Carbon offsetting vs carbon reduction

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To do this a company must have a zero net carbon impact on the environment ie. carbon footprint equals zero. This is essentially achieved by a combination of two methods:

Carbon offsetting

This is the process where a company can purchase carbon credits to offset their carbon footprint. The company will still have a carbon footprint of X tonnes and will still need to report on that. But they can then separately state they have purchased X carbon credits which enables the company to state their carbon neutrality.

Carbon reduction

As the name implies, this is the process where absolute emissions are reduced by implementing carbon emission reduction projects in the company. This will show an actual reduction in emissions from a previous carbon footprint.

In South Africa there are currently no binding targets to reduce or limit carbon emissions. South Africa is classified as a Non-Annex 1 country and therefore are allowed to develop without restriction on emissions according to the Kyoto Protocol. Companies who operate in the country are thus not required to reduce or purchase carbon credits to meet emissions targets. This article will look at which method is best to achieve a net zero carbon footprint. There are four sectors of business which drive value and profitability.

Energy costs

Companies are constantly looking for ways to reduce operating costs to increase profit margins. There are various areas of operations which have environmental impacts, the most common to many businesses is their energy consumption.

Emissions are directly related to the amount of energy a company uses. By reducing carbon emissions in one's business, it is likely that operating costs will also be reduced. Many of South African manufacturing companies rely on coal and HFO to generate steam in boilers or for heat in furnaces. These fossil fuels are expected to increase in price in the future at a more rapid rate than electricity.

Implementing energy efficiency, renewable energy or fuel switch projects all reduce the amount of carbon emitted. Additionally project financing can be assisted by the Manufacturing Competitive Enhancement Programme, carbon projects, Eskom rebates and other tax incentives. One must also consider the pending South African carbon tax in 2015. By reducing a company's Scope 1emissions (direct emissions by the company such as fuel use), the potential carbon tax liability is automatically reduced.

Carbon tax

Carbon tax is being implemented into South Africa from 1 January 2015. Companies will be taxed on Scope 1 direct emissions, however they will receive a minimum of a 60% tax allowance ie. pay 40% of Scope 1 emissions.

The draft policy explains that a maximum of 10% of a company's scope 1 emissions can be offset by purchasing carbon credits. This still leaves a large percentage of taxable emissions (R120 per tonne CO2e). It is likely carbon credit prices will be lower than R120 per tonne CO2e making it attractive for companies to purchase credits. It should be noted that by purchasing carbon credits a company does not reduce the cost of operations as the energy use itself does not decrease.

Reputation, revenue, risk

Company environmental performance has an impact to some degree on its reputation, revenue and risk. Essentially both reducing a carbon footprint and purchasing of carbon credits have positive impacts on:

• Reputation by building a positive environmental brand towards customers, clients, supply chain partners and improving broader stakeholder engagements by being progressive and showing good corporate governance,
  
• Attracting new and retaining current staff.
  
• Increased revenue by winning new business, differentiating a product, and customer loyalty.
  
• Mitigate risks which impact the business such as negative publicity, legislative risk, rising energy costs and loss of competitiveness and market share.

These factors will be influenced at varying degrees depending on whether carbon credits were purchased or if there was an actual reduction of emissions. All in all, there will be some positive outcomes from both options.

Environmental strategy

The purchasing of carbon credits is in terms of an environmental strategy a short-term project. Essentially the problem of emitting carbon is not solved. Additionally according the PAS2060 guideline for carbon neutrality states that no company or entity may fully offset their carbon footprint through purchasing carbon credits after it has done so once already.

From a cost perspective it does not make sense to only purchase carbon credits to offset a footprint. A company will still pay for the energy costs, the carbon tax liability less 10% from offsets and then the cost of carbon credits to get the company to a "carbon neutral" state.

However, by developing a carbon reduction strategy the company can identify methods to reduce their carbon footprint. As discussed above, incentives can make projects financially attractive by reducing payback periods by using the various incentives available. Furthermore, if the projects are financed correctly they can be cash flow positive in year one. Reducing your carbon emissions will lower long-term energy costs and carbon tax costs. If carbon is reduced by a substantial amount then the company can look to register as a carbon project and sell carbon credits.

Companies must start to conduct energy efficiency assessments to identify possible reduction opportunities. Energy projects will reduce long term costs, carbon taxes and actually reduce emissions.

Conclusion

Our concluding statement is quite simple really: "Reduce what you can, offset what you can't.