Carbon offsets play a fundamental role in every carbon neutral target. Planning a sophisticated strategy is critical to ensuring your company manages price, supply and reputational risk. Here are a few simple guiding steps to crafting a robust carbon offset strategy.
Twenty-twenty-one taught us a couple of key lessons in corporate climate change strategy development. One, they will all need carbon offsets. And, two you can no longer rely on year-on-year purchases to meet their requirements. International market prices shifted by as much as 300%, supply became constrained especially in heavily relied upon renewable offset markets, and the reputational risk of getting it wrong became front-page news.
The spaghetti bowl of climate change policy also got messier. There are now almost 70 active Emissions Trading Schemes around the world, and a mosaic of other carbon pricing or regulatory measures springing up at industry levels as well. Added to this is the increasing pressure on many governments to ratchet up their existing policies, namely in Australia where we have a uniquely active voluntary market driving action while the sleepy ‘Safeguard’ mechanism ticks away in the background.
All of this points to a growing need to manage risk and to develop a sophisticated offset strategy. So, where to start? Here are three quick go-to points for organisations pulling together their 2022 plan.
1. Stage your purchases and diversify your supply to manage risk
As carbon offset budgets become scrutinised by CFOs, it’s key to diversify the supply and price risk. Three of the most common approaches we see include:
| Strategy | Timing | |
| Short-term | Making purchases of ‘base volumes’ of carbon offset requirements for an organisation’s carbon footprint for the next three years from an existing suite of known projectsThree years has the advantage of being able to manage enough foreseeable policy and market risk, and is also within most organisation’s budget framework | Get going now! |
| Mid-term | Locking in forward supply for the next 2-5 years from existing projectsThis can help manage any additional offset volume requirements in the next few years while providing price and supply security for the mid term | Within 6-12 months |
| Long-term | Securing either long-term offtake of offsets or directly investing into projectsThis has the advantage of securing volume and price for 10-15 years in advance while also opening up opportunities for the organisation to be deeply involved in the on-ground operations of the project | Start now with offset supply coming online in 2+ years |
2. Be guided by organisations that are in the market
Like in any emerging ‘hot’ market there are advisory firms and ‘experts’ popping up like mushrooms after the rain. But just like mushrooms, they don’t last very long and picking the wrong one can end in disaster… or, a really whacky few hours.
Ensure you are guided by organisations who operate in the market day to day and have broad visibility over the market. You also want guidance from organisations who have ‘skin in the game’ and can support their market advice by demonstrating how they came to that advice through the risks they manage.
3. Don’t cut corners on quality
Twenty-twenty-two will be the year of offset integrity. And this is a good thing!
Although every carbon offset is effectively the same – i.e. they are all equal to one tonne of CO2-e, they are also very different. This article points to what lies behind the price of an offset, and it’s not something you can simply pick up from a trading exchange. A deep look into the projects from organisations with strong due diligence credentials is an absolute must. See here for why due diligence is so critical and what it involves.
Finally, a good offsetting strategy also includes guidance on what sorts of offsets organisations prefer. This can include linking offset purchases to Sustainable Development Goals, Indigenous employment commitments or key markets. Others are preferencing certain offset types, such as sequestration or avoidance projects. While this decision is critical to maximising the value of your offset strategy, we also need to keep in mind that we are part of a global race to cut carbon emissions and action is required right now. The more we deliberate on the small stuff, the less time we have on addressing the big stuff.
So, let’s get going.
Important information
This information has been prepared by Tasman Environmental Markets Australia Pty Ltd (TEM), a corporate authorised representative (ABN 97 659 245 011, CAR 001297708) of TEM Financial Services Pty Limited (ABN 58 142 268 479, AFSL 430036). This material is for general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation, or needs. While we believe that the material is correct, no warranty of accuracy, reliability, or completeness is given, except for liability under statute which can’t be excluded. Before making an investment decision, you should first consider if the information is appropriate for your circumstances and seek professional financial advice. Please note past performance is not a guarantee of future performance.