Carbon offsetting for local authorities: what are they and how do they work

This briefing provides a complete overview for local authorities of the controversial issue of carbon offsetting. Offsetting involves making a payment into an approved project to reduce emissions elsewhere or removes carbon from the atmosphere through habitat restoration. There are international certification schemes which provide a guarantee that the funds are reducing emissions or removing carbon.

Local authorities have important decisions to make about when it is appropriate to offset and what kinds of offset projects to financially support. Offsetting relates to local authorities’ work in four main ways:

1. Offsetting their own organisational emissions or the emissions of a specific project.
2. Purchasing goods and services from organisations that mitigate their own climate impact through offsetting.
3. Participating in offsetting activity by putting forward land or buildings.
4. Operating a local offsetting scheme (carbon tax).

This briefing will be of interest to many people across public services this is a topic that polarizes opinion here we to give local authorities some context and signpost to resources to help make those difficult decisions.

Many local authorities have declared climate emergencies and delivering on this ambition is proving challenging. There is a lack of sufficient funding and tools to move these ambitions forward. Local authorities are directly responsible for emissions from their estate of buildings and services they provide; and, indirectly through purchasing and procurement decisions. As well as these ongoing emissions, large transport and regeneration projects can be substantial new sources of carbon emissions in construction and operation. increasingly larger schemes are being challenged through planning enquiries and in the courts for being incompatible with the Climate Change Act.

Reducing emissions that result from local government activities is critical to meeting national and international obligations to address climate change. In the short to medium term, there will still be some emissions that are very challenging to reduce or avoid. One way to address remaining emissions is through payments into a carbon offset scheme. These payments can fund renewable energy generation, carbon reduction measures such as insulating community buildings, or carbon removal from the atmosphere through habitat management. Intergovernmental Panel on Climate Change (IPCC) addressed this topic directly in its April 2022 report, where carbon removal is ‘unavoidable’. It is a topic that polarizes opinion, and the aim here is to give local authorities some context and signpost to resources to help make difficult decisions.

Offsetting involves compensating for greenhouse gas emissions from a specific project, organization or sector by paying for activities that reduce or remove greenhouse gas emissions elsewhere. Supporters of offsetting argue that it offers a path to significantly raising climate ambition and lowering costs. It can achieve this by engaging the business community, raising finance and deploying technology and expertise into new areas. It does not matter where on the globe the CO2 and other greenhouse gases are emitted or where CO2 is stored. The implications for climate change are the same. However, there can be significant local and regional social, economic and environmental consequences from offsetting schemes both positive and negative.

Offsetting carbon emissions emerged from the business communities’ response to the Kyoto Climate Summit in 1997. It mirrors measures that had been in the US Clean Air Act since the 1970s when new emissions were allowed if they were offset by emissions reductions at other facilities. Another related feature of the Kyoto Summit was the clean development mechanism, which stated that developed countries had a responsibility to assist developing countries to move directly to low carbon technologies, rather than following the high carbon development pathway already taken by developed countries. Offsetting schemes in developing countries are often advocated by NGOs and faith groups, pursuing a climate justice agenda. People in developing countries can be supported to meet their basic energy needs without unnecessary CO2 emissions and deforestation. They can avoid a high carbon development pathway by ‘leap-frogging’ and jumping straight to greener technologies.

Offsetting and net zero

In May 2019, the UK put into law a commitment to reach net zero greenhouse emissions by 2050, accepting the recommendation of the Climate Change Committee. During the Conservative leadership contest in the summer of 2022, candidates faced scrutiny about their commitment to net zero. The policy commitment to reach net zero remains in place. The International Energy Agency warned governments that the current energy crisis is a key reason to accelerate, not pull back on net zero commitments. Net zero emissions mean substantially reducing emissions of greenhouse gases across all sectors and balancing any remaining emissions with ongoing carbon removal into sinks. While it is technically possible for many activities to be net zero, some sectors and processes will still have residual emissions. This raises important questions for local authorities about which emissions are so difficult to reduce or avoid they require an offset. Offsetting can be grouped into two types of activity: carbon reductions and carbon removals.

