Carbon Offset & Carbon Credit: Definition, Types and Their Role in Corporate Climate Strategy

‍

A carbon offset is a mechanism by which a company, organization, or individual compensates for its greenhouse gas (GHG) emissions by funding an equivalent amount of certified emission reductions or removals elsewhere — typically in a different country, sector, or activity.

‍

‍Carbon credits are the tradeable certificates that represent these reductions: each credit typically represents one tonne of CO₂e that has been avoided, reduced, or removed from the atmosphere.

‍

Carbon offsets and credits are frequently discussed in the context of Net Zero and carbon neutral claims — but they play a fundamentally different and much more limited role under the most credible frameworks than is commonly assumed. Understanding exactly where offsets fit in corporate climate strategy — and where they do not — is increasingly important as regulatory scrutiny intensifies.

‍

How carbon offsets work

‍

A company that generates or is responsible for GHG emissions can purchase carbon credits from verified offset projects to "compensate" for those emissions on paper. Credit-generating projects typically fall into two categories:

‍

Avoidance and reduction credits: projects that prevent emissions that would otherwise have occurred — renewable energy projects replacing fossil fuel generation, energy efficiency improvements, destruction of industrial gases, or avoided deforestation (REDD+). These credits represent emissions that were not added to the atmosphere.

‍

Removal credits: projects that actively take CO₂ out of the atmosphere — reforestation and afforestation, soil carbon sequestration, direct air capture, or biochar. These credits represent CO₂ already in the atmosphere that has been physically removed.

‍

Credits are verified by recognized standards such as Verra's Verified Carbon Standard (VCS), the Gold Standard, or American Carbon Registry (ACR) — which specify the methodology, additionality requirements, and permanence criteria that projects must meet to issue tradeable credits.

‍

Carbon offsets in the context of Net Zero and carbon neutrality

‍

The role of carbon offsets differs significantly depending on the climate framework being used:

Carbon neutrality claims: many companies achieve carbon-neutral status by fully compensating their residual (or even total) emissions through credit purchases. There is no universal standard requiring any minimum level of actual emission reduction first, which is why carbon-neutral claims have become a major focus of greenwashing concerns and regulatory scrutiny.

‍

Net Zero under SBTi: the Science Based Targets initiative's Corporate Net-Zero Standard limits offsetting to a small residual role. A company can only claim net zero after achieving deep absolute reductions of 90–95% across Scope 1, 2, and 3. The remaining 5–10% must be neutralized through permanent carbon removals, not avoidance credits. This is a fundamental difference from carbon-neutral approaches that rely primarily on purchasing.

‍

CSRD/ESRS: offset purchases are not counted as GHG reductions in ESRS E1 reporting. Companies must disclose their actual Scope 1, 2, and 3 emissions separately from offset purchases — meaning offsets do not reduce the reported carbon footprint, they are an additional activity disclosed alongside it.

‍

Why offsets are not a substitute for measured emission reduction in PCF and Scope 3

‍

For Product Carbon Footprint (PCF) calculations and Scope 3 reporting, offset purchases have no role: a PCF measures the actual CO₂e embedded in a product's lifecycle, and offsets — however valid — do not change that embedded carbon. A product's cradle-to-gate embodied carbon cannot be reduced by buying credits; it can only be reduced by changing materials, processes, or energy sources.

‍

This has direct implications for supply chain transparency: customers, regulators, and procurement teams requesting PCF data are asking for the actual embedded emissions of a product — not a number adjusted for any offset purchases the seller has made. Conflating the two is a form of misleading disclosure that regulators are increasingly targeting under emerging green claims legislation.

‍

The regulatory direction on carbon offsets

‍

The EU's direction is clearly toward stricter rules on offset-based claims. The EU Green Claims Directive (under development) will require that environmental claims — including "carbon neutral", "climate neutral", or "CO₂ compensated" — be based on verified, measurable actual reductions rather than offset purchases alone, and must clearly distinguish between reduction and compensation. Similarly, CSRD/ESRS separates actual emission reduction from offset activity in reporting, preventing companies from presenting offset purchases as equivalent to actual decarbonization. For companies building Net Zero strategies aligned with SBTi, the priority is always verified emission reduction across Scope 3 — with offsets reserved for the small residual that cannot be eliminated.

‍

Want to measure and reduce actual embedded emissions rather than offset them?

‍

Explore our CO₂e database and PCF calculation tools, or contact our team to access the sustamizer® and identify where real emission reductions are possible across your product portfolio.

‍