Carbon Offsetting: How It Works and the Benefits for Businesses

carbon offsetting
carbon offsetting

It’s crucial for businesses to take steps toward reducing their carbon footprint and mitigating the effects of climate change. While it may not be possible for every company to eliminate their greenhouse gas (GHG) emissions, carbon offsetting can be an achievable way for businesses to make a positive impact when done right.

In today's climate-conscious world, businesses are facing increasing pressure to decrease their carbon impact and act against climate change. To combat its adverse effects, companies must dramatically lower their GHG emissions by 50% by 2030. The ultimate objective is to eliminate 90% – 95% of these emissions by 2050, which will require a collaborative effort from governments, businesses, and society on a global scale.

Meanwhile, carbon offsetting offers an achievable solution for businesses to compensate for their own GHG emissions by investing in projects aimed at reducing carbon emissions. This is typically done by purchasing “carbon credits” from projects such as those in reforestation, renewable energy, or energy efficiency.

The idea is that even if a business can’t totally or significantly eliminate its carbon footprint, it can still have a positive impact on the environment by funding initiatives that decrease emissions elsewhere.

carbon offsetting initiative

How a typical carbon offsetting initiative works


How does carbon offsetting work?

Carbon offsetting is a way for making a positive impact on the environment by enabling organizations to support environmentally conscious third-party organizations and initiatives that offset carbon footprint.

Imagine a company producing 1 million tons of carbon dioxide (CO2) emissions per year through its daily operations. To offset their carbon footprint, the company can work with a carbon offsetting broker. The broker calculates the company’s emissions and charges a fee based on that calculation. The company pays the fee, and a portion of that fee is invested in a renewable energy project, such as a wind farm.

The renewable energy project reduces carbon emissions elsewhere, and the reductions are verified and quantified in tons of CO2 equivalent (CO2e). In this example, let's say the renewable energy project reduces 500,000 tons of CO2 emissions each year, the company can then claim that it has offset its own emissions through its investment in the renewable energy project.

For instance, a business could invest in a carbon offsetting initiative that finances a project offering advanced cookstoves to communities in developing nations. These advanced cookstoves reduce the amount of fuel required for cooking, leading to a decrease in emissions caused by burning wood or charcoal and deforestation.

In addition, carbon offsetting acts as a source of financing for environmental initiatives. Obtaining funds for these projects can be difficult, as large initiatives require significant investment while smaller ones might not attract enough attention from investors. Carbon offsetting bridges the gap between these initiatives and the funds required for their success, making it a viable way toward environmental preservation.


What are the types of carbon offsetting projects?

There are several types of carbon offsetting projects that organizations can choose from, including:

  • Renewable energy. Projects that generate clean and renewable energy such as wind, solar, hydro, or biogas, which replaces energy generated from fossil fuels and helps reduce emissions.

  • Reforestation and forest conservation. Projects that protect and restore forests, which absorb and store CO2 from the atmosphere.

  • Agricultural and livestock management. Projects that improve the management of agricultural lands and reduce emissions from livestock operations.

  • Landfill gas capture. Projects that capture and utilize/recycle methane (CH4), a potent GHG generated from decomposing organic waste in landfills.

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What are the benefits of carbon offsetting in businesses?

The purpose of carbon offsetting for businesses is twofold: it allows them to take responsibility for their carbon footprint and helps mitigate the effects of climate change. By supporting carbon offsetting initiatives, individuals and businesses can counterbalance the effects of their emissions and contribute to the reduction of GHG in the atmosphere.

Here are some benefits of carbon offsetting in businesses:

  • Improved reputation: By offsetting their emissions, businesses can show to their stakeholders that they are taking action to reduce their carbon footprint and contribute to the fight against climate change.

  • Compliance with regulations. Carbon offsetting offers businesses a solution to meet regulatory requirements by enabling them to balance their emissions that exceed regulatory limits through the funding of emission reduction projects.

  • Cost savings: By offsetting emissions through the purchase of carbon credits from projects that reduce or remove GHGs, businesses can achieve their targets without having to invest in costly technology upgrades or operational changes.

  • Risk management: Participating in carbon offsetting projects can help businesses manage operational risks, such as potential operational disruptions caused by new regulations, new technologies, and shifting consumer preferences.

  • Business growth: By investing in low-carbon technologies and projects, companies can demonstrate their commitment to sustainability. It can also enhance their relationships with stakeholders and attract new customers who prioritize environmentally conscious businesses.

Achieving the benefits of carbon offsetting with analytics

Analytics can play a vital role in helping businesses reap the benefits of carbon offsetting. By using advanced and accurate forecasting and reporting methods, businesses can increase transparency and provide stakeholders, regulators, and consumers with a clear understanding of their efforts. Advanced analytics can also simplify the carbon offsetting process and make it easier for businesses to comply with regulations.

With the right technologies, advanced analytics can help organizations calculate their carbon emissions at an asset or process level, determine the number of emissions to be offset, and develop a long-term strategy to optimize operations. In turn, they can invest in greener technologies/assets and align financial performance with net-zero goals. Analytics can also provide credibility to a company's carbon offsetting initiatives, which can be subject to greenwashing, by providing transparent, accurate, and reliable data behind these initiatives.

Lingaro’s supply chain analytics practice provides sustainability analytics solutions that enable organizations to identify, measure, and track relevant data, KPIs, and metrics for calculating and reducing the company’s environmental footprint. Among these solutions are interactive carbon emissions reporting capabilities as well as visual reporting solutions that measure energy consumption, identify energy-saving opportunities, track supplier activities, and evaluate the performance of the company’s own sustainability initiatives — from procurement, product packaging, manufacturing, inventory, transportation, and warehousing to logistics.

Read more articles on carbon offsetting:

  How Businesses Can Offset Their Carbon Footprint
 The Business's Guide to Carbon Offsetting

Making Sense of Carbon Offsetting: Opportunities and Challenges for Businesses

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