GHG compensation / offsetting - SUM: Sustainability Management Wiki

Authors: Marthe Dreyer, Lea Wieser, Henrik Schneider, Maximilian von Wedel
Last updated: December 30, 2022

1 Definition and relevance

The Commission of the European Union has brought a big jolt to the economy and its objectives with the Green Deal.¹ The Green Deal was published on December 19, 2019 and includes two big goals: a 55 percent reduction in emissions of Greenhouse Gases (GHGre) compared to 1990 by 2030 and climate neutrality by 2050.²
These European targets mean that states, communes and companies are now also obliged to set themselves targets for climate neutrality.³ One potential instrument in addition to GHG avoidance is GHG compensation. The definition: GHG compensation refers to payments to finance investments that reduce greenhouse gas emissions.⁴ These payments give companies the opportunity to reduce their GHG balance in the short term through offsetting their own emissions. The idea behind that is that on a global scale it is not relevant for the climate where emissions are emitted or avoided. This means that GHG emissions generated in one location can be compensated at a distant location. Through this possibility of compensation payments, a company has theoretically an instrument to achieve climate neutrality without reducing its own CO₂ emissions.⁵ This can be particularly interesting for emissions that are not directly emitted by the company, as the company can often not directly influence these scope 2 and 3 emissions.⁶ In addition, non-compensated use of mitigation outcomes is also possible if an actor pays for mitigation activities outside its value chain but does not use them to offset its carbon footprint.
In addition to voluntary compensation, there is also mandatory compensation. Mandatory emissions trading is regulated by EU law and involves European companies that consume more than 20 megawatts of district heating or operate larger plants such as steel mills or refineries.⁷ These companies receive so-called emissions allowances, which entitle them to emit a certain amount of CO₂. If they fall below this level at the end of the year, they can sell the remaining allowances; if they exceed it, they must buy additional allowances.

In this wiki the focus is on voluntary GHG offsets by companies.

2 Background

2.1 Historical background

The history of carbon offsetting began in 1989 when the American energy provider “Applied Energy Services” financed an agroforest in Guatemala to offset emissions caused by their newly installed coal-fired power plant in the States⁸. In 1997, the Kyoto Protocol marked the legal beginning of GHG emission avoidance and reduction and the base for emission trading systems. The protocol demanded politics, measures, and reports of industrialized countries as the main contributors to fight climate change.⁹ The world’s first and biggest Emission Trading System, the European Emission Trading System (EU ETS), was implemented in 2005, includes all states from the European Free Trade Association and covers about 40 percent of the total EU GHG emissions. For some industries, the participation is mandatory and because of the cap-and-trade principle, the overall emission reduction over time is ensured.¹⁰ The Copenhagen Accord, the final document of the climate conference in 2009, declared the first overall goal of a maximum global average temperature increase of two degrees Celsius above the pre-industrialized level. The Kyoto Protocol was replaced by the Paris Agreement in 2015, which goal is to limit global warming to well below two degrees compared to pre-industrial levels.¹¹ The Sustainable Development Goals, established in 2015, form a frame and guideline for the whole globe to meet this goal¹² and are specialized in National Determined Contribution targets.¹³ The UN launched the UN Carbon Offset Platform in 2020 where certified projects in developing countries for avoiding, removing, and reducing GHG emissions are listed.¹⁴

As said before, there must be a differentiation between mandatory and voluntary offset markets. The EU Emissions Trading System is mandatory and controls emissions from the power sector, energy-intensive industries, and aviation in a mandatory manner.⁹ But some companies started offsetting emissions without external obligation, e. g. Sky became the first carbon-neutral media group in 2006 and the company is committed to being net-zero in 2030¹⁵ followed by Google, which became carbon neutral in 2007, using only renewable energy since 2017, and aims to consume 100 percent carbon-free energy in 2030.¹⁶ Another example is easyJet, the first airline which offsets all emissions from all operations since 2019 additionally to the EU Emissions Trading System.¹⁷ The EU Emissions Trading System covers mandatory the so-called reduced scope emission compensation, which are all emissions from all flights within the EU (starting and landing). The flights outside the EU are compensated voluntarily by EasyJet.¹⁸ Voluntary carbon markets allow individuals and companies to buy self-imposed carbon offsets and react to the growing interest in the corporate social responsibility of unregulated carbon-emitting companies.¹⁹ While the compliance offset market is managed by carbon reduction regimes²⁰, there are no consistent quality standards for voluntary offset programs.²¹ Some international standards developed over time, e. g. the Verified Carbon Standard and the Gold Standards, based on mandatory market rules.²² To ensure the quality of voluntary carbon offset projects, the German Environment Agency formulated the criteria: Additionality; Permanence; Calculation, Monitoring & Verification; Transparency & Regulations, Time of issue and Double Counting, further explained later.²³

