Offsetting transactions with voluntary CO 2 certificates become a reputation problem for companies

The basic idea of offsetting transactions

Whoever buys a service or a product today often has the opportunity to purchase exactly this service or product CO2-free. Airlines use this offer just as much as petroleum companies that sell their petrol. It is not uncommon for consumers to have no choice but to buy a product that has already been made CO2-neutral. Although this form of CO2 neutralisation is becoming more and more common, it is a little surprising that many people often do not know and understand the mechanisms behind it. The basic approach is quite simple: companies finance projects that can be expected to reduce or save CO2 emissions that would otherwise have been generated. This positive difference can then be offset against the company’s own – often technically almost unavoidable – emissions. In accounting terms and in real terms, this process has actually made a contribution to climate protection. For the climate and the CO2 concentration in the atmosphere, it ultimately does not matter where emissions occur and where they are avoided. The decisive factor is always an overall view. From this perspective, such offsetting transactions would initially be a constructive way of contributing to climate protection.

Theory vs. practice

What sounds good and reasonable in theory is unfortunately often problematic in practice. Sometimes there are even whole abysses – not without reason have offset transactions come under massive pressure in recent months.1 The reasons for this are complex, but can be categorised quite well in principle. For example, the main problem of many offset deals has often arisen with projects that purport to protect existing forests that will otherwise be cut down one day. Here, the question of the reference scenario always arises: What would actually happen if the certified protection had not taken place? Would 10% of the area be deforested or even 100%? Would this happen in the next five years or in the next 50 years? As has been shown, the usual regulations of the market-dominant certifiers allow for almost absurd ranges of assumptions. And of course there is an economic incentive to always assume a worst-case scenario, because then the most certificates can be generated from an existing project. Thus, it is not uncommon for forest areas to become a certificate-printing machine, even though it is highly likely that these very forest areas will not look significantly different in 50 or 100 years from what they do today.
While this unfortunately quite common form of certificate production is sometimes accompanied by almost criminal energy and deliberate deception, other problems of classic offsetting transactions are more conceptual in nature. Take, for example, certificates that are used to finance the reforestation of forests. Since the obvious alternative scenario here is a fallow or agricultural area without trees, manipulation through exaggerated worst-case alternative scenarios is hardly possible. Nevertheless, the investor is making a huge bet on the future. After all, it takes a tree a good 100 years to store a tonne of CO2. In the first few years, only a few kilogrammes of CO2 are actually bound. If a climate protection certificate is to actually compensate for current emissions in the long term, this will only work if the reforestation is successful and the growing forest remains in existence for at least 100, or better still 200 years. However, bark beetles, storms, forest fires and later deforestation can never be ruled out. And even if the forest is still standing in 100 years as planned, there is still the question of additionality: what would have happened if this project had not taken place? In many cases, such projects finance measures that states would have had to take anyway, because the states have committed themselves to this in climate agreements. As an investor, you can be proud of having financed a sensible investment. But since additionality was not given, there can be no compensation. The house of cards of the compensation business falls apart at this point at the latest. And it gets worse: companies that purchase emission certificates in good faith on the so-called voluntary carbon market feel encouraged by this to be able to increase their own CO2 emissions – trusting that these have been compensated. But if this was not the case, the existence of voluntary carbon credits actually increases emissions. An instrument that actually makes sense thus ends up making things worse and counteracts the actual goal of climate protection.


Voluntary emission certificates are problematic because alternative scenarios can be almost freely assumed and additionality is often not certain. This makes the hoped-for effect of offsetting impossible. The result at the company level is accounting emission reductions that are not offset by actual reductions. We therefore assume that the use of the voluntary carbon market will be accompanied by considerable reputational problems for companies in the medium term. This is probably also the reason why, for example, the Net Zero Asset Owner Alliance under the umbrella of the UN now advises its members not to carry out any offsetting transactions at portfolio level.


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