Carbon offsets are a well-known sustainability concept so you most likely have heard of them. But there’s a relatively new sustainable supply chain term on the block: “carbon insetting”.

Carbon insets are still undergoing their transformation. Yet, have the potential to be a significant element of the global movement of decarbonization.

This article will explain in detail what carbon insetting is and how insets differ from offsets. It will also provide some real-life examples to illustrate its application.

What is Carbon Insetting?

The critical net zero strategy suggests that companies looking to decarbonize should mitigate first then offset their unavoidable emissions. What lies between these two measures is carbon insetting.

Insets may sound or look like offsets but they also work like mitigation.

In broader terms, carbon insetting refers to the actions taken by an organization within its own value chain to fight climate change.

• In a more specific sense, carbon insetting means the intentional reduction of Scope 3 emissions within a firm’s own supply chain.

So, the rub with insetting is with Scope 3 emissions, both upstream and downstream, that can count across various parties’ supply chains.

Inset emissions are directly avoided, reduced, or sequestered within the company’s value chain. They’re not sold as a credit to offset another firm’s emissions by capturing carbon somewhere else.

Carbon insetting also means investing in sustainable practices that prevent emissions from happening in the first place. They’re often nature-based projects. They don’t avoid or sequester carbon only, they also protect biodiversity and restore ecosystems.

Are carbon insets better than carbon offsets?

Both carbon measures represent ways that can help mitigate emissions. But they’re also different methods of tackling climate matters with varying impacts. So, it’s important to understand their differences.

Carbon Insets Vs. Carbon Offsets

The key difference between carbon insets and offsets is the way an entity invests to reduce its carbon footprint. Carbon insetting involves investing in projects that are related to a company’s products; carbon offsetting involves projects that are not related to a firm’s products.

• In a sense, carbon insets ensure that firms take direct responsibility for the emissions in their own supply chain. They also aid in improving sustainable management practices directly at the source.

Investing in inset projects can help make a firm’s supply chain more resilient. It can also improve the quality of its raw materials.

However, carbon insets are more limited by their very nature – they only tackle Scope 3 emissions. They don’t address Scope 1 (direct emissions) nor Scope 2 (emissions from the energy that the company buys) emissions.

This means retailers selling other brand’s products or service-based businesses that don’t source raw natural materials can’t take part in carbon insets. It also means even a product-based firm can’t become carbon-neutral only by using carbon insets.

Carbon offsetting, on the other hand, is a way for entities to reduce their carbon footprint by paying money to another entity that works to reduce the total emissions emitted. Common example is planting trees.

• The focus of carbon offsets is on the tonnes of carbon avoided/removed, while the focus of carbon insets is creating carbon emissions reduction capacity.

Moreover, carbon offsetting provides convenience and economic efficiency for they are from verified offset projects.

But critics claim that carbon offsets give companies “a license to pollute”. It means they allow polluters to buy offsets to pay for their footprint without actually cutting their own emissions.

Here are the other major differences between insets and offsets:

Emissions reduction generated: travels separately from the physical product with carbon offsetting while it travels with the product in carbon insetting.

As shown in the image above, farmers deliver the wheat to one party (Cargill) then deliver the quantified emissions reduction to another entity (Microsoft) under carbon offset. But under carbon inset, farmers deliver both the wheat and the emissions reduction to the same party (Cargill).

Methodology and standards: a third party like a registry (Verra, Gold Standard) or rating agency (Sylvera) set the certification standard for carbon offsets. In carbon insets, many parties involved agree on the standard used.

Intended project purpose: carbon offset projects are for the voluntary carbon market. Whereas inset projects are for specific businesses’ supply chains.

Accounting requirements: offsets are a negation of emissions already dumped into the atmosphere so they must meet rigorous standards (fungibility, additionality, durability, etc.).

• On the contrary, insets don’t face the same accounting requirements as offsets do. That’s because they’re not a fungible credit like an offset.

Plus, there’s no need for addressing leakage or permanence issues as emissions through insets didn’t happen in the first place.

Overall, carbon inset represents indirect but embedded emissions reduction activities within a firm’s supply chain. Insetting activities include upstream (fuel and energy-related activities) and downstream (sold product processing).

Carbon offset represents direct but outsourced emissions reduction efforts. An entity buys an offset and outsources it to another entity that takes the project into effect.

