What is Carbon Offsetting? Why Do Companies Use This Strategy?

Why Do Companies Use This Strategy?

For companies, corporate sustainability refers to balancing long-term economic viability with environmental responsibility. In achieving this balance, the management of greenhouse gas emissions and Carbon Offset (or offset) strategies play a critical role. These strategies involve measuring and reducing emissions and compensating for remaining emissions to enable the company to achieve carbon neutral or net zero emissions targets.

This text explains the role of corporate carbon footprinting software and carbon accounting softwarein this process.

What is Carbon Offsetting?

Although sources do not directly define the concept of Carbon Offsetting, they state that this strategy is associated with a company's effort to achieve carbon neutrality by a set date by managing its carbon footprint.

In the context of environmental sustainability, a company aims to decouple growth from environmental degradation by conducting its economic activities with lower carbon emissions and less resource intensity. Offsetting is a potential tool to achieve these goals.

How Carbon Offsetting Works

Measuring and Compensating Emissions

The beginning of the carbon offsetting process is an accurate and reliable inventory of the company's greenhouse gases (GHG). This forms the basis of the Corporate Carbon Footprint Calculation:

Measurement Standards: GHG inventory is usually done in accordance with the ISO 14064-1 standard and the GHG Protocol.

Scoping: Emissions are categorized into Scope 1 (emissions from direct operations), Scope 2 (indirect emissions from purchased energy) and Scope 3 (other indirect emissions in the supply chain).

Compensation: Offsetting the remaining emissions after emission reduction efforts through carbon offsets helps to achieve carbon neutrality or net zero target.

Carbon Credits and Carbon Markets

The sources do not address the technical functioning of carbon credits or carbon markets. However, there are regulatory costs and scenario planning that show that carbon pricing directly affects companies' financial decisions.

Regulatory Costs: The EU's Border Carbon Regulatory Mechanism (CBAM/SKDM) imposes a carbon price on embedded emissions (SEE) of imported products to manage financial risks ahead of financial obligations starting after 2026.

Internal Carbon Price: Companies can use an internal carbon cost shadowing price to account for environmental costs in investment decisions. This ensures that carbon is seen as a financial cost.

How Can Corporations Engage in Carbon Offsetting?

Greenhouse Gas Inventory and Carbon Footprinting

The first and foremost step for organizations to start offsetting or mitigation strategies is accurate data management and determination of carbon footprint.

The CimpactPro platform offers the Corporate Carbon Footprint Calculation module to manage this process. This module

Inventory greenhouse gases at facility or corporate level in full compliance with theISO 14064-1 standard.

MRV Infrastructure (Monitoring, Reporting, Verification): enables the establishment of a system to improve data quality and secure the audit trail ahead of the verification obligation starting in 2026.

Data Reliability: The calculations use an accurate and continuously updated library of emission factors.

The Difference Between Voluntary and Mandatory Carbon Markets

Although the sources do not directly distinguish between voluntary and mandatory carbon markets, a distinction can be made between the obligations and strategic choices faced by companies:

Mandatory Compliance: The CBAM requires quarterly reporting on exports to the EU for certain sectors such as iron and steel, cement and aluminum. This is a mandatory process that requires legal compliance (Priority 1).

Strategic and Voluntary Targets: Long-term goals, such as a Net Zero emissions target, are often strategic choices set by companies themselves and aligned with initiatives such as GRI Reporting or the Science Based Targets initiative (SBTi).

The Place of Carbon Offsetting in Sustainability Strategies

Relation to Net Zero Emission Targets

Carbon Offsetting (compensation) is a mechanism that a company can use towards its Net Zero Emission Targets (net zero).

Mitigation Priority: A Net Zero target requires reducing emissions to the lowest level scientifically possible, in line with global climate goals. Offsetting is generally considered a means of compensation for emissions remaining after these mitigation efforts.

Target Setting: Companies should use science-based mitigation pathways to support their Net Zero strategy and set intermediate milestones for the nearer term, such as 2030.

The Role of Carbon Offsets in ESG Reporting

Carbon Offsetting practices should be transparently disclosed in ESG/Sustainability reports as part of the company's environmental (E) performance.

Transparency and Standards: Emissions data (Scope 1, 2, 3) is reported in accordance with standards such as GRI Reporting and ISSB (IFRS S2). This reporting demonstrates how the organization manages environmental risks.

Governance and Credibility: The credibility of offsetting strategies should be overseen by senior management (Governance). This is because there are criticisms in the literature that some firms are issuing "empty pledges" for decades into the future without adequate interim action and there is a risk of greenwashing. Therefore, it is important to use accurate and audit-ready carbon accounting software.