Energy efficiency measures to existing buildings

This could be improving energy efficiency in publically owned buildings and other community assets including leisure facilities, educational buildings and affordable homes. Improvements can include higher-performance insulation and modernising heating and ventilation systems. Older and more energy-inefficient public buildings have been especially hard hit by recent rises in energy prices. Funding could also be used to accelerate action by private building owners through providing free advice and financial incentives for businesses to undertake efficiency schemes. For all of these, it is important to compile robust data before an intervention is made so you can measure the reductions in CO2 that took place.

New renewable energy generation

Renewable energy electricity generation has grown substantially in the UK, from just 7% in 2010 ( then mainly large hydro-electric projects) to 45% in the first part of 2022. It is now a mix of onshore and offshore wind energy complimented by some solar, hydro and biomass. Much higher daily figures occur when it is sunny and windy. Focusing on Scotland, 98% of electricity used is from renewable sources. There are UK targets for 2035 to achieve 100% renewable energy generation for electricity. In the short to medium term, there is a case for continuing to add to UK renewable energy capacity, as more sectors including building heating and transport shift away from fossil fuels to electrical power. However, there will come a point where adding additional wind and solar capacity does not lead to further carbon reductions. Power is needed when the sun is not shining and the wind is not blowing and investment will be needed in energy storage, demand management of the electricity grid and zero carbon synthetic fuels.

Removing sources of emissions

This involves buying and decommissioning carbon-intensive infrastructure before the end of its design life. For a national government, this could be old power stations and oil and gas fields. Waiting until all of the existing carbon-intensive infrastructures reaches the end of its design life significantly reduces the chances of being able to meet international climate commitments. The planned phasing out of high carbon infrastructure currently gets limited attention compared to other steps to address climate change. Even less attention has been given to what this would mean for a local government, but it could include, for example, replacing a carbon-intensive diesel vehicle fleet as Ipswich has done recently and with electric vehicles and supporting charging infrastructure.

Removing sources of emissions can also involve paying for the management and safe disposal of potent greenhouse gases in cooling systems including fridges and air conditioning units in buildings and vehicles. These gases are used in small amounts but are very potent in causing climate change. The main gases used, CFC and HCFs are thousands of times more powerful than carbon dioxide in trapping heat in the atmosphere, so actions to address these emissions will have a large impact.

Forestation: is what most people think of when carbon offsetting is proposed. It involves planting new areas of woodland and importantly, better management of existing woodlands. As the trees grow they remove CO2 from the atmosphere and store it in the wood and soil. This process is not even, and very newly planted woodlands and mature woodland removes relatively little additional carbon from the atmosphere, while a growing woodland will remove much more. Care also needs to be taken to select tree species that can cope with changing conditions caused by climate change, with those growing in cities subject to particular stress.

Building with Biomass: Using wood in buildings extends the time that carbon in timber is stored and enables the land to be used for new forestry growth, thus increasing the absorption of CO2. This option is currently limited by the rate at which buildings are constructed and the proportion of new homes and other buildings that are timber framed. We could also make much more use of other plant-based materials, which also store carbon for the long term, such as hemp and straw in retrofitting existing buildings.

Farming: changing agricultural land management practices including crop rotations and tilling to increase the carbon stored in the soil. To assist in this process, a material called Biochar is increasingly important, a charcoal-like substance created when organic matter is burned without oxygen, stabilizing organic matter in the soil.

Restoring habitats: Improving peatland and coastal wetlands so they can store more carbon and help ensure the carbon they already store does not degrade and is released into the atmosphere. Peatlands are more about damage limitation, when they are drained they emit CO2 very fast, but as they are restored they absorb new CO2 at a gradual rate. Scotland is widely regarded as an international leader in peatland restoration.

