The negligible role of carbon offsetting in corporate climate strategies

Abstract

Carbon credits feature prominently in corporate climate strategies and have sparked public debate about their potential to delay companies' internal decarbonisation. While industry reports claim that credit purchasers decarbonise faster, rigorous evidence is missing. Here, we provide an in-depth analysis of 89 multinational companies' historical emission reductions and climate target ambitions. Based on self-reported environmental data and more than 400 sustainability reports, we find no significant difference between the climate strategies of companies that purchased credits and those that did not. Voluntary offsetting is not a central part of most companies' climate strategies, and many pass credit costs directly onto their customers. While the companies within our sample retired one-fourth of all carbon credits in 2022, the top five offsetters' expenditures on voluntary emission offsetting are, on average, only 1 percent relative to their capital expenditures. For most companies, carbon credits are, therefore, unlikely to crowd out internal decarbonisation measures. Yet, we document that for large-scale offsetters in the airline industry, carbon credit purchases competed with financing internal decarbonisation measures.

Fig. 1. Ordinary Least Squares (OLS) regression coefficients for (a) scope 1 emissions ratio (CDP 2023/2018) with n = 78 (b) and climate target ambition with n = 89.

The graph displays the estimated regression coefficients (${\widehat{\beta }}_i$), with error bars representing their 95% confidence intervals (CI) with ${\mathrm{CI}}_{{\beta }_i,0.95}=\left[{\widehat{\beta }}_i-t^{*}\cdot \mathrm{SE}\left({\widehat{\beta }}_i\right),{\widehat{\beta }}_i+t^{*}\cdot \mathrm{SE}\left({\widehat{\beta }}_i\right)\right]$ and t^* the critical value from the t-distribution. In (a), positive regression coefficients indicate a negative relationship between the explanatory variables (on y-axis) and decarbonisation speed (x-axis), suggesting that as the explanatory variables increase, we observe a decreased decarbonisation speed. In (b), positive regression coefficients indicate a positive relationship between the explanatory variables (y-axis) and climate target ambition (x-axis), suggesting that as the explanatory variables increase, we observe an increased climate target ambition. The sectoral categorical variables are relative to the aviation sector, and the geographic categorical variables are relative to headquarters in Asia. The label of retired carbon credits is written in bold as it represents the study’s primary outcome variable of interest.

Fig. 2. Costs of purchasing carbon credits for voluntary emission offsetting relative to companies’ capital expenditure (CAPEX) during the reported year.

Minimum estimates (blue) are based on the lowest reported carbon credit price among companies in the sample (easyJet) for 2022, and maximum estimates (red) are based on data from Ecosystem Marketplace (2023). Reported CAPEX shares (green) indicate that companies reported total spending for carbon credits in 2022. The figure includes the 15 companies with the highest share of funds spent on carbon credits relative to their CAPEX.

Fig. 3. Upper estimate of funds that European companies spent on carbon credits (reported in CDP’s 2023 survey) compared to estimated spending on European Emission Trading Scheme (ETS) allowances.

Sources: Retired carbon credits and ETS allowances from the CDP database, average ETS prices from World Bank, Carbon credit price estimates from Ecosystem Marketplace (2023). *Easyjet directly reports spending on carbon credits in their 2022 annual report.

Fig. 4. Emission sources offset by companies.

Overview of offsetting purpose for companies that reported >100,000 retired credits in CDP's 2023 survey between 2014 and 2023.The information is based on companies' sustainability and annual reports.

Fig. 5. Emission share that companies voluntarily offset.

Share of scope 1, 2, and 3 emissions (a) and of scope 1 and 2 emissions (b) that companies voluntarily offset based on emission reporting during the 2023 CDP reporting cycle. Location-based scope 2 emissions are used.

Fig. 6. Illustration of target ambition calculation.

Illustration of emission target quantification for company A. The red area is the magnitude of ambition. Since the targeted emission trajectory is higher than the 1.5^° degree trajectory, the ambition is negative.