As the discourse around climate change intensifies, the role of carbon offsets in achieving net-zero emissions has become a focal point of discussion among investors and companies alike. While opinions vary, we advocate for a judicious utilization of offsets in the pursuit of carbon neutrality, provided that stringent best practices are observed.

Since the inception of the Kyoto Protocol, offsets have been promoted as essential tools in establishing a standardized international marketplace for mitigating emissions. However, concerns have emerged regarding the phenomenon of "carbon indulgences," whereby offsets are utilized to enhance climate credentials without addressing the underlying issue.

Amidst this debate, we maintain that offsets serve as valuable instruments in the broader fight against climate change. With the recent finalization of Article 6 at COP26, we anticipate heightened dialogue and interest, particularly concerning offset regulation and market dynamics.

Carbon offsets serve to "square" the carbon balance sheet by enabling entities to compensate for their greenhouse gas emissions through investments in carbon-reduction initiatives elsewhere. These initiatives typically manifest as offset credits, which trade in both compliance and voluntary markets.

In compliance markets, entities receive offset credits for bringing emissions within prescribed limits to avoid penalties. Notable markets in California and Australia prioritize climate reserves and carbon emissions reduction. Conversely, the voluntary market encompasses credits derived from verifiable GHG reduction programs, such as renewable energy and forestry projects.

As companies worldwide commit to "net-zero by 2050" targets, offsets emerge as indispensable components of their decarbonization strategies. Many companies may find it challenging to achieve net-zero emissions without offsetting, a reality acknowledged by global initiatives and government policies.

CarbonCred partners with numerous verified carbon offsetting solutions underscores the widespread support for carbon offsets within the global climate tech community. Even in the absence of comprehensive global agreements, offsets offer a pathway for companies to independently pursue net-zero targets.

As active investors, we emphasize the importance of a transparent and liquid offset market, which can inform investment decisions at both portfolio and corporate levels. The pricing of offsets provides valuable insights into companies' commitment to climate risk management and presents opportunities for meaningful engagement.

To maximize the effectiveness of carbon offsets, we advocate for adherence to best practices:

1. Moderate Use: Offset usage should complement a long-term net-zero strategy, focusing on high-impact areas such as renewable energy and energy efficiency.
2. Third-Party Certification: Rely on reputable third-party certifications to ensure offset quality and credibility.
3. Price Transparency: Pay attention to offset pricing as a proxy for quality and effectiveness.
4. Nature-Based Solutions: Prioritize nature-based offset projects, particularly those focused on afforestation and carbon sequestration.
5. Compliance Market Preference: Favor compliance offsets for their certified results and price stability.
6. Direct Investments: Consider direct investments in offset projects to support impactful initiatives.

While offsets are not a panacea for climate change, they represent a critical component of a comprehensive mitigation strategy, particularly in sectors like mining, industrials, and energy. By adopting best practices and exercising discernment, companies can leverage offsets effectively to reduce carbon emissions and advance their sustainability goals.

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