Real-world Examples of Carbon Insetting

Carbon insets are relevant across a wide variety of industries. But they’re most significant in the food and agricultural supply chains due to these agriculture-specific conditions.

Low-carbon fruit:
Ag regenerative practices exist for decarbonizing food supply chains with nature-based, scalable climate solutions. Decarbonization in this sector has a lower cost compared to new carbon removal technologies.

Readily available financial systems:
There are existing financial mechanisms already in place that incentivize farmers to adopt ag regenerative practices. It doesn’t need to put up new payment systems.

Biggest sink:
Agricultural soils are by far the world’s largest carbon sink.

Co-benefits:
Decarbonizing food supply chains also result in other positive impacts like biodiversity, improved water and air quality, and nutritious food.

To show a concrete carbon insetting in a real-world setting, here’s an example scenario.

A farmer delivers regeneratively wheat to a downstream customer contracted by a project developer. The customer then pays a premium for the sustainable wheat and the farmer gets more revenue with an increase in price.

The illustration below shows a carbon inset value chain, from the supplier to Scope 3 reductions.

The inset suppliers are farmers that use regenerative practices to grow crops that reduce emissions and receive payment per metric tonne of carbon.

Project developers are companies that work with and support the farmers while partnering with corporations looking to deliver the insets within their supply chains.

Supplier refers to ag retailers and distributors between the farmers and downstream customers. In the example, that’s Cargill.

Customers are those who buy the raw commodities (wheat) as key ingredients in their products like AB InBev, for instance.

MRV refers to an entity that supplies data to verify carbon outcomes delivered by insetting methodology. While standards are the certification bodies that develop best practices for carbon insets.

• One particular company that employs carbon insetting in its quest to net zero emissions is Burberry.

Burberry announced two years ago that it has created a “Regeneration Fund”. The aim of the fund is to support the company’s portfolio of insetting projects across its global supply chain.

The luxury fashion house partnered with PUR Project. It will put in place regenerative farming practices with Burberry’s wool producers in Australia.

The insetting project will work at farm level to improve carbon capture in soils, improve watershed and soil health, reduce dryland salinity and promote biodiversity.

Key Takeaways

For sure, insetting is not the same thing as offsetting but insets may be from offsets.

So, where do we draw the line between carbon insetting and offsetting?

Carbon offsets represent the avoidance or removal of CO2 from the atmosphere via verified projects made available on the carbon market.

While carbon insets represent the addition of nature-based projects into a company’s supply chain. Insetting doesn’t need formal verification.

Given our definition and distinction above, we can say that Scope 1 and 2 are to offsets while Scope 3 is to insets.

Without the need for additionality and permanence considerations in insets, it’s up to the producers and consumers to agree to a methodology.

Carbon insets represent indirect emission reductions. They are the execution of practices that reduce a firm’s carbon footprint outside of its direct operations but within its own supply chain.

In short, carbon insetting can be viewed as a piece of the sustainability puzzle for a company. Firms must continue to focus on their carbon emissions reduction initiatives like transitioning to renewable energy.

Lastly, carbon insets do not came into existence to replace carbon offsets. They should be used along with offsets and other emissions reduction strategies to achieve net zero emissions.

You most likely know the climate benefits of storing carbon and removing gigatons of it from the atmosphere to limit climate change.

But we also bet that you don’t clearly understand how much carbon storage provides value to meeting climate goals.

That’s understandable because there’s currently no single framework for thinking about the climate benefits of temporary carbon storage. Temporary means less than a century of carbon storage.

Several factors affect how carbon accounting is done such as the time horizon over which value is calculated.

Most people equate the benefits of carbon storage with the impacts of CO₂ emissions. For instance, different years of storage (10 yr, 50 yr, or 100 yr) are used for representing offset credit to justify the emission of a tonne of CO₂.

But there’s a growing interest in one family of carbon accounting methods called tonne year accounting (also referred to as “ton-year” accounting). It values carbon storage based on its duration.

Firms use this method to bundle short-term carbon storage into carbon offsets designed to offer permanent climate solutions.

Unfortunately, various tonne year accounting methods provide different interpretations. This makes it harder to know what’s the real value of temporary carbon storage.

This article will explain how tonne year accounting works and what assumptions it should have when valuing temporary carbon storage.

There are also some examples of the most prevalent methods to know their differences.

Breaking the Tonne Year Accounting Process into Steps

Tonne year accounting is a family of methods for measuring how many tonnes of CO₂ stored physically equals to avoiding CO₂ emission in the first place.

