Major report casts uncertainty over carbon-offsets market

The world’s leading authority on corporate climate plans has dealt a blow to the carbon-offset industry, signalling that it objects to corporations using carbon credits in place of emission reductions in their own supply chains.

In a major study of carbon offsets released July 30, the Science Based Targets initiative (SBTi) found that offsets are ineffective at climate mitigation and represent a risk to climate finance and the net-zero transition.

This almost certainly means that companies relying on carbon offsets to claim significant reductions in their carbon dioxide emissions will be ineligible to receive the coveted net-zero certification from SBTi.

The report and an accompanying discussion paper could further deepen troubles in the carbon-offset market, estimated at $2 billion, an amount considered far below its future potential. But with huge pressures on companies to claim lower carbon emissions, including those from carbon offsets, SBTi’s stance could also cause many companies to look to other corporate climate certifiers.

The evidence on carbon offsets challenges “the legitimacy of offsetting claims, arguing that treating carbon credits as fungible with other sources, sinks or reductions of emissions is inadvisable, illogical or damaging to global mitigation goals,” the report says, adding that corporate claims of “carbon neutrality” through carbon offsets are mired in confusion and disagreement.

The discussion paper outlines SBTi’s thinking on how corporations should deal with end-use, or Scope 3, emissions, which represent about 75% of an average company’s emissions.

The discussion paper’s language is at times ambiguous, leaving open the possibility for permitting offsets, but the overall message is that SBTi wants companies to decrease their own emissions rather than relying on carbon offsets. “The SBTi believes that direct decarbonization must remain the priority for corporate climate action,” Alberto Carrillo Pineda, SBTi’s chief technical officer, said in a statement.

There have been numerous problems with carbon offsets – which are bought and sold by companies and financial institutions as a carbon-reduction mechanism – and many have collapsed under greenwashing allegations. One of the most common problems – a point reflected in the SBTi report – is that offset projects very often fail to create additional CO2 reductions beyond emissions that would have been avoided, sequestered or removed regardless of the offset.

SBTi ‘back on track’

Thomas Day, an analyst with the New Climate Institute think tank, welcomed the SBTi report and discussion paper. “We have often criticized the SBTi for drifting too far from its science-based mantra,” he told Reuters. “But the papers published today stick to the science in ruling out offsets and exploring improvements to the standard, putting the SBTi back on track to remain relevant for company transformation.”

SBTi, a non-profit supported by the Bezos Earth Fund and other funders, is the world’s leading agency certifying corporate climate-change reports. It certified the climate plans of 4,200 companies by the end of 2023, double the number from 2022. Investors and regulators consider it the gold standard in assessing the validity of corporate climate plans.

Certified companies must demonstrate that their climate targets and plans are in line with the science-based goals of the Paris Agreement, limiting global warming to 1.5°C above pre-industrial levels.

The discussion paper will go out to consultation and will form the basis of an update to SBTi’s Corporate Net-Zero Standard, the basic guideline for its certification. A draft standard is expected to be released later this year and finalized next year.

The report and discussion paper clarified weeks of confusion after the SBTi board said in April that it would permit companies to claim carbon offsets as a way to reduce Scope 3 emissions, reversing the agency’s traditional policy against the use of offsets for all but 10% of a corporation’s emissions.

Bloomberg reported that the April statement was motivated by pressure from some funders and board members who want the carbon-offset market to grow. The board later walked back its statement after a public outcry from some stakeholders, including its own staff. SBTi’s CEO, Luiz Amaral, resigned in early July, citing personal reasons.

The pressure on the SBTi board came from the Bezos Earth Fund and advisers to former U.S. climate envoy John Kerry, both of which pushed SBTi to accept offsets. Kerry had argued that developing countries could raise billions of dollars for climate mitigation efforts by selling offsets attached to their significant carbon-sequestration assets like rainforests, a view shared by many of those nations, including 10 West African countries that appealed to SBTi to support offsets.

The Biden administration continues to hold this position, recently issuing guidelines for carbon offsets. However, the U.S. guidelines represent a tall order for the offset market; namely, that offsets should provide additional CO2 reductions that wouldn’t otherwise be available and that companies should focus on carbon reductions within their own supply chains before resorting to offsets.

The future of the offsets market

The disrepute that many offset projects have brought to the market combined with SBTi’s rejection would suggest that carbon offsets will fade away under corporate and stakeholder disinterest.

But there are still powerful forces calling for an expansion in the market, not the least of which are large banks hoping to profit from growing carbon-market activity. As well, with production of oil and gas accelerating, many companies in energy and other sectors are looking to offsets to claim lower CO2 emissions. In response, the Integrity Council for the Voluntary Carbon Market was established in 2021 to develop a carbon-offsets standard.

This could pose a threat to SBTi.

Tommy Ricketts, CEO and co-founder of BeZero Carbon (a London-based for-profit carbon-rating company), said that SBTi’s anti-offsets stance could chase some companies away from using it to certify their climate plans. “The focus on technical offsetting alone ignores so much of what’s happening in the carbon market and the ways in which carbon credits positively contribute to the planet and to communities,” he said. “I expect the trend of companies leaving SBTi to accelerate in the next 12 months.”

By digging in on high-integrity CO2 plans, SBTi is hoping to raise the bar on climate mitigation. But this could prompt many companies to take the opposite approach, chasing lower-cost, easily accessible offsets to avoid the expensive and onerous task of reducing their own supply chain emissions.

SBTi sent Corporate Knights the following statement following publication:

The decision to examine the potential role of carbon credits was not driven by BEF or any other donor. It reflected requests from a wide range of civil society organisations and businesses from all sides of the conversation. Our donors have made a critical contribution to SBTi's work which has resulted in thousands of businesses validating their targets through our processes. However, they have not defined how we conducted our research or its objectives. Consistent with our policies, they have not had any input into the papers we have published this month and will not influence the scientific process ahead – and nor would they want to.

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).