2.2 Current state of GHG compensation

The German Environment Agency published an analysis of the German market for voluntary offsetting of greenhouse gas emissions in 2021.²⁴ The analysis states that 43.6 million metric tons of CO₂ equivalents were sold and retired in 2020. The volume has increased sixfold since 2016, where the value was at 6.6 million tons of CO₂ equivalents.

It also illustrates the percentage of the groups requesting voluntary offsetting certificates in each sector. Demand is highest among religious institutions and research facilities (> 80 percent), followed by NGOs and foundations (80 percent) and companies (77 percent).

The analysis by the Federal Environment Agency also revealed the motives behind voluntary offsetting. The most important aspect is climate and environmental protection, followed by the goal of climate neutrality and a sense of responsibility. The most frequently named argument for not offsetting is that the process of reducing GHG is still ongoing, and offsetting has not yet been able to start. Another reason is the lack of clarity in the market. In the last study in 2015, the most frequently cited argument was the high cost of voluntary offsetting; in 2021, only 3 percent of respondents mentioned this as an argument.

There are several providers of voluntary market compensation services. The most common ones in Germany are atmosfair, myclimate and Klima-Kollekte. In a 2018 study by Stiftung Warentest comparing 6 service providers, Atmosfair came out best with an overall score of 0.6. Klima-Kollekte came in second with a score of 1.1. Myclimate received a final score of 2.2 and thus ranked fourth.

3 Practical implementation

3.1 GHG calculation / reporting

The overall priority should be to avoid and reduce GHG emissions or to use GHG-free alternatives. But in some cases, it’s not within the scope of possibilities. This is where it comes to compensating GHG emissions which is mainly done by purchasing and cancelling credits created by emission reduction projects of baseline-and-credit programs. Another option of voluntary compensation is to purchase and cancel allowances from emissions trading systems. Consequently, the cap on total emissions will be further reduced and the scarcity of allowances will be exacerbated.²⁵ To know how many credits or allowances must be purchased, the company must calculate and report on its emissions. The GHG Protocol describes the following steps in identifying and calculating GHG emissions: identifying emitting sources, selecting a calculation approach, collecting data, and choosing emission factors, followed by applying the calculation tool and roll-up data to the corporate level.²⁶

3.1.1 Calculation

The GHG Protocol differentiates between Scope 1, Scope 2, and Scope 3 emissions to reduce the complexity of calculating GHG emissions in the corporate world. At first, emissions of Scope 1, direct emissions of stationary combustion, mobile combustion, process emissions, and fugitive emissions, should be identified. Scope 2 summarizes indirect emissions emerging from using electricity, heat, and steam. The last and third Scope is optional and addresses indirect emissions resulting from corporate upstream and downstream processes along the whole value chain.²⁷

There is not the one and only emission calculation tool. The GHG Protocol offers different optional cross-sector and sector-specific tools. Companies are allowed to use their own tool or customize existing tools to get the most specific emission data.²⁸

Direct emissions from stationary combustion generated by power plants, refineries, and manufacturing facilities can easily be quantified through direct measurement systems, monitoring the concentration of the GHG and output flow rate. Another possibility is to calculate emissions via fuel use data by determining the actual annual consumption of meters or invoices and storage records in combination with default CO₂, CH₄, and N₂O emission factors. With mobile combustion generated by any kind of transport vehicle, direct emissions are calculated like stationary combustion via fuel consumption (actual use or estimation based and weighted with city and highway fuel economy) in combination with the different emission factors. Another emitting source are indirect emissions from electricity use which can be calculated via known electricity use, used area and electricity consumption, cost method, or average intensity (when no information about electricity use in leased space is available). Again, an appropriate emission factor must be chosen. Direct fugitive emissions of hydrofluorocarbon and perfluorocarbon emerge from refrigeration and air conditioning systems along the whole supply chain and product life cycle (transportation, storage, production process, etc.). They are estimated by the simplified mass balance method or screening method. For simplified mass balance, the quantities of the purchase of refrigerant to charge new equipment, total full charge of new equipment, the quantity of refrigerant used to service equipment, the quantity of refrigerant recycled, total full charge of retiring equipment, and refrigerant recovered from retiring equipment are counterbalanced. The screening method is not as accurate as the simplified mass balance method, because the quantity of refrigerants used is multiplied by default emission factors which are unspecific.²⁹