In other words, it quantifies the climate impacts of carbon emissions with two things:

1. The amount of CO₂ involved and
2. The time CO₂ stays in the atmosphere.

This accounting method claims that a larger amount of CO₂ stored for a shorter period of time can claim equivalent climate outcomes. And the same also goes for a smaller amount of CO₂ stored for a longer period of time.

Here’s how tonne year accounting works in five basic steps.

#1. Specify a unit

The very first step to do is to specify a unit that considers both the number of tonnes of carbon stored as well as the time over which they’re stored.

• Concept defined: a tonne year refers to 1 metric ton (MTCO₂) of carbon dioxide held somewhere for 1 year.

For instance, a mangrove tree that holds 1 MTCO₂ for 5 years provides 5 tonne years of carbon storage. But if that same tree can hold 2 MTCO₂ for 10 years, then it delivers 20 tonne years of carbon storage.

#2. Choose a time horizon

The second step is to know how to value the costs and benefits of storing carbon that happen in the future. This is possible by deciding on a time horizon. Doing this is a normative or typical choice rather than scientific.

The shorter the time horizon, the more valuable temporary carbon storage will seem.

#3. Get the tonne year cost of emission

After specifying the unit and choosing the time horizon, you can now calculate the climate impact of emissions in tonne years.

• If an emission “costs” X tonne years, then tonne year accounting suggests that you can get carbon storage providing X tonne years of benefit to offset that mission.

When CO₂ stays in the atmosphere permanently, the impact of emissions in tonne years will be:

quantity of CO₂ emitted   x   time horizon chosen

So, if there’s 1 MTCO₂ emitted for 100 years, that’s equal to 100 tonne years.

But atmospheric CO₂ concentrations aren’t affected by emissions alone. In practice, knowing the cost of emissions has to take into account also the parts of the global carbon cycle that remove CO₂ from the air.

For example, if 1 MTCO₂ is emitted and removed from the atmosphere by natural processes over 4 years.

In the first year, the 1 MTCO₂ equals 1 tonne year of emissions impact. In the next year, there’s only 0.5 MTCO₂ that results in another 0.5 tonne years of impact.

Following the same logic, impacts for year 3 and year 4 are 0.3 and 0.2 tonne years respectively as shown below. Summing all the impact over the 4-year time horizon results in a total cost of 2 tonne years.

#4. Calculate the tonne years of carbon storage solution

This is important when comparing the tonne year cost of emissions with a temporary storage project.

There are various methods for calculating this benefit, but the two most common models are the Moura Costa and Lashof methods.

Here’s how the two methods differ in coming up with the carbon storage benefit calculation.

The figure below shows how the two approaches differ in getting the benefit of temporary carbon storage in 4 years. Moura Costa calculates 2 tonne years while Lashof only has 0.5 tonne year benefit.

#5. Determine how much storage is needed for offsetting

The last step in a tonne year accounting process is determining how much temporary storage you need to offset your emission. This is crucial when making an equivalence claim.

• The answer is in an equivalence ratio: tonne year cost of emissions / tonne year benefit of temporary storage.

Using the above formula, the results vary in two methods with a 2 years time horizon.

Moura Costa accounting: 2 tonne years / 2 tonne years = 1 (equivalence ratio). This means storing 1 tCO₂ for 2 years can offset 100% of the emission.

Lashof accounting: 2 tonne years / 0.5 tonne years = 4 (equivalence ratio). It means only 25% of the emission can be offset by the project.

The results are significantly different, yet emitters can apply either accounting method and use it in determining the carbon offset that temporary storage provides.

Both of them can even be regarded as an offset equal to 1 MTCO₂, which can be an issue when offsetting emissions. 

Linking Tonne Year Accounting to Climate Impact

Tonne year accounting is used to calculate the correct equivalence ratio and relate it to the climate impacts that the entire world is experiencing.

Unlike the simplified example calculation provided above, this one calls for a more realistic situation on the effects of emissions on the atmosphere. This means considering the changes in the global carbon cycle due to emitting more carbon.

• Naturally, oceans and other carbon sinks take up the extra CO₂ when their concentrations go up. This lowers the cost of the emission.

But instead of taking into account all those natural processes, tonne year accounting methods simplify things by treating emissions as a function of time represented in curves.

Those curves make it easier to know the impact of carbon in tonne years without using complicated modeling.

