Emission reduction and emission compensation are key terms in corporate decarbonisation. Knowing the difference between them and their relative places in the sustainability journey is crucial to effective carbon management.

Emission reduction is achieved through the implementation of decarbonisation actions and broadly involves the reduction of human-induced emissions into the atmosphere. Decarbonisation is achieved through cross-cutting measures to reduce or eliminate carbon emissions from an organisation's activities.

This can be approached in two main ways. Firstly, organisations can reduce emissions-intensive business activities through measures such as business travel policies which restrict travel frequency and encourage travel by rail over flights, or installing light switch sensors in your building to reduce electricity consumption. Secondly, organisations can make business activities less emissions-intensive by switching to greener fuels (scope 1) or engaging suppliers to reduce the emissions intensity of their goods and services (scope 2 and 3).

In contrast, emissions compensation - also referred to as carbon offsetting - entails funding projects that remove or prevent the release of carbon dioxide and other greenhouse gas emissions elsewhere to compensate for an organisation's own emissions. This can be thought of as paying to balance the release of emissions in one place with reductions in another place.

Organisations buy carbon credits where one credit equals one tonne of emissions removed or avoided. The amount of offset emissions is calculated relative to a baseline year, representing a hypothetical scenario for emissions without the mitigation project generating the emissions removal or avoidance.

Offset projects can be categorised into nature-based projects, such as reforestation, afforestation, and forest protection projects, as well as technological projects, including direct carbon capture and providing clean cookstoves to communities otherwise using carbon-intensive cooking fuels such as wood and coal.

It is also important to note that not all carbon credits are of equal value, with some more robust and impactful than others, from both an offsetting and social impact perspective. As such, it is important that due diligence is conducted on the projects from which carbon credits are purchased.

The key difference is where the reduction of emissions occurs. Emission reductions occur within your value chain and, therefore, contribute to reducing the size of your corporate carbon footprint. In emissions compensation, however, emissions avoidance or reductions occur outside of your value chain and, therefore, must not be counted as reductions in your corporate carbon footprint.

This difference is key because likening emission compensation to emission reduction has led to the notion of carbon neutrality, which is essentially a greenwashing term. Carbon neutrality refers to a state where all emissions have been offset without any requirement for emission reductions. As a result, carbon-neutral claims have now been banned in the EU.

Plan A's philosophy, following industry-wide consensus, is that emissions reductions must form the basis of any decarbonisation plan, and such plans should aim towards net-zero.

Companies should, therefore, prioritise reducing their emissions and work internally and with suppliers to minimise emissions throughout their operations and value chain. We suggest calculating a full base year for your emissions, setting targets, creating and implementing an action plan to meet targets, and then evaluating your options for compensation. This approach is an effective pathway to net-zero, which we recommend reading more about in our academy article, 'Net-zero journey, explained'.