3.1.2 Reporting

The GHG Protocol offers a standard and guidance regarding reporting GHG emissions. The claim is to provide a GHG emission report with all important information that is complete, consistent, accurate, and transparent. To increase the quality of the report, regular repetition with growing knowledge and experience is recommended. All available data and their limitations should be included. Furthermore, transparent communication about inconsistencies linked to earlier reports and information about inventory boundaries is necessary.³⁰

If a company decides to calculate and report GHG emissions, scope 1 and scope 2 are manda-tory for all while scope 3 is optional. The first part of every report should be the description of the company, the chosen inventory boundaries, operational boundaries, and the reporting period. To get more specific about the information on emissions, the total scope 1 and 2 emissions, unaffected by any trades of allowances, shall be named. As well as more detailed emissions data for each scope and for all GHG (CO₂, CH₄, N₂O, HFCs, PFCs, SF₆). Furthermore, the GHG protocol asks for a tabular illustration of the development of GHG over time and all emission data shall be set into context. It is also necessary to state a description of the methodologies used and further information about exclusions of sources, facilities, and operations.³¹

Scope 3 emissions, which are indirect emissions caused by all activities along the value chain, are optional information. As well as emission data classified according to business units, country, source types, and activity types, emissions subdivided into own generation and external sale, performance measurement against internal and external benchmarks, GHG not included in Kyoto Protocol, performance indicators and a description of the strategy how to reduce GHG emissions, etc. It is also recommended to report on purchased or developed offsets outside the inventory boundary (GHG removals and emission reduction projects) as well as inside the inventory boundary (reductions sold as offsets).³²

To ensure the quality of GHG accounting and reporting, the GHG Protocol named five principles. Relevance: the chosen GHG inventory should reflect the company’s GHG emissions and be of users’ (internal and external) interest. All emissions within the inventory boundary should be reported completely, calculated with consistent methodologies and any changes in inventory, method or boundaries reported transparently. Another principle is to transparently report on issues and limitations and due to accuracy, GHG emissions should not be under- or overestimated and uncertainties reduced.³³

3.2 GHG compensation methods

There are many different GHG compensation project types for offsetting GHG emissions, yet they all share the same underlying understanding: it is irrelevant, where on the globe the emissions are emitted and where they are avoided/reduced due to the global connection of our atmosphere. This global thinking enables a variety of different compensation possibilities in different locations that also differ in their approach to reduce, avoid, or store emissions.³⁴

According to the German environmental ministry, there are around 4 major and 10 minor categories of GHG compensation projects.

Energy

Renewable energies (36%)

Energy efficiency (19%)

Change of fuel (2%)

Reduction / binding of GHG

Agriculture (17%)

Forests and forestry (17%)

Moors (<1%)

Projects for lowering emissions through deforestation / forest damages

Avoidance of deforestation (4%)

Other

Waste and landfill gases (2%)

Industry (1%)

Transportation (1%)

Table 1: Categories of GHG compensation projects³⁵.

3.2.1 Renewable energy

Energy projects are the most prominent example of GHG compensation projects. They make up around 57 percent of the overall projects and include the topics of renewable energies, energy efficiency and change of fuels.³⁶

Renewable energies include for example water-, wind-, solar or biogas-projects which reduce the overall emission output caused by the general electricity production. To determine the reduction quantity, it is necessary to calculate the corresponding quantity of how the energy would be usually produced. This calculation then serves as the underlying baseline for the emission output on which then it is calculated how much the renewable energy project is lowering the emission output. This calculated reduction then can be bought via emission certification. In general, such projects need heavy fundings but turn out to be profitable the longer they are producing energy.

