While some high-profile incidents may have damaged the reputation of these projects, dismissing all carbon offset projects as greenwashing (creating a misleading impression that companies and products are more environmentally friendly than they actually are) because of a few unsuccessful project implementers would be like “throwing out an envelope with money in it”.

How effective are carbon offsets?

Given the growing climate crisis, the need to achieve net-zero emissions has never been more urgent. The world is facing a climate emergency, underscored by the unmistakable extreme weather patterns observed globally. Given these circumstances, it is only logical that we discuss this topic.

In discussions about potential exaggerations, carbon offsets are often criticised for being seen as a convenient “get out of jail free” card for emitters. Critics argue that these offsets allow companies to maintain their emissions without addressing the root causes.

However, this view fails to account for the fact that the transition to a low-carbon economy is a complex and gradual process. On the path to net-zero, focus must be placed not only on reducing emissions but also on carbon sequestration. Simply put, the net-zero goal is to balance the amount of greenhouse gases emitted into the atmosphere with an equivalent amount removed. In seeking this balance, carbon offsets offer a path that aligns economic growth with ecological restoration. The essence is the enhancement of natural systems, such as forests, wetlands, and agricultural land, which absorb more carbon dioxide than they release.

In early 2023, the Intergovernmental Panel on Climate Change (IPCC) report highlighted the immediate and urgent need for more ambitious measures to reduce emissions. In this “win or lose” battle, it is essential to recognise that nature-based carbon offsets were never intended as a standalone approach. Rather, they are just one element of a broader strategy for emission reduction. While there have been cases where nature-based carbon offsets have been problematic, there are also legitimate offsets that reduce and mitigate emissions.

Some statistical data

According to data from the United Nations Framework Convention on Climate Change (UNFCCC), 13 of the 60 developing countries that reported REDD+ activities to the UN Climate Change Secretariat reported a carbon dioxide emission reduction of nearly 10 billion tonnes. This is almost twice as much as the greenhouse gas emissions from the United States in 2020, and equates to taking 150 million cars off the road for a year.

REDD is an acronym for “Reducing emissions from deforestation and forest degradation in developing countries” (Reducing emissions from deforestation and forest degradation in developing countries). The “+” denotes additional forest-related activities, such as sustainable forest management and conservation, as well as increasing forest carbon stocks. Projects under REDD+, regulated by the United Nations, can provide result-based payments for emission reductions if they decrease deforestation. Transforming REDD into a market mechanism undoubtedly holds great potential, as it is a crucial action in the fight against climate change. At the same time, it contributes to achieving sustainable development goals in countries in the Global South.

In addition to natural ecosystems, agriculture plays a vital role in the carbon offset story. Sustainable agricultural practices, such as no-till or reduced tillage, agroforestry, cover cropping, etc., contribute to soil health while capturing carbon.

Agroforestry, for example, involves integrating trees into agricultural land, enhancing carbon sequestration and providing numerous benefits such as improving soil fertility, water conservation, and diversifying farmers' income sources.

In no-till farming, crops are grown without disturbing the soil, which provides many benefits. These include, for example, reduced soil erosion, better soil health and air quality, as well as greater water retention. It can also sequester 0.3 tonnes of carbon per hectare per year, according to a document from the Soil Science Society of America (Soil Science Society of America).

The Canadian experience

The Canadian Agri-Food Policy Institute (Canadian Agri-Food Policy Institute) notes that “the adoption of no-till methodologies has significantly impacted carbon losses in Western Canada, moving provinces from a net carbon loss position to a net gain position since 1981”. According to another study, carbon sequestration in Saskatchewan agricultural land due to no-till farming is 0.3–0.65 [tonnes] per acre per year, as indicated by a study conducted by the GHG Registry – an organisation founded by a group of academics aiming to develop rigorous scientific standards for carbon sequestration projects – and the scientific team of CarbonTerra, a Saskatchewan-based company engaged in creating a carbon-neutral agricultural ecosystem in the province.

In addition to providing extra income for farmers, this process increases the organic carbon content in the soil. For example, the Chicago Climate Exchange currently pays land managers approximately 2 to 3 dollars per acre if they use techniques such as soil conservation methods that sequester CO₂, according to a document from the Soil Science Society of America (Soil Science Society of America).

