Voluntary offset demand

Demand for offsets on the voluntary carbon market is on the rise, with some companies spending tens of millions of dollars to work toward sustainability goals or gain a competitive advantage with customers. Purchasing carbon offsets can serve as an expedient alternative to reducing their own emissions, as it allows companies to make progress on their targets without shifting their business models or risking investments in non-viable technologies. In 2023, about 163 million voluntary carbon offsets were retired (1 carbon credit represents 1 metric ton of CO2-equivalent). This is almost four times the total amount of voluntary carbon offsets retired in 2015.

Overview

A small number of corporations account for a significant share of offsets retired on a voluntary registry, such as Verra and Gold Standard. While the top buyers tend to be heavy emitters, they operate in a diverse range of sectors and vary in the types of offset they purchase.

Offset demand could be behavioral or fundamental. Behavioral demand comes from companies buying offsets to satisfy a specific customer, achieving carbon neutrality in particular years or distinguishing a product they offer – for example, “carbon-neutral liquefied natural gas”. This kind of demand is more susceptible to reputational risk, and tends to be more elastic. Fundamental demand pertains to companies using offsets as a last-resort mechanism to achieve a net-zero emissions goal. Fundamental demand tends to be more inelastic, unaffected by changes in price and reputational risk, as companies need to meet their emission reduction goals regardless.

Of the top 10 carbon offset buyers of 2023, seven buyers are from the energy or industrial sectors. Shell and Volkswagen AG, the top two buyers of carbon offsets in 2023, collectively purchased more than the remaining eight buyers in the list. Historically, other than companies in the energy and industrial sectors, top buyers also come from sectors such as consumer discretionary, communications, and consumer staples.

The most notable corporate buyers come from the transportation and logistics sector, primarily airlines, which use customer offsetting programs to reduce their emissions. Over 30 airlines that are members of the International Air Transport Association have offsetting programs, allowing customers to voluntarily pay a premium to make their flights “carbon neutral”. Airlines also must reduce emissions in compliance with the Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) led by the International Civil Aviation Organization. Such obligations drive fundamental offset demand from the airlines sector.

Telecommunications and retail of both non-essential (discretionary) and staple goods and services are among the other consumer-facing sectors that purchased significant amounts of offsets in 2023. Top buyers in these sectors are all consumer-facing and purchase offsets to gain a competitive advantage and attract environmentally conscious customers. Other sectors that could soon get more involved in offset buying for behavioral purposes are materials companies (to produce sustainable products like green steel and aluminum), shipping firms and e-commerce providers.

It is worth noting that companies have the option to not publicly disclose their offsetting activities to avoid reputational risk. The environmental integrity of some offset is controversial and attracts bad press. This factsheet is based on publicly disclosed data from Verra, the largest of the carbon offset registries, accounting for 80% of supply.

Geography and sector

The lion’s share of voluntary offsets are purchased by companies in industrialized markets, especially North America and Europe. By contrast, most offsets are created in emerging economies in Asia Pacific, Latin America, and Africa. This could help fund emerging economies’ decarbonization efforts and enable companies in industrialized nations (and their governments) meet their climate targets. However, many emerging economies now have their own sustainability goals for which they can use offsets. This raises the risk of double-counting of reduced emissions - by both the country where the offset is created and the country where it is retired. This has led to the concept of corresponding adjustments.

A carbon offset project sector determines its operational cost, where the project can be built and how permanent the emissions reduction from offsets are. Avoided deforestation, often abbreviated as REDD+, remains the most popular sector with customers in 2023. Avoided deforestation projects often have co-benefits beyond decarbonization. They can also create offsets immediately – a reason they are sometimes valued over other nature-based solutions like reforestation, which can sometimes take decades to begin sequestering carbon. However, they have high permanence risk, especially in wildfire-prone areas. REDD+ projects present opportunities to protect forests at risk, using offsets as a financing tool.

Energy generation was the second-most popular offset sector with companies in 2023. However, it is gradually losing its appeal as registries like Verra limit when offsets can be created from energy generation projects because these are often not additional. Projects in emerging economies may still issue credits under Verra and Gold Standard. In addition, renewable energy certificate schemes, which work like an offset but cover electricity rather than emissions, are becoming more popular. Clean-energy developers may opt to sell these certificates instead of carbon offsets, as they cannot do both due to double-counting.

Other trends

Co-benefits, or the additional positive attributes a carbon offset brings outside of decarbonization, are growing more popular over time, and can range from wildlife protection to benefits for indigenous communities. Projects that have co-benefits tend to be valued higher and can sell their offsets for a premium. They are also in higher demand. In many cases, the offsets are “benefit-agnostic”, meaning the project was generally listed as meeting all of the UN Sustainable Development Goals or having achieved Verra’s Climate, Community and Biodiversity verification.

The second-most popular type of co-benefit came from projects specifically earmarked for having social benefits, such as improving the livelihood of local communities or developing a water treatment facility. In third place was biodiversity and climate co-benefits -- for example, protecting local wildlife populations.

Demand for carbon offsets today is elastic and many companies prioritize purchasing the cheapest offsets regardless of quality – perhaps the biggest criticism of the market today. Should prices for offsets rise, companies will respond differently. Many of the largest offset buyers are currently consumer-facing companies, meaning that the customer bears some of the costs. Should offset prices rise too far, many companies will lose any competitive advantage they have by offering offsets because customers will not be willing to pay such a premium. This could have the adverse effect of pricing these companies out of the market, or forcing them to buy cheap, low-quality offsets at a greater rate. Companies driven more by sustainability goals may prioritize gross emission reductions further, relying less on offsets.