Energy efficiency projects tackle a different approach: lowering the emission output caused by consumption instead of production. The common approach of such projects is to replace inefficient and emission-intensive gear with newer, more emission friendly technologies which reduce the emission output in private households or industrial applications. In general, all projects often also have several side benefits, e. g. the job situation, improved health situations through less fine dust pollution caused by inefficient burning of wood or general support of rural regions through initial energy supply.³⁷

3.2.2 Reduction / binding of GHG

Another approach of compensation projects is the reduction and binding of emissions. This includes projects in the field of re-forestation/sustainable forestry, agriculture, and moor areas which together make up around 35 percent of all compensation projects.³⁸

In general, those projects focus on the capability of plants to store and bind carbon dioxide from the air. This not only leads to an overall emission reduction, but also to possibilities of improving biodiversity, soil quality and monetary incentives against deforestation through providing an income possibility through planting and maintaining the areas through the certificate pricing.

However, re-forestation and forestry-related projects also bear some difficulties. The major problem is that the carbon binding needs to be permanent as all the stored carbon can be emitted back into the atmosphere e. g. through wildfires or deforestation. A rash choice of invasive plants, a monocultural layout or ethical issues e. g. through influencing indigenous communities with the forestry projects can further decrease the quality of these projects. Therefore, a thoughtful and holistic management is especially important for this type of compensation projects.³⁹

Regarding moor area projects, these areas are immensely important carbon storages. Even though they make up a relatively small percentage of the area, they are e. g. responsible for around 7.5 percent of the yearly German CO₂-equivalent output. More than 90 percent of these areas are under agricultural usage⁴⁰ and therefore are drained which results in a transformation from an emission storage to an emission emitting area. Climate compensation projects that focus on moors are mainly re-hydrating those areas to return them back to their carbon storage function. Another positive aspect of such renaturation projects is the preservation of moors as recovering areas and biodiversity hotspots with highly specialized and unique species.⁴¹

3.2.3 Avoidance of deforestation

Reducing Emissions from Deforestation and Forest Degradation, or also REDD+, focusses on projects to mitigate emission output caused by deforestation in developing countries and make up around 4 percent of the projects. The program was initiated by the United Nations Framework Convention of Climate Change (UNFCCC). The overall difference to the previous section is the focus on preserving existing areas compared to renaturation projects and also in its international orientation. REDD+ focusses on 5 major points:

reducing carbon emissions from deforestation,
reducing carbon emissions from forest degradation,
conservation of forest carbon stocks,
sustainable management of forests,
and enhancement of forest carbon stocks.

The program aims to provide developing countries with incentives to install meaningful, holistic, and sustainable emission reduction programs regarding their forest areas. When a country provides enough proof for their ambitions, the UNFCCC provides support in executing these strategies. There are also three phases in the program called “readiness” (1), “demonstration” (2), and “implementation” (3) where those countries lay out their strategies & action plans (1), demonstrate and test them (2) and afterwards implemented them at the national level including measuring-, report- and verification processes (3)⁴².

3.2.4 Other

According to the German Environment Agency, the remaining projects are located in the areas of waste and landfill gases, industry gases, and transportation and make up the remaining 4 percent of the compensation projects.

Landfills are important drivers when regarding emission output⁴³. Missing separation of waste can lead to severe emission outputs, especially organic waste that rots away in the open. A proper management is therefore necessary which can lead not only to less emission output, but also to lower air, groundwater, and soil pollution. Projects in this area provide permanent working space and properly managed waste facilities can provide energy or fertilizers for agriculture.⁴⁴

Industry projects are not further specified. One example for projects in this area are so called industrial gases emitted through industrial processes. These gases are mainly extremely potent greenhouse gases which provides possibilities for lowering the emission output through proper degradation of these gases. However, these projects are often seen as controversial as they normally do not provide a permanent reduction approach and focus more on short term reduction. Another critical point is the general question if it is acceptable to reward those industries by financing them through certificates even though they were also the emitting party in the first place.⁴⁵

3.3 Criticism, quality criteria and standards

3.3.1 Criticism and resulting quality criteria

Climate offsets are publicly criticized, especially by conservation groups and climate activists. For example, Greta Thunberg tweeted in 2019, “Good and instructive series by DN (Dagens Nyheter, Swedish newspaper) researching the climate compensation bluff, which most likely in most cases does more harm than good. This must become common knowledge by 2020.”⁴⁶

In the voluntary CO₂ offsetting guide of the German Environmental Agency, it takes up the criticism points of offsetting and transform them to criteria which a compensation project should fulfill.⁴⁷

A major criticism of offset projects is that in some cases the reduction of emissions does not happen additionally, meaning that the climate protection measure would have been implemented even without the money from the offset payment. This is also the case if the reduction is required by law or is part of the common practice of the region. In this case, no additional greenhouse gas emissions are saved, and the measure fails. The project must therefore ensure that the saving happens only through and because of the payment and that the reduction is additional (criteria: additionality).

