Differences between insetting and offsetting in the Voluntary Carbon Market

May 22, 2023



Carbon neutrality
Grégoire Guirauden

Grégoire Guirauden

Chief Operations Officer

Compensation strategies with carbon credits

Multinational corporations (MNCs) face increasing pressure to address their environmental impact and embrace sustainable practices. Insetting and offsetting have gained popularity as compensation strategies for MNCs to mitigate their carbon emissions and ecological footprints. These approaches aim to support conservation projects and minimize environmental harm. In this article, we delve deeper into the benefits and challenges of insetting and offsetting as compensation strategies for MNCs.

Insetting with carbon credits

Insetting involves investing in sustainability projects within a company's supply chain or operations, allowing MNCs to directly address their environmental impact while fostering positive change within their business operations.

The main benefits of insetting with carbon credits are:

  1. Operational Integration: Insetting enables MNCs to integrate sustainability into their core business operations. According to a study conducted by the World Business Council for Sustainable Development, 92% of companies implementing insetting reported improved operational efficiency and reduced environmental impact.
  2. Cost Savings and Efficiency: Insetting strategies can lead to cost savings and operational efficiency improvements. By implementing energy-efficient measures, optimizing resource usage, and reducing waste, MNCs can lower their energy and resource consumption. This not only reduces emissions but also cuts operational costs, enhances resource productivity, and improves overall efficiency.
  3. Local Benefits: Insetting projects often prioritize local communities, generating social and economic benefits. The United Nations Global Compact highlights that such projects can enhance the well-being of local communities, leading to improved social license to operate for MNCs. For instance, Unilever's Sustainable Living Plan incorporates insetting projects, such as the creation of the Sustainable Tea Partnership in Kenya, which focuses on improving livelihoods for small-scale tea farmers while reducing the environmental impact of tea production.
  4. Brand Differentiation and Reputation: Insetting demonstrates an MNC's commitment to sustainability and environmental stewardship. By actively reducing emissions within their operations and value chain, MNCs can differentiate themselves in the market, build a strong brand, and enhance their reputation. This can attract environmentally conscious customers, investors, and employees who align with the company's values, leading to potential business opportunities and competitive advantages.
company-transportation-in-sunset for insetting

However, insetting also presents challenges that must be acknowledged.

  1. Limited Scope: While insetting can effectively reduce emissions within a specific supply chain or operation, its impact may be insufficient to address broader environmental challenges. The Carbon Trust suggests that MNCs need to complement insetting with broader emission reduction strategies, such as renewable energy adoption and process optimization, to achieve significant overall reductions.
  2. Complexity and Implementation Challenges: Insetting strategies can be complex and challenging to implement, especially in large and geographically dispersed MNCs. Coordinating emission reduction efforts across diverse operations, supply chains, and subsidiaries requires careful planning, coordination, and collaboration. It may involve overcoming technical, logistical, and cultural barriers within the organization.
  3. Time and Transition Challenges: Achieving significant emission reductions through insetting takes time and may require a gradual transition to cleaner technologies or processes. Depending on the scale and complexity of operations, it may take years or even decades to fully implement and realize the benefits of insetting strategies. MNCs need to balance short-term business needs with long-term sustainability objectives and manage the transition effectively.
  4. Accountability and Transparency: To ensure credibility and transparency, companies must provide verifiable data and demonstrate the additionality of their efforts. There is a huge need for robust reporting and third-party verification to avoid accusations of greenwashing. The Science-Based Targets initiative provides guidance on setting scientifically grounded targets and reporting methodologies, enhancing transparency in insetting initiatives.
reselling-plant-in-sunset showing insetting example

Offsetting with carbon credits

Offsetting allows companies to compensate for their carbon emissions by investing in projects external to their operations. It offers opportunities to mitigate environmental impact while supporting global sustainability efforts.

The main benefits of offsetting with carbon credits are:

  1. Scalability: Offset projects can have a substantial impact on the environment by targeting large-scale initiatives.
  2. Expertise and Collaboration: Through offsetting, companies can collaborate with specialized organizations and environmental NGOs, leveraging their expertise and knowledge. A study published in Environmental Research Letters highlights the positive outcomes of such collaborations, including improved project management and enhanced environmental impact. For instance, luxury fashion brand Gucci collaborates with the Green Belt Movement in Kenya, supporting reforestation efforts that not only sequester carbon but also empower local communities.
  3. Flexibility and Global Impact: Offsetting provides MNCs with flexibility in addressing emissions across their value chain. It allows them to support emission reduction projects beyond their direct control, such as in their supply chain or product life cycle. By investing in offset projects globally, MNCs can have a broader impact on emissions reductions and sustainable development.
  4. Reputation and Stakeholder Engagement: Offsetting can enhance an MNC's reputation and stakeholder engagement. It demonstrates the company's commitment to sustainability and environmental responsibility, appealing to environmentally conscious customers, investors, and employees. It can improve brand perception, attract customers, and even help retain top talent who value companies with strong environmental credentials.

However, offsetting also comes with challenges.

  1. Lack of Emission Reductions: Offsetting does not directly reduce a company's own emissions, potentially leading to the misconception that business-as-usual practices can continue without internal emission reduction efforts. The Natural Resources Defense Council advocates for companies to prioritize internal emission reductions alongside offsetting to ensure meaningful progress. Effective offsetting should be seen as a complementary measure to internal emission reduction efforts rather than a substitute.
  2. Rebound Effect: There is a risk of a rebound effect where the act of offsetting emissions might create a false sense of achievement, leading to complacency in pursuing deeper emission reduction efforts within MNCs' operations. It is crucial to remember that offsetting should be part of a comprehensive sustainability strategy that includes internal emission reductions and transitioning to cleaner technologies.
  3. Additionality and Credibility: Ensuring the additionality and credibility of offset projects can be challenging. Additionality refers to the assurance that the emission reductions would not have occurred without the offset funding. MNCs need to carefully select reputable offset providers and projects to ensure they align with recognized standards and methodologies.
  4. Indirect Impact: Offsetting does not directly reduce a company's own emissions, potentially leading to the misconception that business-as-usual practices can continue without internal emission reduction efforts. The Natural Resources Defense Council advocates for companies to prioritize internal emission reductions alongside offsetting to ensure meaningful progress. Effective offsetting should be seen as a complementary measure to internal emission reduction efforts rather than a substitute.

The role of voluntary carbon credits

By using voluntary carbon credits in an offsetting strategy, MCNs can ensure higher traceability and transparency when it comes to their compensation initiatives. Voluntary carbon credit projects involve detailed public documentation and reporting of emission reduction activities. MNCs can access comprehensive project information, including methodologies, baseline data, and monitoring reports. This transparency enables MNCs to evaluate the environmental and social co-benefits of the projects they support and verify the credibility of the emission reductions being claimed. Voluntary carbon credits also allow for a wonderful marketing tool for MCNs to show which projects they have helped developed while compensating their emissions.

Insetting and offsetting offer valuable compensation strategies for MNCs to mitigate their environmental impact. Insetting allows for operational integration and local benefits, while offsetting provides scalability and collaboration opportunities. By combining insetting and offsetting, MNCs can achieve a comprehensive and responsible compensation approach that contributes to their sustainability objectives and fosters positive environmental change. Carbon credits are also a vital instrument in MCNs compensation strategies. They allow companies to offset their emissions with projects close to their supply chains. MNCs can tap into established mechanisms and standards that promote transparency, credibility, and accountability in their offsetting strategies. Finding the right balance and ensuring collaboration and accountability are key to making a meaningful impact on our planet's future.

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