Bioenergy with Carbon Capture and Storage (BECCS): As the plants grow, they take CO2 out of the atmosphere. This can be captured and put into long-term storage when the plants are burned to generate electricity. Crops can be grown specifically, such as fast-growing plants including the grass Miscanthus or willows, or waste materials used from forestry and farming. Bioenergy with carbon capture and storage technology has the potential to be carbon negative as long as the land management and transport of the plant material burnt are not carbon intensive. It features prominently in the energy scenarios modelled to meet the Paris Agreement. However, although bioenergy and carbon capture and storage technologies have been deployed separately in several countries they have not yet combined at scale. The HyNet scheme supported by £72m of UK Government innovation fund is the first commercial application of Carbon Capture and Storage in the UK. It is potentially an important technology for the future, assisting localities that are transitioning jobs away from the oil and gas industries. It is too early for local authorities to offset their emissions now through this approach.

Direct air capture and carbon storage: (DACCS) uses engineering technologies to capture CO2 directly from the atmosphere and put it into geological storage. A variation of this involves using CO2 to make products of economic value such as plastics, concrete and biofuel. This is called carbon capture and utilisation. These technologies are very expensive compared to other methods of removing or reducing emissions and are currently being supported through public and private research and development funding. These are also not yet available at scale for organizations to pay into offsetting funds.

A number of good practice guides and reports have been developed for organisations looking to offset their emissions. These have recently been integrated into a resource called the Oxford Offsetting Principles, which provides a useful, single point for organisations including local authorities. The first stage in any offsetting process is to reduce emissions so there is as little offsetting needed as possible. Benchmarking against other comparable local authorities can be a valuable exercise to help maximise all the opportunities for emissions reductions. There are many advice and guidance materials to help local authorities reduce their organisational emissions including:

• LGIU April briefing outlines 10 things councillors can do to drive action.
• Centre for Sustainable Energy based in Bristol has developed a scorecard they can use to assess their current performance and target future action.
• ICLIE have a range of tools for local authorities covering transport, renewable energy and public procurement, which showcase international examples.
• Ashden Trust has a climate action toolkit aimed at UK local authorities.
• Energy Saving Trust has a guide focused on travel and transport.
• UK100 have briefings covering emissions reductions in housing, transport and heat networks. It also has a guide focusing on rural authorities.

Reducing emissions as far as possible is necessary because there is insufficient land, either domestically or internationally, to continue with all the activities that currently generate emissions and then offset them. Today only about 6% of our emissions are absorbed by forests and other ecosystems here, in the UK. We would need a forested area at least double the land area of the whole UK to balance our current greenhouse gas emissions. How to manage competing demands on land for offsetting, energy generation and food growing, and the extent to which expanding forestation and other habitat restoration are technically feasible is explored in detail in the Zero Carbon Britain report.

Offsetting and new infrastructure projects

For projects that would lead to an increase in CO2 emissions, those designing and developing them should to look at reducing or even eliminating emissions before considering offsetting. The recent cases of two road proposals in England illustrate this. Shrewsbury and Hereford are two towns with many common characteristics, with long-standing proposals for major road schemes. The scheme in Shrewsbury has attracted significant criticism from the Environment Agency and civic and environmental organisations. The local authority on the one hand is declaring a climate emergency, while on the other taking forward a large new road project, which will lead to significant increases in emissions from construction and from additional traffic emissions once the road is built. The Council has responded to criticisms by pointing to offsetting measures. In contrast in Hereford, the city has abandoned plans for a large road scheme and is instead exploring options to improve walking, cycling and enhanced bus services. Re-purposing of existing infrastructure and behaviour change may mean new construction and offset resulting emissions are not needed.

Pricing carbon

When offsetting first emerged as an idea, it was supposed to be a radical driver for action on climate change. As carbon prices increase year on year, it would generate financial pressure to introduce energy efficiency measures and install onsite renewable energy. In practice, this has not happened and carbon prices remain too low to act as an incentive for most capital investments. While low prices can be good for buyers, it does not sufficiently encourage developers, brokers and banks to participate in the market. The low price of carbon is one of the core tensions for offsetting. Retrofitting a building to be nearly zero carbon in use and new zero carbon infrastructure usually involves significant additional capital costs. In contrast, the costs of offsetting are much lower. Typically offsetting costs between £8 and £25 per tonne, making offsetting a highly, and many would argue too affordable option for carbon reduction.