Another criticism is that projects cannot guarantee the longevity of the measure. An example is reforestation. The reduction of greenhouse gas emissions through trees only pays off after a few decades. Until this happens, events such as forest fires or insect pests can occur. A negative example were compensation areas financed by Microsoft and BP in 2016, which burned down five years later and released vast amount of CO₂ again.⁴⁸ Offset providers must therefore be able to ensure that the greenhouse gas savings are permanent and cannot be reversed by unforeseen events (criteria: permanence).

The problem of double counting is also often mentioned in connection with compensation. For voluntary offsetting, there is no central registry in which all certificates are managed. It can therefore happen that certificates are not properly set-aside and are sold twice. The saved emissions are claimed twice although only one saving is made. Another point for double counting is that a certificate is claimed multiple times by different parties (for example, by a city, but also by the associated country). In the future, there must therefore such a central register for voluntary certificates, in which it is clearly marked which certificates have already been cancelled (criteria: double counting).

Furthermore, the calculation methods are often discussed. The recording and calculation of emissions are very complex, as it is almost impossible to record the total network of connections. One example of this is leakage. “Leakage refers to the relocation of emissions if the implementation of a project elsewhere increases greenhouse gas emissions and results in emissions (in part) that should have been avoided.”⁴⁹ For example, a rangeland reforestation project may result in farmers clearing other forest land for new rangeland. To prevent this a high-quality, and detailed calculation of emissions must be implemented. The whole process must be completely transparent (criteria: calculation, monitoring and verification of emissions and transparency).

The social aspect plays an important role in terms of climate compensation as well. There have been several scandals in the past, particularly in connection with reforestation projects. In Uganda, for example, land grabbing occurred.⁵⁰ The Norwegian company Green Resources received public land for reforestation which local farmers were previously allowed to use. The farmers are now struggling to make a living. There have also been reports of biodiversity loss and human rights violations on compensation project plantations. One report used the term “new form of neocolonialism”.⁵¹ Accordingly, the following criteria should be mandatory for offset projects: stakeholder involvement and sustainable development. A project should always provide social added value at the project site, such as secure jobs, knowledge transfer on which the local population can build, improvement of air quality, etc. To ensure this, it is important to work closely with the local people and not to decide over their heads. “Violation of human rights and damage to biodiversity should be sanctioned by exclusion.”⁵² (criteria: stakeholder involvement and sustainable development)

The timing of the certificates’ sale is also a controversial issue. They can either be sold “ex-ante”, meaning that the certificate is bought first and then the climate protection measure is implemented, or “ex-post”, meaning that certificates are sold from climate protection measures that have already been implemented. The advantage of ex-post is that it ensures that the measure has been implemented and that no unexpected events can come between planning and implementation. The disadvantage is that the already mentioned problem of additionality cannot be ensured as well with ex-post as with ex-ante and that start-up capital may be lacking with ex-post. “In any case a transparent identification of the timing of the distribution is essential as well as a buffer for uncertainties in the later implementation of the reduction projects.”⁵³ (Criteria: time of issue).

Critics also criticize that climate compensation can lead to the so-called rebound effect.⁵⁴ This means that companies are less ambitious in reducing greenhouse gas emissions because they know they are offsetting. This leads to a prevention of change and new structures. Critics even call it a form of sale of indulgence.⁵⁵ The important guiding principle in climate offsetting is always: reduce first, then offset. Only unavoidable emissions should be compensated. To counter the criticism, some offset service providers offer advice on reducing greenhouse gas emissions before offsetting.⁵⁶

3.3.2 Standards

To create comparability between different choices, standards are often introduced in practice that apply to all providers acting in the field.⁵⁷ These providers must fulfill the promoted requirements in order to obtain a corresponding time classification for their projects. These quality standards are primarily intended to ensure that greenhouse gas emissions are offset at the desired level. The criteria are closely aligned with the criteria for the Clean Development Mechanism established by the UN. Example questions for these projects could for example be: Does a new wind turbine really account for lower emissions than without it? Are there negative side effects after reforestation that negate the benefits of the project? And wouldn’t the Indonesian city government have city government not have taken action against the hazardous waste in the first place?

