It's time to ditch offsets and embrace insets (with a twist)

I’ve been wanting to write this ever since the drama at the SBTi kicked off. I’m squarely on the side of their rebellious staff. (Here's the latest update on that story.) As the Reuters update reports, offsets are very often "ineffective” and at worst become a green sticking plaster for inaction. But here’s the conundrum: we still need to get investment flowing into decarbonization projects. So, if offsets are off the table, what’s the alternative?

The Scope 3 Emissions Challenge

We’re all too familiar with the challenges of Scope 3 emissions. It’s the Everest of emissions reduction. SBTi recently axed 239 companies' short-term or net zero climate commitments (including carbon reduction pioneers like Microsoft, Eurostar, Asda, Twitter, Diageo, P&G, and Unilever). And their research shows that 53.6% of companies find Scope 3 “too much of a challenge”!

Customers must hit their Scope 3 targets, or it’ll hit their pockets hard come 2030. Both suppliers and customers need all the help they can muster to meet these goals.

No one’s thrilled about unreliable offsets being used to escape accountability. So it’s high time for corporations and suppliers to fully embrace insets instead.

Insets are currently a fuzzy concept - a way to invest in decarbonizing your supply chain, often through ‘payment-by-results’ contracts. But for it to really work, I propose a twist. Let’s explore a simplified example of how it can currently work and what’s blocking widespread adoption.

A Practical Example, and its Challenges

Our customer wants to encourage an important yet small supplier to reduce emissions by upgrading old inefficient assets like boilers and installing renewable energy technology.

Now, our customer is considering providing the investment necessary. But here’s the snag: they’re not the supplier’s sole customer. Two other customers buy equal amounts of the same product. So, under current rules, any emissions savings would be apportioned equally among the customers as part of their Scope 3. Our customer would pay for everything but reap only a third of the benefits. Ouch!

The solution? Our customer suggests providing only a third of the investment needed, on a payment-by-results basis. The supplier would make the investment and the customer would pay for its share of the carbon reduced. This is a form of inset.

Sadly, the supplier can’t muster the required capital or access off-balance sheet financing. So, the project stalls.

A New Approach to Drive Investment

The current rules for strict carbon allocation between customers aren’t cutting it. They’re not driving investment into supply chains, whether through offsets or insets.

So, how can we do this differently?

I have an idea I want to float for discussion, and I’m eager to hear others’ thoughts.

What if our customer provides all the investment necessary for the project; reduces their Scope 3 from this supplier by 33%, and claims the rest as a 10% overshoot in SBTi submissions? It’s akin to offsetting but more defensible. The other customers still see their Scope 3 reduced by 33% each, while our customer gets rewarded for investing beyond its own Scope 3.

I know, it’s double accounting and breaks current SBTi rules where only certain sectors are allowed to offset and the projects in my illustration create efficiencies rather than direct removals. But should that stop us if it drives the right behavior? Surely not?

Scope 3 is already riddled with double accounting with both customers and suppliers reporting the same reductions, but it’s necessary to dissuade large corporations from outsourcing their emissions. And if we have concerns about the veracity of removals, wouldn’t it make sense to focus on encouraging investment on real avoided emissions through efficiencies?

The Benefits of Insets with a Twist

In my pragmatic, imaginary world, our customer might decide from the outset to make insets to cover at least 10% of its total emissions. This would not only reduce their overall exposure, but each inset investment would deliver real and accountable Scope 3 reductions in their supply chain (in proportion to their rightful share of emissions), helping to build strong supplier relationships, greater resilience, and security of supply. Across any given industry, the combined actions of customers doing this might have a seismic impact.

So, unlike offsets, these insets with a twist would be:

• Relatively easy to monitor and validate since they’re within your industry and supply chain, not remote and opaque.
• Likely to happen earlier rather than later, because the customer starts benefiting from a reduced Scope 3 as soon as emissions are cut.
• And because insets happen early, their cost would be significantly cheaper than last-minute offsets.

Feel free to shoot this idea down, but keep in mind, I’m not trying to stay within the rules; I’m exploring new ones that actually work in driving the right behaviors. If you’re not sold on mine, I’m all ears for alternatives. And let’s come up with a catchier name while we’re at it.