsetting gives companies the opportunity to diversify their climate investments and become involved with an entire portfolio of projects they care about.

When it comes to treating carbon credits as an investment, “the most strategic players are looking at moving upstream in the value chain and trying to secure quality supply ahead of time,” says Torsten Lichtenau, Senior Partner at Bain & Company. “Carbon credits are an asset, and should be treated as such on the balance sheet.”

But as more companies make net zero claims, the demand for carbon credits could easily outstrip supply, driving costs up and making climate commitments a financial liability for some companies. “The most progressive players probably have a balanced view,” Torsten says, “managing liability but also investing in a growing asset that is needed for the world to decarbonize.”

Follow the mitigation hierarchy

Carbon credits play a crucial role in the private sector’s ability to accelerate the global transition to net zero, but only as part of a strategic mitigation hierarchy. According to the SBTi, “purchasing high-quality carbon credits in addition to reducing emissions along a science-based trajectory can play a critical role in accelerating the transition to net-zero emissions at the global level.”

This means that offsetting is just one piece of an effective climate strategy. Although carbon neutrality can be achieved simply by offsetting existing greenhouse gasses, net zero (an increasingly popular goal) requires that a company first reduce emissions as much as possible before offsetting.

What's the difference between carbon neutral and net zero? Carbon neutral organizations compensate for, or offset, their emissions each year by purchasing and then canceling carbon credits. Setting a net zero target means committing to reduce GHG emissions as much as possible (usually by at least 90%) by a target date (generally no later than 2050, to align with global climate goals) and “neutralizing” any remaining emissions with removals credits (not just reduction/avoidance credits). Read more →

Margaret Mistry, VP Carbon Markets at Equinor, explains: “[At Equinor] we follow a mitigation hierarchy,” Margaret says. “First we avoid, then we reduce, and we only offset when other measures have been prioritized.

At Sylvera, we recommend companies follow the mitigation hierarchy. First, avoid creating additional carbon emissions (for example, if you’re hosting an event for the first time, consider doing so online). Second, reduce the emissions you’re already producing (for example, invest in energy-saving appliances, switch to providers offering renewable energy, and upgrade to electric vehicles). Finally, when you’ve done as much as possible to avoid and reduce your company’s emissions, look for high quality carbon credits to offset the difference.

Do we need a new word for carbon offsets?

Recently, the UN’s COP27 report and the SBTi’s Net Zero Standard recommendations on carbon offsetting echo a theme that is gaining popularity in carbon markets. Both emphasize the importance of beyond value chain mitigation (BVCM) which refers to contributing over and above the impact of your own value chains.

What does that mean?

Rather than simply calculating and then ‘offsetting’ the carbon emissions of your company and its value chain, you think about contributing outside of your own operations. How and where else can your company leave a lasting and positive environmental impact?

This is why some people talk about needing a new word to replace ‘carbon offsets’. Perhaps ‘carbon contributions’ or ‘carbon donations’ would be more appropriate.

At Sylvera, we’re on board with the idea of BVCM, and we encourage companies to think less about ‘offsetting’ their operating emissions in order to become net zero or carbon neutral. The activity of compensating against corporate emissions is non-negotiable and carbon credits can be a vessel for companies to contribute above and beyond to a healthier planet.

How should companies evaluate carbon credits?

The lack of regulation in VCMs means the quality of a project and credit can vary greatly depending on variables such as carbon performance, additionality, permanence, and co-benefits. These are the defining attributes of whether a project is of high quality or not. To thoroughly assess a carbon project’s performance requires a significant amount of time and resources. Without proper due diligence, you could invest in poorly designed, low quality projects, which do not achieve meaningful climate impact or even harm communities and could result in significant financial loss and, reputational damage.

“[At Equinor] we fully expect to be scrutinized on the offsets we use, and as such we’ve got very high thresholds for quality in terms of what kind of offsets we will use,” says Margaret. “The thresholds include how the offsets are verified, what type of projects they relate to, whether they’re also addressing community co-benefits, biodiversity and so on.”

If a credit does not reliably represent 1 metric ton of CO2e emissions avoided or removed from the atmosphere, then it cannot credibly be claimed to compensate for emissions. It is essential that organizations conduct sufficient due diligence to confidently make this claim.

There are four key factors to consider when conducting due diligence on carbon credits

Carbon performance: refers to whether a carbon project reports accurately on its carbon-avoiding or carbon-removing activities. Make sure that the number of credits a project developer issues reflects the same amount of carbon avoided or removed by the project.

Additionality: ensures that the emissions you are avoiding or removing through a particular project would not have been avoided or removed without carbon revenues as well as quantifying over-crediting risk.

Permanence: refers to the degree of confidence that the carbon avoided or removed will stay out of the atmosphere for the long term.

Co-benefits: some carbon projects offer more than emissions mitigation — they also promote biodiversity and the health of local communities. Look for co-benefits wherever possible. 

Each of these factors is extremely difficult to quantify independently, and most firms won’t have the tools, infrastructure, or access to the right data to do so in-house.

Our State of Carbon Credits 2022 report gives deeper insight into the different types of offset projects around the world, and their various quality ratings.

How Sylvera helps companies invest in high impact carbon credits

The best way to ensure you are investing in high quality, high impact credits is to work with a trusted partner like Sylvera.

Sylvera’s independent ratings platform was designed to give sustainability leaders, traders and asset managers confidence in the VCMs. Our carbon project reports are comprehensive and accessible, and can be used by sustainability teams to help educate board members and other key decision-makers about specific carbon credit investments, their potential impact, and how to best manage the risks associated with the VCMs.

With Sylvera’s carbon intelligence platform, you can:

  • Save time and money on due diligence, and protect your organization’s reputation
  • Avoid bad investments and missed opportunities by getting a view of the whole market and comparing quality and price side-by-side
  • Continuously monitor the performance and risks associated with carbon offsetting projects

Sylvera’s mission is to be a source of truth for carbon markets. We help corporate sustainability leaders, carbon traders and asset managers confidently evaluate and invest in the best carbon credits by providing comprehensive and accessible insights on carbon projects.

What sets us apart?

Project-type-specific frameworks: We build rigorous frameworks and production systems for every project category to accurately test project design, carbon accounting, and climate impact claims. Sylvera’s frameworks are peer-reviewed by a committee of experts and carbon market stakeholders – including project developers & registries – to ensure scientific consensus. We publish our frameworks so buyers understand exactly what we test and how we do it. Read our white paper for more information.

Our process for rating Agriculture, Forestry and Other Land Use (AFOLU) projects at a glance

Unparalleled depth & accuracy: We extract, clean, and organize data from project design documentation (PDD) and every monitoring report. Then we meticulously build carbon, strength of baseline and financial additionality models from the ground up to validate emissions reductions or removals claims and evaluate project economics. Our project assessments are the most comprehensive in the market, providing granular analysis of core project characteristics, insightful data visualizations, and interactive maps.

Sylvera utilizes multiple types of data to train and run our machine learning models. Each type provides different data, which enables us to detect specific features.

Independent Data Validation: Our expert analysts leverage advanced machine learning (ML) technology, verified, independent data, and proprietary field data to test the accuracy of credit issuances and claims. For example, we use market-leading geospatial ML models when rating nature-based solutions.

Want help investing in high-impact carbon credits? Request a demo today.

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