What is Carbon Offsetting?
An explanation of how carbon offsetting works, the different types of offset, their limitations, and how to use them responsibly as part of a broader climate strategy.
Key Takeaways
- Carbon offsets allow businesses to fund emissions reductions or removals elsewhere to compensate for their own emissions.
- Offset quality varies enormously — additionality, permanence and verification are the key quality tests.
- Offsets should complement deep reductions, not substitute for them.
How carbon offsetting works
A carbon offset represents one tonne of CO2 equivalent that has been reduced, avoided or removed from the atmosphere by a project elsewhere. Businesses purchase offsets — often called carbon credits — to compensate for emissions they cannot yet eliminate. Projects range from renewable energy and energy efficiency in developing countries, to forestry, peatland restoration and direct air capture. Offsets are typically verified and issued by standards bodies such as Verra (Verified Carbon Standard), Gold Standard or the UK Woodland Carbon Code, which provide independent assurance that the claimed reductions are real.
Quality questions to ask
Not all offsets are equal. The three key quality tests are: additionality (would the emissions reduction have happened anyway without the offset funding?), permanence (is the carbon stored long-term, or could it be released — for example, if a forest burns?), and verification (has an independent third party confirmed the claimed reduction?). Nature-based offsets such as forestry carry higher permanence risk than engineered removals like biochar or direct air capture. Low-cost offsets on the voluntary market often fail additionality tests. Paying a higher price per tonne for a verified, additional, permanent offset is almost always better value than buying cheap credits in bulk.
Using offsets responsibly
The emerging consensus — reflected in the SBTi framework and the Voluntary Carbon Markets Integrity Initiative (VCMI) — is that offsets should be used only for residual emissions that cannot be eliminated through genuine operational changes, not as a first resort. A business that buys offsets to claim carbon neutrality while making no reduction efforts is exposed to greenwashing risk. Best practice is to reduce first, disclose transparently, and use verified offsets only for the remainder while continuing to drive reductions. Document your offset purchases, the standard used, and the project details — customers and auditors may ask.