Beyond offsetting (part 2): Why we need carbon philanthropy, not carbon offsets, to solve the climate crisis
In part 1 of “Beyond Offsetting” I delved into the problems around corporate net zero claims and their reliance upon cheap carbon offsets to achieve carbon neutrality. In this piece, I’ll lay out the alternative — what some are now calling “carbon philanthropy” — and run through a scenario of what it might look like for a company seeking to achieve net zero emissions by 2040 through an internal price on carbon and climate compensations. But first..
A common baseline
Before getting into the nuts and bolts of a carbon philanthropy program, it’s important to have clarity on a few central concepts and key terms (some of which have only recently been agreed upon):
Net zero. This one term took government negotiators, NGOs, businesses, and academics years to clearly define. Its meaning is now fairly precise — the date by which a company achieves as close as possible to truly zero emissions (i.e. a 100% reduction from 2019 levels). Companies making net zero claims need to adhere to the “principle of supplementarity,” meaning that internal abatement of emissions should take precedence with a clear limit on external offsets. The Science Based Targets initiative (SBTi), the lead standard-setting coalition for net zero targets, suggests 5–10% should be the limit on allowable offsetting for hard-to-abate sectors (e.g. aviation, steel, and cement). Companies in easier sectors (e.g. services, technology, media) should strive for a full 100% reduction of emissions if possible, aiming for much earlier target dates.
Neutralization. SBTi rolled out new language that attempts to clear up the confusion around offsetting, differentiating between “neutralizations” and “compensations”. A neutralization is a purchased carbon offset that provides a guarantee of permanence and additionality, for example, a reforestation project in a protected area with high precipitation, which would reliably remove carbon for multiple decades despite changes in climate. In contrast, a reforestation project in California, a State prone to drought and wildfires, would not count as a neutralization.
Compensation. A compensation does not have the burden of proving permanence, but it does need to show additionality. NCI’s term “climate contribution” fits under this definition as a beneficial activity with a specific climate outcome. Selective thinning of California forests to reduce the risk of fire, REDD+ avoided deforestation credits, wetlands restoration, temperate reforestation, or tree planting on farmland, would all fit into this category. While these contributions could be made by purchasing credits on the market, a carbon philanthropy approach is preferred for all the reasons described above.
Paris-aligned. This term is still quite open to interpretation. AR6 compiled nearly a hundred climate mitigation models that limit global temperature rise to 1.5°C limit (with little or no overshoot). Unfortunately, most of these models allow for a delayed phase-out of fossil fuel emissions, relying on novel and unproven technologies to achieve carbon neutrality. Six of the models achieve the 1.5°C goal without novel technologies, and half of these indicate a net-zero target by 2040 for a truly “Paris aligned” target with a 50% reduction in emissions before 2030:
Internal Price on Carbon (IPC). An IPC allows a company to price carbon into its business operations and long-term strategy. According to CDP Worldwide, in 2020, nearly half of the world’s biggest companies utilized an IPC, averaging about $25 per tonne. Last year, the weighted carbon price tracked by HIS Markit, shot up to an average of $35 per tonne. And this price point will continue to rise with $40-$80 per tonne as the recommended range for a Paris-aligned IPC. One way to think about an IPC is that it allows a company to charge itself a fee for its Scope 1–3 carbon emissions, helping to create an incentive within the company to reduce emissions across its business units. Like an internal “carbon tax”, fees can be put to work to pay for energy efficiency and renewable power measures within the company’s value chain, and they can also be directed to carbon philanthropy. The two could and should be done in tandem.
Scopes 1–3 emissions encompass all parts of the business across its entire value chain, including all gases (converted to a CO2 equivalent). Scope 1 emissions occur directly on business property, including on-site combustion of fuels and emissions from company-owned vehicles. They also include leakage of CFCs from refrigeration equipment as well as direct emissions from chemical processes on site. Scope 2 are simply emissions from purchased electricity or distributed heat. Scope 3 is the tough one, covering an array of upstream activities — from commuting to purchased goods — and downstream activities — from product distribution to financial investments. The Greenhouse Gas Protocol details what’s in each Scope and provides guidance on how to calculate Scope 3 emissions.
A template for carbon philanthropy
When designing a corporate climate compensation program, the first and most important goal line to set is the ‘half-zero’ target — the date by which a company is committing to cut 50% of its Scope 1–3 emissions. The vast majority of companies do not yet have a company-wide mitigation plan in place, so providing 18 months for the development and approval of a half-zero plan (and commitment to net zero), let’s use early 2024 as a realistic start date for mitigation measures to commence.
From this point, the company has 8 years to reduce emissions by 50% (EOY 2031) and 16 years to reach carbon neutrality (EOY 2039). Adapting SBTi’s net zero roadmap, we can create a basic template for a gradual phase-out of climate compensations (red) as direct emissions ramp down (gold), allowing for some permanent neutralizations if needed (purple):
Note: investments in decarbonization are likely to increase the company’s profit margin and-long term value, as these investments will result in energy savings, business efficiencies, and brand recognition. So as more resources become available, the company may also want to consider compensating for its historic emissions (pink).
Let’s run through a scenario with a company that has a baseline of 10,000 tonnes CO2 with no mitigation occurring 2020–2023. After a carbon audit of current emissions and the development of a long-term mitigation plan in 2023, the company decides it will use an IPC of $30 per tonne, allocating one-half of IPC fees to a carbon philanthropy program with the other half reserved for investments needed to decarbonize its value chain.
With each passing year, the company’s carbon liability diminishes, reducing the amount of compensations paid out through its carbon philanthropy program. This creates an ongoing incentive for continued mitigation and gradually builds an investment reserve to handle the increasing cost of internal mitigation over time (from approximately $50/t for the “low hanging fruit” to $250/t for hard-to-abate emissions):
By the end of 2031 the company will have succeeded in cutting emissions by half, reaching net zero by 2040, while contributing over $1.2 million in much needed philanthropic support for on-the-ground projects. In the process of decarbonizing its operations, the company would also generate a surplus of its own avoided emissions “insets”, which it can use to compensate for the remaining half of its annual carbon footprint, along with a small budget to purchase permanent carbon neutralizations for hard-to-abate emissions. So as soon as the company secures the financial commitment from its board, it can confidently join the Climate Pledge and make the following claim:
“Our company is on track to achieving net zero emissions by 2040, and we compensate for 100% of our carbon emissions every year.”
This new type of claim is transparent and clear, and it positions the company as a true climate leader, encouraging other companies to join a “race to the top” to solve the climate crisis.
