Earth Day 2021 was perhaps most defined by commitments to slash carbon emissions. The US hosted ‘Leaders’ Summit on Climate’ saw a once-laggard US finally submit an updated Nationally Determined Contribution (NDC), targeting a 50-52% reduction of greenhouse gas (GHG) emissions from 2005 levels by 2030. That still places the US behind its peers in the international climate space; the EU has proposed reductions of 55% as compared to 1990 by 2030, and the UK has already formally committed to net zero emissions (achieving a ‘net’ balance of GHG volume produced and GHG removed from the atmosphere) by 2050, the first major economy to do so.
Of course, national governments cannot achieve these lofty goals in a vacuum. In light of those government signals, as well as increasing consumer sentiment to take climate change into account, large corporations have also begun committing to deep carbon emissions, with many of them making net-zero commitments. In fact, a joint report from the Energy and Climate Intelligence Unit and Oxford University, Taking Stock, found that as many as 21% of the world’s largest public companies have made some sort of net-zero commitment or target. They span a wide array of industries, and include household names like Ikea, Microsoft, Unilever, PepsiCo, and more. Not to be outdone, asset managers are also moving towards net zero en masse. The Net Zero Asset Managers Initiative is a group of now 87 asset managers, including large players like BlackRock and Vanguard, that have committed to aligning their investment portfolios with net zero emissions by 2030. The group’s total AUM totals $37 trillion, which accounts for more than a third of all global funds under management.
But amidst all these optimistic commitments, it’s worth asking just how these corporations and portfolios actually plan on reaching these targets. The answer to that question isn’t abundantly clear; the Taking Stock report evaluated the net zero claims it compiled and found that only 20% of existing net zero targets meet a basic set of robustness criteria, based on the timing and formality of commitment, whether the commitment covers all GHG gases, and other implementation considerations.
Importantly, one common method cited by corporations and portfolios alike in how they plan to reach net zero emissions is via carbon offsetting. The concept isn’t overly complicated; an entity offsets its own carbon emissions by sponsoring or paying for a project that will remove carbon emissions from the atmosphere, through projects like renewable energy generation, direct carbon capture at point sources of pollution, and most commonly carbon capture via conservation projects like forest and wetland restoration. And many corporations whose industries are inherently carbon intensive, like oil and gas giants or airlines, plan on utilizing carbon offsets as key parts of their climate commitments. American University’s Carbon Removal Corporate Action Tracker reports that nine airlines with net zero commitments as well as multiple large oil and gas manufacturers like Shell, Chevron and BP plan on reaching their emissions goals in large part by carbon offsetting. Additionally, big tech companies like Google, Apple and Microsoft report carbon offsetting as significant parts of their plans to attain net zero emissions.
However, carbon offsetting probably doesn’t present a silver bullet for investors and companies to address climate. To start, the demand for offsetting carbon far outstrips the planet’s current capacity to sequester it. For instance, Shell plans on becoming a net zero business by 2050, and touts nature-based carbon offsets as a key part of that commitment – the company aims to offset 120 million tons of CO2 equivalent per year by 2030. But that goal should be put into perspective by the fact that the entire global market for offsets in 2019 accounted for just 104 million tons of CO2 removal. Even if the global supply of carbon offset projects grows rapidly, it is unlikely to have the capacity to handle the world’s offset ambitions; a UN taskforce estimated that the voluntary carbon market would need to become 15 times larger in the next decade to meet demand. Additionally, nature-based offsets specifically could have the unintended consequence of enforcing a new sort of eco-colonialism, where wealthier countries and their corporations offload their emission responsibilities onto poorer countries who can produce offsets at a lower cost, potentially displacing the people who already live there.
Finally, regulation of voluntary offsets is flimsy at best, and is currently overseen by NGO’s and private actors that lack the capacity to truly regulate the market. This is an especially key issue for offsets when not all carbon offsets are equal in their ability to sequester carbon; a 2016 EU study found that 85% of offset projects overestimate their ability to sequester carbon. Without proper oversight, confidence in the legitimacy of carbon offsets could falter, hurting its viability as a true solution even further.
For these reasons and more, corporations and portfolios looking to reduce their carbon emissions ought to treat significant carbon offsetting with a healthy degree of skepticism. Such a position has recently been adopted by high profile investment consortiums, such as the Institutional Investors Group on Climate Change. The group’s Net Zero Investment Framework Implementation Guide, which provides guidance as to how investors can properly align their portfolios with net zero emissions, explicitly warns against utilizing offsets as a key facet of emissions reductions:
“As a general principle, investors should not use purchased offsets at the portfolio level to achieve emissions reduction targets. They should also adopt a precautionary approach when assessing assets’ alignment with net zero and the use of offsets. Recognising the finite availability of offsets from land use in particular, and the need to rapidly decarbonise all activities within sectors to the extent possible, investors should not allow the use of external offsets as a significant long-term strategy for achievement of decarbonisation goals by assets in their portfolios, except where there is no technologically or financially viable solution.”
To the climate-savvy investor’s critical eye, this philosophy should make sense. After all, carbon offsetting isn’t addressing the root cause of carbon emissions but instead just puts a band-aid over it by ‘accounting’ for the emissions elsewhere. What companies and investors should really strive for, then, is decarbonization of their actual operations. This is intuitive; if the Earth is a bathtub, and climate change is hot water rushing out of the faucet, a first step should be turning off the faucet, not throwing sponges into the tub to soak up the water. Companies that can decarbonize their operations, like tech companies who could power their servers with renewable energy or electrify their vehicle fleets, should prioritize those such measures before turning to offsets.
That is not to say that carbon offsetting has no utility. Deep decarbonization is possible, even in historically carbon intensive industries. However, some carbon emission is likely unavoidable, and offsets can be a helpful tool in counter-balancing those emissions where there is no viable alternative. For instance, though significant progress has been made in decarbonizing aviation, that technology is still nascent and thus offsetting may be a legitimate tool for airlines to reach their climate goals. But for companies whose operations can and should be decarbonized, like big tech, decarbonization of actual operations should still come first.
There is no singular solution to the climate crisis, and carbon offsets are just one tool that investors and companies can use to reach their climate goals. But to treat that tool as an end all solution would be to miss the point of aiming for net zero entirely. For investors and companies alike with ambitious climate goals, the message is clear: focus on decarbonizing actual operations first, and then use offsetting to fill in the cracks afterwards.