Carbon offsets: key considerations for corporates

The challenges to corporate decarbonisation are considerable, but Wood Mackenzie research suggests that companies with the most diverse and flexible carbon management strategies will have the best chance of success in the coming years.  

Improved transparency, alongside consistent measurement and target-setting will be key to cutting Scope 1 and 2 emissions. As a first step, companies are expected to meet their net zero targets by implementing internal carbon reduction projects, for example improving processing efficiencies, or implementing carbon capture and storage technology.  

It is a different story for indirect Scope 3 emissions. For oil and gas companies, these emissions are generated largely from the end use combustion of their sold products and could account for up to 90% of the total emissions. 

There are few levers that oil and gas companies can pull to lower their Scope 3 emissions. Energy companies can reduce fossil fuel emissions by cutting back on oil and gas production and limiting refining. However, demand for fossil fuels is forecast to remain through 2050 and reducing production can have an impact on decreasing energy security and increasing energy cost which are other critical considerations to balance. 

To reach net zero emission reduction targets, companies need to consider how to incorporate carbon offsets into their overall carbon management strategies. Carbon offsets can be used to tackle both direct and indirect emissions and can play a key role in the energy industry’s journey to net zero.. 

We discuss approaches to carbon compensation in detail in our report, Carbon offsets III: The decisions driving the net zero of tomorrow. Please fill in the form for an extract and read on for an introduction to some of the key considerations for corporates. 

Sourcing carbon offsets 

Carbon offsets are available to purchase today from brokers and traders, but companies may also choose to engage the market more directly. Corporates who decide on a deeper level of involvement might develop their own offset projects, establish partnerships with project developers or even buy offset companies. 

However they choose to engage with carbon credit projects, companies should seek out reliable projects, but with numerous factors affecting the calibre of an offset program, quality is difficult to guarantee.  

Market initiatives are beginning to be established and selecting for quality will get easier. The Integrity Council for the Voluntary Carbon Market (ICVCM) is expected to enhance trust and transparency for carbon offsets, aiming to ensure high-quality offsets. Their first Core Carbon Principles (CCPs) labelled high-quality offsets should be available in early 2024. 

This report explores many of the key considerations that companies should evaluate as they develop their carbon offsets strategy, including: 

• Carbon offset quality factors include a project’s type, design, implementation, location and accreditation source. High-quality projects with recognised standards are often traded at a premium.  
• Projects must comply with an approved methodology if carbon credits are to be issued by a registry, and with such a wide range of approaches currently in use, paying attention to detail will be key.   
• Additionality – would the offset project have gone forward in the absence of carbon offsets – is often considered one of the most essential criteria for carbon offset quality.  
• Carbon offsets with CORSIA eligibility, CCP labels, or accredited for contribution to sustainable development goals and co-benefits are often rewarded with higher prices than the market average. 

Using carbon offsets 

There are three ways that companies can use carbon offsets:  

• For their own decarbonisation needs 
• To compensate for emissions along their value chain 
• As financial instruments  

Carbon offsets can be used both for voluntary decarbonisation and to meet mandatory emissions reduction requirements. When carbon offsets are used for compliance purposes, they often face more restrictions. 

When carbon offsets are used as a financial instrument, liquidity issues associated with uncertainties in future market and price need to be considered. The investment horizon needs also to be considered to minimise the effect of losing offset value over time. 

The market is craving clarity and certainty. Government and financial regulators are increasingly emphasizing the importance of sustainability disclosure, including the use of carbon offsets. And various independent institutions like the Science-Based Targets initiative (SBTi), the Global Reporting Initiative (GRI) and Voluntary Carbon Markets Integrity Initiative (VCMI) are working collaboratively to provide guidance on corporate climate disclosure and usage of carbon offsets.  

Fill in the form for an extract of our report, Carbon offsets III: The decisions driving the net zero of tomorrow. This is the last in our three-part series of insights on this subject. The first gives an overview of the fundamentals of offsets, while the second focuses on how offsets decarbonise, and create value for oil and gas companies.