For Germany and the German market, the most important quality standards are:⁵⁸

International standards

Clean Development Mechanism (CDM):
The CDM, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction project in developing countries.
Verified Carbon Standard (VCS):
Projects developed under the VCS Program must follow a rigorous assessment process in order to be certified. VCS projects cover a diverse range of sectors, including renewable energy (such as wind and hydroelectric projects), forestry (including the avoidance of deforestation), and others.
Plan Vivo:
Plan Vivo attaches particular importance to fair trade and the promotion of rural communities. Local residents are involved in the planning and implementation of Plan Vivo’s climate protection projects.
Gold Standard:
Gold standard projects are projects that demonstrably lead to the reduction of greenhouse gases and at the same time are good for the local environment and social concerns of the population.
ISO 14064:
The ISO 14064 standard is part of the ISO 14000 series of International Standards for environmental management. The ISO 14064 standard provides governments, businesses, regions and other organizations with a complementary set of tools for programs to quantify, monitor, report and verify greenhouse gas emissions.

Additional standards

SOCIALCARBON:
Is an international GHG standard focused on nature-based solutions. Projects go beyond carbon, embedding social, environmental and economic benefits to the projects and their local stakeholders.
Climate Community Biodiversity Standard:
It looks at the overall benefits of a project beyond just emissions reductions, with a particular focus on biodiversity conservation and social impacts in the project region – used primarily in forestry and agricultural projects

Regional standards

Moor Futures:
Certified projects ensure the preservation and maintenance of peatlands over a period of 50 years – exclusively in Germany.

The Verified Carbon Standard is the world’s most widely used voluntary standard for offsetting greenhouse gas emissions.⁵⁹ In 2015, Verified Carbon Standard accounted for half of the transactions on the global voluntary market and therefore has great market relevance, especially in terms of prevented deforestation. Worldwide, the standard has already offset 130.1 million metric tons of CO₂ equivalents in his project. In Germany the market share is 20 percent. With a market share of 72,7 percent, the Gold Standard is the most common standard for compensation in Germany. The Gold Standard has been developed by the WWF and other environmental organizations. The standard compensated 46 million tonnes CO₂ equivalents worldwide in following projects: renewable energy, waste & landfill, forests & forestry, agriculture, others.

In a study commissioned by the Federal Environment Agency, the 107 respondents had the opportunity to rate various standards according to their quality, resulting in the following ranking.⁶⁰

How do you rate the quality standards on a 1-5 scale?	1=very low quality; 5=very high quality
Clean Development Mechanism	4.5
GoldStandard	4.3
Climate, Community, and Biodiversity	4.0
Verified Carbon Standard	3.8
Social Carbon	3.8
Plan Vivo	3.1
MoorFutures	2.7

Table 2: Rating of quality standards.

3.4 Best practice examples

As mentioned in the previous segment, there are different quality standards that ensure the compliance of important like the Clean Development Mechanism, the Verified Carbon Standard Verified Carbon Standard or the Gold Standard which cover the majority of the market.⁶¹

In general, not only individual, but also larger scale compensation (e. g. through companies) are executed through external providers of carbon offsetting projects. Therefore, when choosing best practice examples, it is important to choose providers and projects that sufficiently follow the mentioned guidelines. Examples for this are the already mentioned German providers Klima-Kollekte and Atmosfair. Both focus on high transparency, external certification, own projects and consequent monitoring⁶²^,⁶³.

Klima-Kollekte has 10 different projects in the areas of renewable energies and energy efficiency. All projects are aligned with the SDGs and fulfill the Gold Standard⁶⁴. One example project is in the field of energy efficiency and renewable energies and is located in the region of Kolar, India. Traditionally, the families in this area are cooking with inefficient, wood-fueled stoves. However, the region of Kolar has heavily limited wood resources, which also leads to the necessity of using expensive and emission heavy kerosene as a substitute energy source. As a result, these stoves are not only emitting a lot of emissions, but also are leading to severe smoke exposure that can cause damage to the eyes and the respiratory system. Because wood is heavily limited, the demand for it led to a heavy deforestation which resulted in a remaining forested area in the size of only around 17 percent of the original area. The search for wood also leads to time-consuming tours as the families need to cover even greater distances.

