The COP26 Summit is now complete, with mixed reactions about its ability to push through a game changing climate deal.

While there may have been several disappointments, one victory claimed was the agreement on Article 6 of the Paris agreement which clarifies rules for the creation of a government led international carbon credits market where Singapore had an important part to play in facilitating the negotiations.

Over the last several years, in the absence of such an international regulated market, voluntary markets have not only filled the vacuum and allowed the private sector to trade carbon credits, but also thrived and grown tremendously — 58% in the last year itself. The new development from COP26 brings good news to these voluntary markets, as it helps legitimise these efforts and increase the scrutiny on the quality of offsets. Voluntary markets will likely align with these regulations overtime, and this will help accelerate decarbonization by bringing much needed quality and scale to carbon offsets projects.

But the question remains, how can businesses that are serious and committed to achieving net-zero, use offsetting as a valid strategic tool?

Setting the record straight

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Carbon offsetting enables businesses to compensate for the unavoidable emissions by funding projects that remove, avoid, or reduce GHG emissions. If done right, offsetting can be a strategic tool for companies that are serious and committed to achieving carbon neutrality, by unlocking ambitious, short-term action. There is also scientific consensus that supports using high-quality carbon offsets, avoidance, and removals to neutralise residual emissions that have not yet been reduced by other means.

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Carbon offsetting is a nascent and mostly voluntary market in APAC, but more and more businesses in APAC are starting to include offsets as part of their carbon neutrality strategies. Earlier this year, Grab and Gojek each launched carbon offsetting features for ride-hailing services, while the Association of Asia Pacific Airlines (AAPA) recently announced carbon offsets as part of its goal of attaining net-zero carbon emissions by 2050.

How can business leaders get started?

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To realise the full potential of offsetting — and hasten the transition to net-zero — a disciplined and strategic approach is needed, encompassing the following three areas: timing, quality, and procurement strategy.

  • Getting the timing right
The timing is largely influenced by the industry the business is in as well as market conditions available for organisations to decisively undertake internal reductions.

There are some benefits to introducing offsets at the early stages of an organisation’s decarbonisation journey. Offsetting early allows organisations to immediately tackle GHG emissions generated within their operations or supply chains, especially if they don’t have direct control of the emissions and/ or the ability to decarbonise immediately (e.g., scope 3). It is however critical to also pilot and invest in other decarbonisation levers together with this offset strategy. 

Organisations with high Scope 1 emissions should in turn focus on significant decarbonisation initiatives, especially if these are within the organisation’s operational control, while delaying offsets to phase in later.

Choosing the timing of offsetting is hence related to an organisations ability to immediately take action on decarbonisation levers.

Leaders must also keep in mind to follow the mitigation hierarchy that prioritises or at least does not compromise on internal reductions.

  • Ensuring offset quality
Besides timing, another important consideration is the ability to purchase good quality credits. The bad press surrounding offsets stems from reports about flawed systems and methodologies. How then can organisations determine the quality of the offsets purchased?

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There is a criterion that can be followed — first, organisations need to check if credits are measurable. That is, emissions are quantifiable using recognised measurement tools against a credible baseline. They also must be independently audited and permanent, meaning the benefits from reductions are not reversible. It goes to follow that any offsets purchased should not have an adverse effect on the environment, including biodiversity, water quality, and local livelihoods. Finally, all offsets purchased need to produce socio-economic benefits for local communities.

The announcement of the upcoming launch of Climate Impact X, a Singapore-based global carbon exchange and marketplace, that aims to harness the potential of nature-based solutions in Southeast Asia is a step in the right direction by unlocking high-quality carbon credits for businesses and building trust in the system.

It is also great that the recent article 6 discussions have focused on quality issues such as prevention of double counting, as this is critical to ensure success of offsetting efforts towards real carbon abatement.

  • Shifting From Tactical Credit Purchases to a Strategic Investment
In procuring offsets, it is important to adopt a strategic approach. That means organisations might need to shift from a volume-based, price-driven “spot” purchasing approach to a multi-year offset strategy that is aligned with the overall net-zero goals.

Besides ensuring the approach is science-based, it should also allow the company to adapt to changing market trends, regulations, or requirements from different climate standards that organisations choose to follow. Procurement approach and investments should be, in a nutshell, aligned with the strategic intent. A more strategic approach typically anchors on longer-term investments, in which the company has a greater stake in and control over projects.

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Organisations can either buy or generate offsets by choosing from four options: Trade, Purchase, Develop, and Fund. Offsets can always be bought in the secondary market or from a project owner. But the more strategic approach is to generate projects internally through financial arrangements like joint ventures, or by investing capital in partnership with other companies. Companies that are developing or funding their own projects are more likely to maximise economic, social, and environmental value in the long term.

Is Carbon offsetting Greenwashing?

Offsets, often used by companies to claim they are carbon neutral, have been dogged by untrustworthy claims and face a major credibility problem. Many claim it gives organisations a license to continue emitting. This is where the new SBTI standards provide companies a clear blueprint on how to bring their net-zero plans in line with the science. The new standards dictate that carbon offsetting should only be implemented to offset residual emissions after they have undertaken deep emission cuts. This means the onus remains on organisations to make every effort in reducing their emissions via other levers, before considering carbon offsets to account for their remaining emissions. What we now need, is a wider acceptance of this principle.

If organisations can get their carbon offset strategy right, by basing their offset strategy on their emissions profile, decarbonisation levers and business strategy, they will not only move faster toward net-zero—but they will also be contributing toward building a more trustworthy market for offsets, helping to accelerate the world’s transition to carbon neutrality.

Malavika Bambawale is the managing director, sustainability solutions - APAC at ENGIE Impact

Photo: Bloomberg