What Role do Carbon Offsets Play in Setting an Internal Carbon Price?
30th June 2023
Internal Carbon Pricing (ICP) is a powerful tool that can support the implementation of a robust and successful Net Zero journey. ICP links greenhouse gas emissions and the consequent climate risk to investment and operational costs, directly impacting a company’s balance sheet.
A company’s greenhouse gas emissions represent real costs
Over the last few years, there has been a noticeable acceleration in businesses responding to the climate crisis. Companies are now realising the true cost of the climate crisis and the tangible risk to their bottom lines. Climate science is now being translated into activities that directly impact business activities, such as TCFD & CSRD regulations and scrutiny of ideas like stranded assets, and there is increased investor and consumer pressure to take positive action.
However, the response from businesses is less-related to ‘pure’ climate science, and more to the cultural and market changes which stem from ignoring it – for example, changes which represent real costs and opportunities for businesses.
Offsetting costs may be part of your organisation’s cost of carbon
So what is the true cost of carbon to your unique business?
ICP answers this question while influencing and improving future decision-making. An organisation’s carbon price can vary and is dependent upon:
- Its highest priority areas of focus;
- Its unique dynamics and level of risk;
- The sector and geography within which it operates, and
- Its goals and ambitions.
Additionally, if carbon offsetting investment is part of your organisation’s Net Zero strategy, the cost of offsetting will be part of your implicit carbon price. Ideally, this implicit carbon price will include tangible, measured actions which your organisation can take to reduce emissions while growing your business over time.
Organisations sometimes use the cost of carbon offsets as the sole basis for their internal carbon price. Carbon offsets are typically less expensive than other actions needed to achieve decarbonisation targets and are therefore tempting to keep the cost of carbon reduction low.
However, if an organisation has set a science-based or Net Zero target, a carbon offsetting investment strategy can only be one of several steps to achieving absolute emissions reduction. Carbon offsets are not a stand-alone solution and must be implemented in parallel with a clear, well-managed reduction pathway.
Therefore, using offsets as a proxy price of carbon can be problematic – especially if this is diverting awareness away from other unavoidable decarbonisation costs.
Reducing emissions while growing your business
ICP is one extremely important step to building a sound and long-lasting foundation for successful emissions reduction. Having a robust and relevant internal carbon price in place will support your growth plans while, at the same time, reducing emissions.
A robust ICP encourages and embraces innovation to further reduce emissions over time. During this decarbonisation journey, your organisation can take responsibility for its carbon impact now.
Anthesis recommends developing and implementing a well-managed carbon offset investment strategy to compensate your residual emissions with viable, high-quality projects – projects which encourage the security of our global forests, provide important, renewable energy to remote areas and support community capacity building.
Finally, we must hold ourselves to account to ensure that any offsetting investment is reviewed and scrutinised thoroughly and operates in parallel with a clearly defined emissions reduction strategy, supported by one or both of a science-based target and audited climate certification scheme.
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