Carbon Offsets: How They Work and Why Integrity Matters
Carbon offsets are financial instruments that fund projects to reduce, avoid, or remove emissions. They allow companies to compensate for emissions they cannot cut directly. The voluntary carbon market (VCM) is growing into a multi-billion-dollar ecosystem, but credibility and quality remain the central challenges. This is Week 2 of Innovo’s six-part educational series on environmental assets, building on last week’s focus on renewable energy certificates.
What are carbon offsets?
Carbon offsets represent one metric ton of CO₂e reduced, avoided, or removed from the atmosphere. Offsets finance projects that would not have happened without external funding, creating a causal link between the buyer’s payment and the emissions impact. For a claim to hold, the offset must be additional, verifiable, permanent, and retired in an accredited registry.
Offsets fall into three broad categories.
- Reduction projects cut emissions through efficiency or fuel switching (e.g., industrial upgrades, energy efficiency, or replacing coal with gas)
- Avoidance projects prevent new emissions from entering the atmosphere, such as stopping deforestation (e.g., stopping deforestation, installing renewable energy)
- Removal projects take CO₂ out of the air and store it, either biologically or through engineered solutions (e.g., reforestation, direct air capture)
How do carbon offsets work in practice?
Offsets flow through a cycle:
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A project developer creates a carbon reduction, avoidance, or removal project
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An accredited registry (e.g., Verra, Gold Standard) verifies the methodology and impact
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Verified offsets are issued and made available for purchase
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A buyer purchases and retires offsets in the registry, claiming the associated reduction against its own emissions
Offsets only hold credibility when they are additional (the project depends on offset funding), verifiable (measured and audited), permanent (not reversed by deforestation or leakage), and unique (retired once to prevent double counting).
The voluntary carbon market (VCM)
The VCM is where corporates, NGOs, and individuals purchase offsets beyond legal obligations. It is expanding quickly as net-zero targets outpace internal abatement capacity.
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$1.3B market size in 2022, projected to hit $50B by 2030 (Bain & Company)
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57% of consumers willing to switch brands to avoid environmental harm (Patch)
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Companies using offsets decarbonize twice as fast as those that don’t (Trove Research)
The VCM channels billions into climate projects that otherwise would not be financed, turning corporate demand into real-world decarbonization. Transparent verification, third-party certification, and registry retirement processes ensure that claimed reductions are real, quantifiable, and permanent. By adhering to internationally recognized standards, companies not only safeguard their reputations but contribute to the broader integrity of the voluntary carbon market and accelerate collective progress toward net-zero targets.
Why do companies buy offsets?
Offsets offer speed, flexibility, and cost efficiency. For many, they are the only way to close the gap between today’s emissions and near-term net-zero targets. They let companies manage decarbonization budgets strategically while maintaining competitiveness.
By leveraging carbon offsets, organizations gain the flexibility to progress toward ambitious sustainability commitments while navigating operational, financial, or technological constraints that limit rapid internal emissions reductions. Offsets can be purchased on an ongoing or project-specific basis, allowing companies to adapt their decarbonization strategies to market conditions and regulatory developments. For many sectors, offsets offer an efficient and scalable mechanism for demonstrating climate action to investors, regulators, and customers.
Offsets can be cheaper than reducing emissions internally. This economic efficiency enables companies to manage decarbonization budgets more strategically, directing capital toward high-impact external opportunities without sacrificing their own competitiveness or growth objectives.
Consumer sentiment is increasingly influencing corporate sustainability strategies. Data indicates that 57% of consumers would switch brands to avoid environmental harm, and ESG-branded products consistently demonstrate higher growth rates. Companies utilizing credible offsets position themselves as leaders in the transition to a low-carbon economy, strengthening brand loyalty, capturing market share, and meeting the evolving expectations of stakeholders.
Who sells offsets?
Offset supply originates with project developers. These are efforts from specialists who design, implement, and manage emission reduction, avoidance, or removal projects worldwide. These developers work to meet rigorous methodologies and scientific criteria. Once a project is operational, certification is provided by independent registries such as Verra, Gold Standard, Climate Action Reserve, and American Carbon Registry. These bodies evaluate the project's adherence to stringent standards, verify measurable climate impact, issue carbon offsets, and maintain secure records to ensure traceability, permanence, and prevent double counting.
Marketplaces and brokers serve as vital intermediaries, enhancing liquidity and broadening market access by aggregating offset supply from a wide array of project developers and linking it to demand from corporates, investors, and institutional buyers. However, due to its global scope and diverse participants, this ecosystem remains highly complex and often challenging for new entrants to navigate.
The integrity challenge
Despite their promise, the carbon offset market has been hampered by persistent concerns around project quality, methodological inconsistency, and exposure to reputational risk. Establishing trust and ensuring rigorous standards are key to unlocking large-scale adoption. In this landscape, quality assurance has become the principal barrier to effective scaling, and buyers are responding accordingly.
Recent BCG surveys show that 75% of buyers now prioritize the quality of credits over mere volume. Nevertheless, only 15% of major offset purchasers report having dedicated carbon market teams. This highlights a clear operational gap that exposes companies to heightened reputational vulnerability, procurement delays, and missed opportunities. The process remains slow and fragmented.
Buyer pain points are clear:
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48% cite difficulty sourcing suitable offsets;
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40% express concern over reputational risks stemming from projects of questionable integrity;
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17% struggle with the complexity inherent in the purchasing process.
As a result, while offsets remain essential for credible decarbonization and risk mitigation, their adoption and impact are often constrained by operational uncertainty and market inefficiency. The industry’s path forward depends on strong standards, technology-enabled transparency, and customer solutions that can instill confidence at scale.
Carbon Offsets Explained: How They Work, Who Buys Them, and Why Integrity Matters
Integrity and efficiency are the levers for scaling carbon markets. That’s where Innovo comes in. We streamline the offset lifecycle from sourcing, contracting, settlement, retirement, and reporting, so buyers move faster, with greater confidence.
Through direct connections with verified registries, we ensure credits are traceable and retired cleanly. By layering enriched project data, we give buyers the transparency they need on additionality, emissionality, and permanence. And by closing contracts faster, we help corporates secure high-demand credits before they disappear.
Offsets are not a uniform commodity. They’re complex instruments tied to diverse project types and standards. Innovo makes them accessible, credible, and strategic for companies that need action now.
The bottom line
Carbon offsets are a critical piece of global climate finance, channeling billions into projects that cut, avoid, or remove emissions. The voluntary market is scaling quickly, but credibility is the currency that will determine its impact.
This is Week 2 in Innovo’s educational series on environmental assets.