Rather than going through all the formulas used earlier, tonne year accounting lets you get the cost of emitting 1 tCO₂ by integrating the time horizon under a CO₂ emission curve. Refer to the figure below.

As shown above, tonne year accounting estimates the amount of extra heat trapped in the atmosphere due to emission. This leads to damaging climate effects such as rising sea-levels.

Alternatively, temporary carbon storage reduces warming. If the reduction balances out with the added emission, then tonne year accounting may claim the corresponding equivalence.

However, when balancing or offsetting climate impacts, the accounting method must take into account the timeframe when comparing tonne year results.

Though you can use a 10-year horizon, it may not represent the real climate impact of carbon. It can last for a much longer time in the atmosphere than 10 years.

Not to mention that there are other climate outcomes affected by emitting CO₂ at a given time. They particularly include the critical global warming limits of 1.5 or 2 degrees.

In a sense, storing 1 MTCO₂ today but re-emitting it many years later will only kick the can down the road.

Once the temporary storage ends, how should an emitter take this into account towards long-term climate goals?

Sadly, tonne year accounting can’t address the concern. It simply takes into consideration the added heat trapped in the atmosphere – also called cumulative radiative forcing. For other climate impacts, this assumption does not apply.

Also notably, the Moura Costa method results in physical equivalence claims that don’t add up. It allows for the claim that temporarily storing 1 MTCO₂ justifies the emission of more than 1 MTCO₂ (1.91 MTCO₂).

That is not a defensible outcome; hence, it may not be useful in making equivalence emission claims.

Analysts prefer to use the Lashof accounting instead as it shows a defensible result when considering the cost of emission in tonne year as well as its benefit.

Making Sense of All the Elements with Examples

Regardless of the method, Moura Costa or Lashof, changing the input parameters can affect the value of temporary carbon storage.

• For example, if the time horizon chosen is 1000 years, the cost of an emission is about 310 tonne years.

Lashof calculates that 1 MTCO₂ stored for 1 year will result in about 0.235 tonne year benefit. So, for the equivalence claims, you need to store about 1319 MTCO₂ for 1 year (310.161 / 0.235 = 1319.45).

Lowering the time horizon to 100 years, storage also reduces to 128 tCO₂ under Lashof accounting.

To make things clearer, we take the case of a company called NCX.

An independent analysis reveals that the NCX accounting method is identical to the Lashof method but with one critical difference – a 3.3% discount rate.

Applying the discount rate makes the accounting process more complex. The primary goal of tonne year accounting is to generate the physical equivalence claims. So, using a discount rate invalidates this claim.

Both temporary carbon storage and emitting CO₂ result in quantifiable changes to the Earth’s energy balance. This means we must compare them directly without discount rates.

By applying a discount rate, the entity makes an economic equivalence claim instead of a physical equivalence claim. So, if they market their credits as generating equivalent climate impacts, it may raise questions.

• That is because using a discount rate allows for more climate impacts tomorrow in exchange for temporary climate benefits today.

Right now, carbon markets assume that all carbon credits justify ongoing CO₂ emissions on a physical equivalence claim.

For instance, an entity releasing 10 MTCO₂ needs to buy only 10 offset credits to negate the climate impacts of its emissions.

In such a case, using tonne year accounting with discount rates becomes inconsistent. So, whoever sells credits on this basis has to make its equivalence claims clear and transparent.

The tendency is for firms to overestimate the physical value of temporary carbon storage. If so, they issue more carbon credits than the climate benefits those credits can support.

NCX’s current accounting method does exactly that. A reconsideration may be necessary to avoid complications and proper accounting of an offset’s physical equivalence claim.

Key Takeaways

To wrap things up, here are the major points we can say about the use of tonne year accounting.

The different tonne year methods allow varying quantities of temporary carbon storage to be marketed as equivalent to 1 MTCO₂. So assumptions must be clear – time horizon or use of a discount rate.

It is only useful for equivalence claims about climate damages due to extra energy trapped in the atmosphere.

Equivalence claims made by some tonne year methods don’t match climate impact. They’re not useful in establishing climate-equivalence claims or issuing carbon offsets.

Application of discount rates within tonne year accounting can blur the real climate impacts of temporary carbon storage.

Temporary storage has a non-zero value, but it’s important to be open and transparent about both the risks and benefits that come when valuing it.

Overall, more work is necessary to establish a coherent framework for valuing temporary carbon storage.