Before the COVID-19 pandemic hit, carbon offsets were a trending corporate sustainability strategy. An increasing number of companies, from Microsoft to JetBlue to Lyft, had announced plans for reaching carbon neutrality or other goals for emissions reductions that included carbon offsetting.

What Is Carbon Offsetting?

In short, carbon offsetting allows a company to compensate for some portion of its greenhouse gas emissions by investing in climate-friendly projects like waste-to-energy generation, renewable energy in emerging markets, or nature-based solutions such as wetland conservation, reforestation, and regenerative agriculture. The polluting company typically purchases the offsets through a broker that offers various projects, all of which should be independently verified by third-party sources like the Gold Standard or Verra.

Volume on the voluntary carbon markets, where companies buy offsets, hit a seven-year high in 2018, jumping 52.6% from two years earlier, according to Forest Trends. Companies purchased more than $295 million in offsets that year, the equivalent of roughly 100 million metric tons of carbon dioxide.

If a company has not first taken all possible measures to cut its greenhouse gas emissions, then buying offsets does not add anything to the climate change equation.

Sustainable Investors Dig Deeper on Offsets

What effect COVID-19 will have on this demand is unclear. What we do know is that the climate crisis is not going anywhere, so pressure on companies to reduce their carbon footprint is likely to continue in the long term.

Not everyone agrees that carbon offsets actually accomplish that goal. Detractors say offsets distract companies and governments from developing real solutions and give polluters license to continue polluting. Others place them in the “better than nothing” category. Even proponents stress that a company should use carbon offsetting only after it has done everything it can to reduce its emissions.

This makes how offsets fit into a company’s sustainability plan perhaps even more important than the amount of carbon dioxide its investments in various projects offset. If a company has not first taken all possible measures to cut its greenhouse gas emissions, then buying offsets does not add anything to the climate change equation.

Another key to offsets serving their purpose is what is known as additionality—the assurance that the project being financed would not have happened without the money that comes from the buyers of the offsets. This is why it is crucial that projects meet strong verification criteria, especially forest conservation projects, which are particularly complex in terms of additionality.

In the end, when it comes to carbon offsetting, environmental investors looking at a company’s sustainability plan have a number of important questions to ask themselves about the company’s overall efforts to reduce its carbon footprint and the quality of the projects it is supporting.

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