Such improvement in soil composition contributes to increased productivity, reduced soil erosion and nutrient runoff, as well as improved water quality. Thus, carbon sequestration in the soil is a win-win result for both the agricultural industry and the environment.

Furthermore, such sustainable agricultural practices also result in reduced use of machinery and labour on agricultural land. Consequently, fossil fuel emissions associated with these operations are reduced. Studies have estimated that by using so-called no-till practices, GHG emissions can be reduced by up to 71% compared to traditional soil tillage methods.

Carbon offsets are an effective tool

With nature-based carbon offsets in forests, individuals, companies, or governments can offset their carbon dioxide emissions by investing in projects that remove or reduce the amount of carbon dioxide from the atmosphere. This helps to neutralise emissions and combat climate change.

There are two segments in the industry: the compliance market, where companies have a legal obligation under regulations or agreements to offset emissions, and the voluntary carbon market, where companies choose to offset their emissions for ethical or reputational reasons. It is the voluntary market that has recently come under intense scrutiny.

Overall, the offset industry is seeing significant growth. According to Refinitiv data, the global carbon credit market was valued at 850 billion US dollars in 2021, which is 164% more than in 2020. The voluntary carbon market grew at a record pace, reaching 2 billion US dollars – four times more than in 2020. The rate of purchases increased even more significantly in 2022, according to a BCG report. It is expected that by 2030, the market will reach between 10 and 40 billion US dollars.

The nature-based carbon offset market was valued at 0.6 billion US dollars in 2020. This is only 0.01% of the compliance credit market, according to a report by the HSBC Centre of Sustainable Finance. However, according to BCG data, nature-based solutions will be one of the most popular types of projects in the voluntary carbon market.

The need for strict regulations

Given that regulatory frameworks are struggling to keep up with this rapidly growing global market, as is the case in any new industry, the carbon offset sector is currently facing difficulties. However, these obstacles have not deterred agri-food and food-tech investors from putting carbon-related start-ups at the forefront of their investment priorities for 2023, according to the AgFunder Global AgriFoodTech Investment Report 2023.

Establishing strict governance standards, independent verification, and market standards are essential steps to ensure reliable nature-based carbon offsets. Issues such as additionality, leakage, and permanence must also be addressed. The 2015 Paris Agreement has already set guidelines for proper accounting of offsets, thereby laying the foundation for their integration.

In July 2023, the Integrity Council for the Voluntary Carbon Market (ICVCM) published the full assessment framework for the Core Carbon Principles (CCP). It sets high standards aimed at improving the quality of the voluntary carbon market. ICVCM claims that the CCP framework will help restore trust, ensure impact, and attract greater investment for urgently needed climate solutions. At the same time, the ICVCM has also emphasised that it is impossible to reach 1.5 °C without nature-based solutions.

Previously, in June 2023, the new code of practice published by the Voluntary Carbon Markets Integrity Initiative (VCMI) provided guidance to private companies and other non-state actors on how to use carbon credits to achieve their short-term emission reduction targets and long-term net-zero commitments. VCMI recommends that companies “purchase only high-quality carbon credits that represent emission reductions and/or removals outside the company's value chain”. These are welcome steps towards improving transparency and setting standards in the carbon offset market. They replace a broad range of norms and the inconsistency of regulatory systems that exist in different countries.

The recent criticism regarding nature-based carbon offsets is actually a success, providing an opportunity to rethink the state of the market and gain valuable insights.

A positive trend is already emerging – buyers clearly prefer a respectable Monitoring, Reporting, and Verification (MRV) system, which is the key criterion for purchasing credits. More than 90% of buyers consider MRV a key factor in credit purchase decisions, according to a BCG report.

With increasing attention on carbon offsets, buyers are increasingly wanting to ensure that the credits they purchase are of high quality. ICVCM refers to them as “high-integrity” credits, thus providing protection against accusations of, so-called, greenwashing.

Despite initial difficulties, the carbon dioxide offset industry has great potential to truly contribute to the fight against climate change. But to achieve this, the sector must be more open to criticism and ready to evolve.

By focusing on proven approaches and achieving significant net-negative emissions at scale, it is possible to increase public trust. At the same time, all stakeholders, including governments, regulators, and even investors, must demonstrate a responsible and ethical approach to carbon offsetting.