How are carbon offsets dealt with in carbon accounting?

Carbon offsets have become a common method for companies to compensate for their carbon emissions, let's take a look at what they are and what the standards say regarding disclosing these. 

What are ‘Carbon Credits’ and ‘Carbon Offsets’?

Carbon ‘offsets’ and ‘credits’ are often used interchangeably, but aren’t exactly the same - Offsets are a way for individuals, businesses, or countries to compensate for what they are emitting, and thereby decrease their net emissions (often to ‘0’ to claim “Carbon neutral”, learn more about the term here). Carbon credits on the other hand are a financial instrument representing 1 tonne of carbon dioxide equivalent GHG emissions. When a carbon credit is “retired” it is allocated a corresponding tonne of emissions to create an offset.

Rather than preventing emissions from being released (i.e. focusing on reducing your emissions) organisations can offset their emissions by funding projects that reduce, remove, or store greenhouse gases. There’s many different types of projects that generate carbon credits. Avoidance credits are credits that are generated by projects that prevent emissions being released compared to what would otherwise have happened (e.g. prevent deforestation, renewable energy replacing coal). Removal credits are credits generated by projects that capture and remove emissions from the atmosphere (e.g. reforestation / planting trees, restoring peatlands). Projects can be either nature-based i.e leveraging natural ecosystem services to capture carbon, or they can utilise engineering solutions to remove carbon, such as Direct Air Capture (DAC) facilities.

What do the standards say?

Under the GHG Protocol: A Corporate Accounting and Reporting Standard’s Chapter 8 provides guidance on Accounting for GHG Reductions. The standard stipulates that Project reductions, intended for use as offsets, should be quantified using a method considering the following aspects: baseline scenario (the anticipated outcome without the project), additionality, secondary effects, reversibility, and double counting. It refers to The GHG Protocol for Project Accounting for quantifying these aspects. The measurement of these offsets is an interesting space. IFAC has published an article discussing the role accountants can play in enhancing the quality of carbon offsets, but for this article’s purpose we will focus on disclosing carbon offsets within a GHG inventory. 

In Chapter 9 - Reporting GHG Emissions, it recommends a public GHG report disclose the “company’s gross emissions for its chosen inventory boundary separate from and independent of any GHG trades it might engage in.” with offsets as ‘Optional information’ to disclose, and if chosen to disclose, they must “specify if the offsets are verified/certified… and/or approved by an external GHG program.” 

IFRS’s ISSB follows the same as GHG Protocol’s guidance, per IFRS S2 section 29 it requires disclosure of its absolute gross greenhouse gas emissions generated during the reporting period, expressed as metric tonnes of CO2 equivalent across the following scope 1, 2, and 3. And for disclosure over Greenhouse gas emission targets.

In Appendix B - Application Guidance, section B68-B69 requires entities to specify whether their targets are gross or net, and if net is chosen, they are also required to disclose a gross target.

The two leading standards clearly state that companies should disclose their gross greenhouse gas emissions. Disclosure of carbon credits and offsets is optional. However, if chosen, companies must clearly distinguish between gross and net emissions.

Sumday provides template reports which include examples of how to disclose your gross emissions as well as account for any removals or emissions compensation activities that occurred during the reporting year.

Note: Some jurisdictions may have prescribed reporting formats to follow, e.g. Page 35-38 of ESRS E1 as part of the European CSRD

What can we do about it?

The starting point is measuring your carbon emissions in line with best practices outlined in the global standards. This way, you understand what activities and operations are generating emissions in your business, and from there you can identify the opportunities to reduce those emissions.

There is nothing wrong with supporting projects that sequester carbon, in fact the world needs to invest in projects that do both this and restore nature at a scale we haven’t yet seen!

But the key question we should ask is - what can the business do to actually reduce emissions? Likely if your target is getting to net zero the focus of your energy should be on reducing your emissions rather than purchasing offsets. Once businesses have made deep reductions, then they can offset residual emissions with carbon removal credits. For organisations with other targets, offsets might play a different role as part of their overall climate impact strategy.  

In order for us to reach net zero, we must be carbon accounting properly so markets, customers and consumers trust and support that progress. This is what drives more companies to follow on this path, at pace.

Whether you're a big corporate or a small business, everyone is on the same journey.

Let’s get started on this journey by educating ourselves first. Jump on a free trial and get started with Sumday Academy.

Here’s a sneak peak of our Carbon Accounting for Businesses course.