Carbon offsetting

What it means

Carbon offsetting means buying carbon credits from projects that reduce or remove greenhouse gas emissions elsewhere, such as tree planting, renewable energy or methane capture. One credit usually represents one tonne of CO2 equivalent.

Credits are traded on the voluntary market and verified under private standards. Offsetting differs from emissions trading, where the law sets an emissions cap for certain sectors and companies are obliged to surrender allowances.

Offsetting does not replace cutting your own emissions. Frameworks such as SBTi require you first to measure scope 1, 2 and 3 emissions and genuinely reduce them; credits may only cover residual emissions or serve as an additional contribution beyond your own plan.

How it works in practice

Quality is what matters when choosing projects. The key questions are whether the project delivers a reduction that would not otherwise happen, whether it is permanent, whether it is double-counted and whether an independent auditor has verified it. Cheap credits often come from projects with doubtful benefit.

In the books, buying credits for voluntary offsetting is generally expensed in the period, since the company is not meeting a legal obligation with them and does not acquire an asset it could resell. For larger amounts, the treatment should be set out in the accounting policy.

A company reporting on sustainability should show offsets separately from emission reductions. Under CSRD reporting, carbon credits are disclosed separately and may not be deducted from total emissions, so that the picture is not distorted.

What to watch out for

Claims that a product is carbon neutral based solely on offsets are risky. EU rules against greenwashing prohibit telling consumers that a product has a neutral or reduced climate impact when this rests only on offsetting emissions.

Reputational risk also arises when a project later fails, for example a planted forest burns or it turns out it would have been protected without the credits. A company should keep records of which credits it bought, from whom and under which standard, and communicate cautiously.