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Carbon Offsets Explained

Clara Suki

With the climate crisis nearing, many companies have vowed to reduce their environmental impact and become carbon neutral. This has resulted from increasing climate strikes worldwide, and the growing awareness of global warming and its destructive impacts. A common tactic businesses use to achieve their environmental goals are to purchase carbon offsets. With companies such as Amazon, NASCAR, and whole countries such as Norway heavily investing in the carbon offset market, this multibillion dollar market has made for a popular, yet controversial way to combat climate change.

What is a carbon offset?

A carbon offset allows an individual, business, or government to pay another entity to remove a certain amount of greenhouse gases from the atmosphere over time. This can take many different forms, from financing a wind turbine generator to aiding the restoration of certain forest areas. A company will typically purchase their carbon offsets in discrete units or for shares for that renewable project that would reduce the equivalent amount of CO2. Purchasing a carbon offset means that whoever has bought the offset is able to ‘balance’ their own greenhouse emissions and achieve the net zero they have promised.

The carbon offset market is driven by two main considerations. Businesses can either purchase carbon offsets at their own discretion to further their own environmental agenda, or be forced to buy them to comply with certain regulations, such as those imposed by the European Union’s Emissions Trading System.

There are many positives associated with carbon offsets. Participants are not restricted geographically and can purchase carbon offsets that finance a renewable project anywhere in the world. As climate change is a global problem it does not matter where decarbonisation occurs - every bit will count. Carbon offsets are also extremely scalable, with even countries participating. For example, Norway, under the UN’s Clean Development Mechanism, has used offsets to balance ‘carbon-heavy’ sectors of its economy by paying other countries such as South Africa and Brazil to help them utilise cleaner sources of energy. Overall, this UN initiative facilitated 8,000 projects and has resulted in 111 countries reducing or avoiding 2 billion tonnes of CO2.

The dangers and discrepancies

However, it is notable that carbon offsets come with their own problems. Whilst there is huge potential for such a market to facilitate decarbonisation, the reality is slightly farther away.

First, it is important to note that avoiding or reducing climate change through the carbon offset market is inherently limited. Humans will inevitably have to ensure that their processes are carbon neutral - there simply are not enough carbon sinks in the world to stop global warming. This means that while offsets can be a useful tool to buy us time, they are not a final solution.

Further, the details are extremely difficult. Specifying exactly how much carbon will be removed due to a specific forest on the other side of the world is complicated. Moreover, renewable energy projects are prone to performance variations that can make it difficult to ensure that the carbon output and renewable input are equal.

Another issue is the type of carbon offset. Whilst financing a hydroelectric power plant in the Democratic Republic of the Congo is a permanent project that will increase in size and effectiveness, buying carbon offsets of a tree planting project can be less permanent. Forest offsets have been criticised for a number of issues, including that carbon savings can be lost easily by deforestation occurring elsewhere. Further, any gains may be short lived, particularly as many environmental factors can impact the way in which a forest grows and if it will continue sequestering carbon. With such transactions occurring internationally, it is difficult to trust that funds are actually contributing to a renewable future.

The future of climate tech

With the nearing threat of climate change pushing a new generation of ‘climate tech’ and resulting in a stark increase in investment interest, we turn now to look at how startups can improve the carbon offset market. Many companies are now using software and AI technologies to improve trust and make transactions easier.

NCX is a startup that connects corporations to landowners and communities that help preserve the environment. This democratised approach to the creation of a ‘carbon market’ allows for more participants to contribute to the preservation of land, regardless of whether you are an individual or a business. By using sensor data and aerial imagery to estimate and monitor how carbon is stored in forest trees, NCX displaced the need for difficult manual labour, through its use of software.

Hence, whilst many issues remain with the carbon offset market, it has many positives that will only grow stronger as more and more startups apply themselves to this cause.

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