Is Corporate Offsetting a Good Idea?

Voluntary offsetting is the practice of firms (and other actors) compensating for their ongoing greenhouse gas emissions by funding, through the purchase of carbon credits on the Voluntary Carbon Market (VCM), projects that seek to mitigate climate change. Offsetting is said to be voluntary because the demand for offsetting is not driven by the need to comply with legally mandated requirements. Instead, voluntary offsetting is typically used by firms to meet their own, self-imposed, net-zero targets. Emission offsetting has proven highly contentious in a world in which the scientific consensus holds that emissions must be cut quickly and significantly to prevent the worst consequences of climate change. In a new article, to be published in the European Business Organization Law Review, I assess corporate offsetting and the VCM. My basic question is what, if any, role voluntary offsetting and the VCM can play in relation to climate change mitigation. 

Offsetting has many vocal critics. These critics rightly stress that emission cuts must be a priority. They also note that the environmental credentials of projects that have reached the VCM have been found lacking. Critics also routinely call out firms involved in voluntary offsetting for greenwashing. VCM supporters, on the other hand, often observe that the VCM can offer perfectly good projects and that rejecting all projects which reach the VCM without differentiation, is to throw out the proverbial baby with the bathwater. Importantly, they are likely to stress that temperature levels will not be brought under control without removing large quantities of carbon dioxide from the atmosphere, and that this will require significant funding to successfully scale mitigation (removal) projects.

Amidst this heated debate—one of immediate relevance to the corporate world—it is perhaps surprising that the contribution of financial and corporate law scholarship has been limited so far. The main contributors are Vittoria Battocletti, Luca Enriques, and Alessandro Romano who have led the way with an engaging piece on the workings of the VCM. Subsequent contributions include work by Enriques, Romano and Tuch on so-called ‘green gatekeepers’.

In my forthcoming article, I aim to make two contributions. First, I chart and examine the evolution of the debate on corporate offsetting. Secondly, I focus specifically on whether corporate offsetting and the VCM can play a role in relation to a particular type of emissions, known as Scope 3 emissions. Scope 3 emissions are a type of indirect emission. For many firms, they represent the most significant emission source (p. 5). Importantly, Scope 3 emissions are owned or controlled by others in the value chain of a firm. They include, for example, emissions generated upstream by a supplier when producing materials which go into the manufacture of a product by a target-setting firm, or emissions that are generated downstream from the use of that product. How to tackle Scope 3 emissions has proven highly contentious. Critics reject offsetting, arguing inter alia that firms will gravitate towards offsetting simply because purchasing (often cheap) offsets is more cost-effective than undertaking meaningful changes to reduce Scope 3 emissions. Supporters of offsetting, on the other hand, are likely to point out that many firms are failing to reduce Scope 3 emissions at the necessary pace (p. 10), and that offsetting could play a part in addressing this problem.

In my article, I start from the premise that the search for ‘cost-effectiveness’ need not be the prime motivator for turning to offsetting. There is a distinct rationale for considering voluntary offsetting in the context of Scope 3 emissions—and that is power, or rather, the lack of it.

Scope 3 emissions have proved difficult to address because they are, by definition, not owned or controlled by a target-setting firm. Also, in practice, it is widely acknowledged, including by those that reject offsetting, that firms might simply lack the clout, or influence, to persuade their value chain partners to decarbonise. This points to a more fundamental truth in value chain relations: they are often not that of equals. In unequal relations, what grounds influence—or power—is often the dependence of one actor on another or, if translated into the context of organisations, the dependency on resources controlled by others in the value chain (physical, financial, etc). It is this fundamental insight—derived from Emerson’s work on power-dependence and Pfeffer and Salancik’s work on resource-dependence—that my article uses as a starting point to explore how corporate offsetting should develop in order to play a meaningful role in relation to Scope 3 emissions. In doing so, it aims to present an approach to corporate offsetting that focusses less on the individual mitigation actions of a smaller number of ‘best-in-class’ firms, and more on incentivising a wider range of firms—ie, those that lack individually the power to influence Scope 3 sources—to collectively drive change in Scope 3 emissions.

But this approach is not a ‘free-for-all’. It does not seek to substitute offsets for emission cuts where firms are able to effect change in Scope 3 emissions. What it proposes is to substitute offsets for inaction when firms lack the power to influence Scope 3 emission sources. Moreover, the article specifies conditions and requirements that are necessary to operationalise this approach and to avoid abuse. Meanwhile, on the supply side, it advocates wide-ranging and fundamental changes to the operation of the VCM. Unlike Battocletti et al., whose assessment of the VCM is grounded in a market failure paradigm, my analysis focuses on the role of legitimacy in securing the VCM’s future. Specifically, the proposition is that voluntary offsetting can only play a useful role if the VCM can gain broad acceptance as a marketplace capable of supporting mitigation efforts. Such acceptance is, in turn, more likely to be forthcoming if the institutions and arrangements that govern the VCM are regarded as legitimate—understood here both in terms of input legitimacy and output legitimacy. Crucially, the article contends that the need for legitimacy is likely to be more or less acute depending on the risk of conflicts between arrangements that support the VCM and broader climate policies. The article goes on to argue that in the case of offsets, the risk of such conflicts is acute because the compensation logic that is central to offsetting, places climate policy and climate targets at a greater risk of being undermined when mitigation projects fall short of implementing the required integrity standards. The article concludes by asserting that this key insight justifies significant reforms to the VCM. Specifically, it calls for (i) tiering the VCM, thereby limiting the market for offsets to projects whose methodologies are uncontroversial; and (ii) ultimately establishing market supervision over a market for offsets.

Pierre Schammo is a Professor of Law at Durham University and a Research Team Member at the Jean Monnet Centre of Excellence on European Union Sustainable Finance and Law, University of Genoa.

The author’s article can be found here.