Therefore, Klima-Kollekte provides this region with small-scale biogas facilities. The biogas facility is manufactured from bricks and cover around 2m³. Inside the digestive tank, organic waste and cow dung is getting decomposed which leads to biogas which is then available for the household to cook with. This leads to more efficient cooking, less deforestation, less health impacts and less time intensive search for wood which can e. g. be used for other work activities or childcare. The usage of cow dung especially lowers sickness through bacterial infections and leads to improved groundwater quality. Another by-product is the production of fertilizer which can be used for agricultural activities. As the facilities are built with local materials and have a life expectancy of around 25 years, it is also very cost efficient and sustainable.

In summary, this project is a best practice example for combining different positive aspects in the social, economic, and ecological area. The project is also scalable as over 18,000 units have been established already. It reduces the emission output, but also improves other important aspects such as biodiversity preservation, health aspects or groundwater quality⁶⁵.

Another best practice example is the provider Atmosfair. They provide projects in 6 different categories: efficient stoves, solar energy, biogas & biomass, hydropower, environmental education and change of tourism. According to Atmosfair, 90 percent of their projects are certified by the Clean Development Mechanism Gold Standard. Additionally, they also develop small scale projects according to the Gold Standard Microscale-certification to implement projects in areas that are not suitable for bigger projects⁶⁶. One example project which is certified after Clean Development Mechanism Gold Standard is in the field of renewable energies. The project is located in the west of Senegal and consists of two large scale photovoltaic facilities that are not only the first of their kind in the country, but that are also connected to the national power grid and therefore directly influence the national electricity grid. The project was developed in cooperation with the two energy providers (Senergy PV SA and Ten Mérina Ndakhar SA) which focus on the operation and maintenance of the facilities which also leads to the provision of new jobs in the area. As Senegal is one of the least developed countries in the world, the necessary infrastructure is often not available in large parts of the country. As the country is also expected to be one of the most suffering countries from climate change, the policy makers decided on different development strategies to become more and more independent on fossil fuels and to improve the situation regarding the missing infrastructure. The two photovoltaic facilities provide around 50 GWh per facility due to the excellent sun conditions available in the country which leads to an overall emission reduction of around 68,000 t CO₂ /a⁶⁷.

Concluding, this project focusses more on the emission reduction aspect and does not come with as many other positive side aspects as the example project in Kolar. However, the scale of the carbon reduction is immense, and the projects provides a national-scale possibility for sustainable energy production which makes it another fitting best practice example.

4 Drivers and barriers

4.1 Drivers

There is more than one reason, that companies feel responsible for sustainability.⁶⁸ Aguinis identifies drivers for CSR and organizes the literature based on a distinction at the institutional, organizational and individual levels.⁶⁹ Lozano on the other hand, distinguishes between internal and external drivers in his overview.⁷⁰ The following presents drivers of corporate sustainability, which emerge as key drivers of GHG compensation, in terms of these two categorizations.

The institutional level comprises normative, cultural-cognitive and regulative elements, which are considered the three pillars of an institution.⁷¹ The driver at this level is considered to be pressure from stakeholders of different expectations on the institution.⁷² Internally, these are mainly shareholders,⁷³ whereas at the external level, customers,⁷⁴ non-governmental organizations and the local population⁷⁵ are important. Also, there are instrumental (focus on own interests), relational (focus on relationships) and moral motives (focus on ethical principles), why stakeholders exert pressure on companies.⁷⁶ At an external level, regulations, standards and certifications also have an influence on sustainable action.⁷⁷ The latter can lead to companies only symbolically carrying out activities in order to comply with the imposed requirements. The core of sustainable entrepreneurial action can be neglected hereby.⁷⁸ Assessments from third parties, such as environmental classifications, can also be considered drivers at the external institutional level.⁷⁹ In addition, the context in which the company operates, such as the socio-cultural framework, plays a role.

To achieve climate neutrality as a company, they often have no other option than to compensate their GHG emissions through offset payments.⁸⁰ These unavoidable emissions can be justified both technically and economically. This can be justified by the fact that some sectors and processes generate GHG emissions for which there is as yet no technical solution to avoid them. However, greenhouse gases can also be unavoidable from an economic point of view if avoiding them would lead to prohibitively high costs. The inevitable of emissions changes with technological progress and should always be questioned by those who are responsible.