This may however change in near future, and offsetting could soon become a much stronger driver for action. The financial costs of high-quality projects will increase in as they become in more demand. This is because more companies and organisations are looking for offsets to meet their zero carbon pledges. Greater demand and higher regulation are projected to lead to a significant price increase. Experts at UCL predict prices will rise to around £45 per tonne. Bloomberg has three possible price scenarios based on regulatory differences, ranging from £45 with light regulation of markets to £200 with tighter regulation. Under the tighter regulation scenario, prices could rise very rapidly, causing problems for local authorities seeking offsets around 2030. Local authorities therefore could gain advantages from signing long-term agreements sooner rather than later. Longer-term arrangements rather than add-hoc purchases of carbon offsets could also help improve the stability of carbon markets and reduce risks to long-term activities including forestation and habitat restoration.

Verification and standards

Offsetting schemes are no longer the unregulated ‘free for all’ that first developed in the late 1990s. This gave offsetting a tarnished reputation, which it has subsequently struggled to overcome. There are several independent accreditation schemes the best know of which are the Gold Standard and UN Offset Platform. Most offsets available through these schemes are carbon reductions rather than carbon removals. These activities are necessary but will not achieve zero carbon in the medium and longer term. Organisations that undertake offsetting should shift their offsetting activities towards more removals. Currently, in the UK, these are accredited through the Woodland Carbon Code and the Peatland Code.

One of the concerns with green financing measures and taxes, including offsetting, is the relatively large proportion of the funds taken up with the administration. Technology has developed in the past 20 years, with remote sensing to help monitor implementation. Blockchain is used to provide assurance and accountability about the transfer of funds and carbon credits. Using Blockchain to create an auditable record of carbon, including credits and exchanges has been piloted by Liverpool City Council. These tools can help reduce administration costs, allowing more of the funds to be spent on carbon reduction and removal activities.

Verification: means the greenhouse gas removal or emissions reductions actually take place. These should be measured using recognized tools against a realistic baseline. It needs to avoid any double counting and take account of any leakage (emissions that may result elsewhere). Credits should only be issued after the reduction or removal activity has taken place. How verification would work was put forward in very general terms in a section of the Paris Agreement (Article six). In the four years following the Paris Agreement, it proved very difficult to reach an international agreement on how the rulebook would work in practice. One of the surprises of COP 26 in Glasgow was finally coming to a compromise, including the thorny issue of double counting. The buyer, such as a local authority or company in the UK would “own” the emissions reduction and could claim it against its own emissions total – for example, towards a net-zero target. Meanwhile, the host country would have to apply a corresponding adjustment to its own inventory, to reflect the ‘sale’.

Additionality: means that the activity would not have taken place anyway without the offsetting funding. For example, the costs of installing renewable energy technology, in particular wind power, is competitive in the energy market and it does not need additional financial support from offsetting payments. Additionality also means elements of the project that are legally required through planning and licensing cannot also be counted as an offset.

Permanence: means the risk of the carbon being re-released back into the atmosphere is minimized. If carbon is stored in forests this could be re-released if it is damaged by fire or pests. Both fire and pests are more likely to impact forests and other habitats as a result of climate change. A portfolio of projects helps mitigate the risk of any one project experiencing failure.

