Executive Summary

The Russian invasion of Ukraine is a stark reminder that fossil fuels—a major contributor to climate change—are highly vulnerable to geopolitical risks. While governments and business leaders may turn to a greater share of fossil fuels to supplement their energy needs over the next few years, we expect an accelerated effort to tackle climate change as the crisis eases.¹ Reframing commitments to net zero—achieving a balance between emissions produced and emissions taken out of the atmosphere—not only as a climate goal but as a stable and a safer way to achieve energy security and decarbonization could be helpful to reconcile short-term energy needs and long-term climate commitments.

A corporate net-zero commitment seeks to reduce emissions as far as possible as the primary strategy. Offsets are only considered once strategies to avoid, reduce, and substitute have been implemented. 

Climate change has become front and center for many investors, regulators, customers, and employees, and an increasing number of companies are making net-zero commitments. These pledges can play a central role in guiding emission reductions and have grown in popularity in the last few years; over 20 percent of all companies in the Forbes Global 2000 list have a net-zero target in place.² But this momentum currently has limits: Asia is by far the largest carbon emitter, but committing to net zero is still a nascent practice for Asian companies.³ Carbon offsetting—the principle of paying someone else to reduce the greenhouse gas (GHG) emissions you have generated—has long been a tool to address climate change; however, opinions are divided on whether using it does more harm than good to the environment and climate change efforts. Some critics see offsets as a form of greenwashing, a way for buyers to pay someone else to adopt climate-friendly actions rather than cutting their own emissions. There are also concerns that offsets may not represent valid additional GHG reductions or may cause further harm by not taking into account other important environmental objectives such as water access, waste, and biodiversity management. Nevertheless, given the urgent need to reduce emissions and remove CO2 from the atmosphere, the use of “high-quality” carbon offsets is a necessary part of the long-term journey to net zero.

Insights for What’s Ahead

• Growing stakeholder engagement on climate will continue to drive net-zero pledges. Achieving net zero will need active participation from all actors including businesses. More than 70 countries, including the biggest polluters—China, the United States, and the European Union—have set a net-zero target, covering about 76 percent of global emissions.⁴ We may see these jurisdictional pledges translate into increased corporate ambition and action on climate. Companies will be urged to set “science-based targets” (SBTs) as well as encompass targets that include Scope 1 emissions (from direct activities), Scope 2 emissions (indirect, from electricity and heat), and Scope 3 emissions (from the full value chain, often the greatest proportion of total emissions).⁵
• Voluntary carbon markets will undergo a rapid transformation that includes adhering to minimum global standards, primarily to enhance carbon credit integrity. As an S&P Global article notes, “Voluntary carbon markets allow carbon emitters to offset their unavoidable emissions by purchasing carbon credits emitted by projects targeted at removing or reducing GHG from the atmosphere.”⁶ While compliance markets (which form to address regulatory requirements) are currently limited to specific regions, voluntary carbon markets are unregulated and lack global governance. This has resulted in a two-tier market characterized by high-cost/high-quality certified and verified offsets and low-cost/low-quality offsets with questionable integrity. With a view to changing this in the coming years, the Taskforce on Scaling Voluntary Carbon Markets, a private sector initiative under the sponsorship of the Institute of International Finance, is seeking to establish a new umbrella governance body to oversee the voluntary carbon markets. Such a body will also develop minimum standards for carbon credits to ensure integrity and create a connected ecosystem to better enable accurate carbon accounting and avoid double counting or claiming. Formalized carbon markets can play a role in mitigating the worst effects of climate-related risks, but offsetting should not be the primary mechanism through which companies aim to reduce their carbon footprint.
• Rising demand for and pursuit of high-integrity credits will drive up carbon credit prices. Decarbonization and net-zero commitments will continue to increase carbon offset demands; the voluntary offset market is expected to grow fifteenfold by 2030 compared to 2019.⁷ The current average voluntary carbon credit price is around US$3-5 per metric tonne of carbon dioxide equivalent (tCO2 e); the push toward high-quality offsets may drive prices up to US$20-50/tCO2 e or more by 2030.⁸ Offsets should be seen as a long-term strategic investment rather than a tactical purchase. It is essential to have a cross-functional team (e.g., chief financial officer, chief procurement officer, and chief sustainability officer) to oversee and execute the offsetting strategy.
• Reaching net zero will require complete business transformation. While many companies have set ambitious climate targets, not all have backed those commitments with substance.⁹ Often, this is because a climate strategy is not integrated within business strategy and capital expenditure plans. Companies will need to forgo stand-alone climate strategies and embed and align net-zero targets into their business strategies. This approach includes oversight and accountability by the board, changes in operating models to support transformation, engagement across the value chain to enable and encourage partners and customers to decarbonize, and sustainable innovation to develop new products and services that deliver on net-zero commitments.
• Realizing net-zero targets will require companies to use carbon offsets, but offsetting can only be credible as a secondary strategy. Carbon offsets should only be considered as part of the net-zero journey to balance out residual emissions that are unfeasible to eliminate. As companies operationalize their net-zero strategies and go through the carbon mitigation hierarchy—avoid, reduce, and substitute—some 5–10 percent of emissions will remain unavoidable or ineliminable. Companies can choose to use offsetting to become carbon neutral today, provided they do not use it as a proxy for real climate action. A company’s offset strategy should include a timeline of when and where the company would integrate offsets into its net-zero strategy.
• Companies should prioritize near-term emissions mitigation and reduction and consider offsets in the long term. Offsetting alone will not tackle climate change and can only be credible if it comes after concerted efforts to avoid, reduce, and substitute emissions.
• Companies that choose to use carbon offsets must ensure their credibility. It is of paramount importance that a company purchase quality offsets that meet specific standards and are recognized by a credible program such as the Verified Carbon Standard. Offsets can undermine the credibility of a company’s climate and sustainability strategy and, over time, be quite an expensive undertaking. Even more importantly, poor-quality offsets may offer no real benefit to the environment and may even potentially turn into a reputational risk for buyers. Companies should proceed with caution and conduct offset quality due diligence. Ideally, companies should commit to purchasing only offsets that are auditable, verifiable, and certified in their environmental integrity.