One of the biggest drivers for offsetting should be consumerism, in addition to the political targets for achieving climate neutrality by 2050. Like the political factors, they represent an external motivation for companies’ decision-making.⁸¹
A representative survey commissioned by ClimatePartner in January 2021 among 1,000 people between the ages of 16 and 65 showed that the “climate neutral” label is perceived positively:⁸² For 74 percent of the survey participants, it is a decision-making aid when making purchases. This study result is confirmed by another study by Utopia with 4000 interviewees. Of these, 67.2 percent confirmed that climate neutrality was a decisive purchasing argument at least once.⁸³ They are quite prepared to pay more for climate-neutral products and services than for comparable others. One third (32.6 percent) of those surveyed are even “completely” prepared to do so, while a further 51.6 percent agree “tend to agree”. The younger the consumers, the more positive their attitude toward climate-neutral products. For example, 80 percent of the 18–24-year-olds and 72.3 percent of the 25–34-year-olds we surveyed have already specifically chosen a climate-neutral product or service. The 18–34-year-olds are not only more open to the purchase itself, they are also willing to dig deeper into their pockets for it: 90 percent “fully agree” or “tend to agree” that they would pay an extra price for climate-neutral products.
In addition to consumer behaviour toward climate-neutral products, investors attitude of entitlement in the stock market also acts as an external motivator for companies. Stephanie Pfeifer, Chair of the Institutional Investors Group on Climate Change, told Handelsblatt in an interview: “Companies can no longer ignore what climate change means for their business.”⁸⁴ The Investors Group on Climate Change is made up of European pension funds, among others, and manages assets of more than 33 trillion euros.
These drivers are causing companies to consider ways to quickly become carbon neutral in order to satisfy their shareholders and survive in the marketplace. The way via GHG compensation and offsetting enables companies to show fast results to the outside world and thus create the appearance of a sustainable company.⁸⁵

An important driver from the internal of the companies are the employees. According to a study commissioned by Porsche Consulting, four out of ten employees believe that their employer doesn’t do enough to protect the climate.⁸⁶ Clear impetus is provided by the finding that one third of those surveyed would no longer apply to their employer for this reason. Here, companies can use GHG compensation as a tool to get involved in climate protection. One possibility would be to involve employees in the selection of projects by means of surveys in order to give them the opportunity to commit themselves to climate protection. According to the study, the majority of employees have the impression that they are not actively involved in climate protection within the company.

4.2 Barriers

For companies, one of the biggest barriers shouldbe the resonating image of GHG compensation. Pure compensation solutions are seen as untrustworthy. In essence, they can be interpreted as “I’m buying my way out and I’m not interested in solutions”.⁸⁷ At best, these can be transitional solutions. But without a binding plan for the “actual” climate neutrality of a company, the instrument of compensation is unbelievable.
For credible compensation of GHG emissions, it must be ensured that the emissions are actually saved elsewhere and not exposed as fraud by independent reports, such as the “Plant for the Planet” organization by Die Zeit in its article “Aus der Traum vom Billigbaum”.⁸⁸ This led for example to the fact that large companies like Procter & Gamble, which transferred large compensation payments for the planting of trees in states such as Mexico, were brought in connection with this fraud and had to justify themselves publicly. It is assumed that the companies did not know about the fraud but being associated with it is not good PR and no GHG emissions were compensated despite the payments made.
A major hurdle for companies here is the risk of fraud on the part of a chosen compensation partner, in addition to the difficulty of verifying the legality of the project and its actual achievement of the desired GHG compensation.
The image of GHG compensation among stakeholders mentioned in the first paragraph, coupled with a possible scandal involving the compensation partner, can quickly lead to companies being accused of greenwashing and only being able to refute this accusation through extensive public relations work. This damage to the company’s image often leads to high direct costs, e.g., for public relations work, but also to high opportunity costs, e.g., for lost sales or, as mentioned above, to a loss of image on the labor market.

In order to evade internal and external barriers and to position themselves as transparently as possible with stakeholders, many companies orientate themselves according to the best practice examples described in Chapter 3.4. They select their projects and suppliers according to the existing quality standards (Chapter 3.3.2), can thus pass on their responsibility to the market for GHG offsetting and point out that they have made their decisions according to the best possible standards.
To find further measures for solving barriers in practice, it is advisable to conduct interviews with practicing companies.

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