High quality schemes and co-benefits

High quality nature-based offsets can embed additional value such as enhancements to biodiversity, incomes for local people, improved climate-change resilience and safeguarding community land rights. These co-benefits are often discussed in terms of developing countries but nature-based offsets can bring local and regional benefits in the UK. Large habitat restoration schemes in England are still relatively uncommon, but those that have taken place can generate benefits for public health and wellbeing, local tourism, and biodiversity. Land management schemes in the uplands such as SCAMP and Upstream Thinking are largely driven by water companies wanting to improve the quality and reliability of water supplies and avoid costly investments in new infrastructure. These upland land management schemes have substantial co-benefits in conserving peatlands and the carbon stored in them. They will be easier to take forward with the arrival of Conservation Covenants as a policy tool in September 2022. With careful planning regarding the location, both upland and lowland projects can also deliver co-benefits for natural flood risk management. In contrast, poor quality offsetting schemes can harm incomes for farmers and low-diversity plantations of trees have a negative impact on biodiversity. In Ireland, large-scale tree planting activities have been criticized for relying heavily on quick growing conifers that have a negative impact on biodiversity and local amenities.

Local authority managed offsetting schemes and local carbon taxes

A number of local authorities have introduced requirements through the planning system for new developments to be net zero carbon. Milton Keynes Council established the UK’s first carbon offset Local Plan policy in 2008 and other authorities, including the GLA in London, have followed. The requirement to be net zero is usually addressed by the developer paying into a locally administered offsetting fund. Net zero in this context is normally defined as the regulated emissions specified in the Building Regulations. Energy Statements, written as part of the planning process, are used to predict the anticipated level of CO2 that each new building will emit during its first year of use. The developer then pays a set sum for each tonne of CO2 over the target, multiplied by the set number of years determined by the council (often 30). A one-off payment, in advance of development taking place, is made through a S106 agreement. For smaller developments that do not produce an energy statement, a flat fee could be used.

Locally administered offsetting schemes potentially represent an important tool for local authorities in taking forward climate change policies in their locality. They are, however, affected by the same challenges that concern larger offsetting programmes. How to make sure the emissions that are saved are additional and would not have happened anyway? How to administer and direct funds to suitable projects? This proved a particular challenge in London where in the early years of the scheme, significant under-spending occurred. When projects are identified and implemented, do they lead to the measurable carbon reductions that have been promised? The Centre for Sustainable Energy has carried out scoping studies for a number of local authorities, and its research provides a useful resource for councils looking to introduce or scale their activity. Locally administered carbon offsetting schemes are one of a number of options for local authorities looking at new financing models to take forward action on climate change

UK has some of the highest levels of concern in the world among the general public about climate change. It is growing and consistent, with 89% of the public putting it in the top four issues in every poll since 2020. The extreme weather events in 2022 including winter storms and heatwaves have only added to public sentiment that urgent action is needed. This public concern presents both opportunities and challenges for local authorities as they work to reduce their own emissions and support emissions reductions by wider society. Offsetting payments are likely to be particularly prone to negative public attention, as they can be seen as simply permitting polluting activities to continue. More can be done to address this through putting strong governance measures in place as funds are collected and spent and well thought out through public communication. This public concern about making a payment to continue with the status quo is shared by some environmental policy experts. They fear offsetting creates a false sense of security among decision-makers – that reducing emissions is less urgent than it actually is.

As carbon markets develop, opportunities are starting to appear for local authorities as land-owners integrate carbon removal into the management of parks, nature reserves and farmland, while delivering co-benefits. There are financial risks too for local authorities if they ignore offsetting as an issue and wait to see how it develops. Energy costs are high and could rise further over the next five years. Owning buildings or other infrastructure that uses a lot of energy and needs ongoing offsetting payments to be net zero carbon is relatively cheap while offsetting costs are low. As the costs of carbon offsetting also rise this becomes more of a financial burden, carbon intensive buildings can become ‘stranded assets’ that are too costly to own and difficult to sell. Offsetting has implications across local authority functions, from building management and housing, regeneration, procurement, planning, and parks and greenspaces. The GLA in London is increasingly advocating collaborations between local authorities and combining offsetting payments with other funds to help deliver action at scale. Within national and international offsetting standards, local authorities have considerable flexibility for action, to benefit both their own communities and take forward action on climate change.