Understanding CO₂ compensation correctly: How compensation projects work
Corporate Sustainability
The global economy is under tremendous pressure to transition to a climate-neutral future. While companies today are taking various measures to avoid and reduce emissions, it is becoming increasingly clear that reduction alone will not be sufficient to limit global warming to below 2 °C. Various scientific institutions – including the IPCC and the Royal Society – point out that even with ambitious reduction strategies, unavoidable emissions will remain. This is where CO₂ compensation comes in: it aims to offset remaining emissions while also financing climate protection projects worldwide.
However, compensation is not just compensation. The quality of the projects determines whether a genuine contribution to climate protection arises – or whether a company ultimately finances ineffective measures. This article explains how CO₂ compensation works, what types of projects exist, why Carbon Removal is becoming increasingly important, and what companies need to consider when utilizing CO₂ certificates.
In a nutshell
Reduction first: Compensation is only intended for unavoidable residual emissions.
Quality matters: Only additional, permanently stored, and independently verified emission reductions without double counting are effective.
Offset vs. Removal: Offset prevents new emissions; Removal removes existing CO₂ – increasingly essential for net-zero.
Significant quality differences: Strict standards and verified projects are crucial to ensure genuine climate benefits.
Reduction before compensation
Essentially, the most important measure for companies remains the reduction of emissions throughout the entire value chain. Without massive reduction, the targets of the Paris Climate Agreement cannot be achieved. The Science Based Targets Initiative (SBTi) provides clear guidelines here: companies must first reduce those emissions that are avoidable or alterable – for example, through more efficient processes, low-emission energies, circular design, or changes in the supply chain.
Only when a company has exhausted all realistic reduction potentials does CO₂ compensation come into play. According to scientific assessments, this will remain necessary: processes in the cement or steel industry, parts of agriculture, and global transport chains cannot be made completely emission-free. These "residual emissions" should be offset by high-quality compensation projects.
How CO₂ compensation works
A central physical principle enables compensation: for the greenhouse effect, it does not matter where on Earth CO₂ is emitted or saved. Greenhouse gases are globally distributed in the atmosphere, and their climate effect is independent of the location of emission.
Therefore, companies can offset emissions by financing projects that avoid, reduce, or remove greenhouse gases from the atmosphere. For every verified ton of CO₂ that is saved or tied up by a project, a certificate is issued. Companies purchase these certificates and "retire" them; this ensures that the same emission reduction cannot be accounted for multiple times.
However, the prerequisite for this logic is that companies realistically and completely calculate their emissions. This can be complex, particularly in aviation: alongside pure CO₂ emissions, so-called non-CO₂ effects – such as contrails and altered cloud formation – have significant climate impact.
How the voluntary trading of CO₂ certificates works
In addition to the legally regulated emissions trading systems that primarily affect large industrial plants, energy suppliers, or aviation, there exists a separate voluntary market where companies can offset emissions without being required to do so. This so-called Voluntary Carbon Market follows clear processes to ensure that every issued certificate represents a demonstrable climate effect. The process always begins at the project level: a climate protection project must demonstrate the quantity of greenhouse gas emissions it can save or remove. These savings are verified by independent auditing organizations. Only after this proof is provided can certificates be issued – each representing a ton of CO₂ that the project has genuinely and additionally reduced or removed.
After verification, the certificates are recorded in public registries maintained by independent institutions. These registries ensure transparency: they show which certificates exist, who owns them, and whether they have already been used. When a company wants to offset emissions, it purchases the corresponding certificates and then "retires" or "cancels" them. This retirement is a crucial step because it prevents double counting: once retired, a certificate cannot be traded or counted again. Only with this cancellation is a certificate officially considered used – and the corresponding emission reduction is permanently attributed to a single company.
This process – from verification through registration to final retirement – is essential for CO₂ compensation to function reliably. It creates traceable transparency and gives companies the assurance that the certificates they purchase contribute to measurable global emission reductions.
The difference between Carbon Offset and Carbon Removal
For those looking to offset CO₂, two fundamental mechanisms quickly come into play: Carbon Offset and Carbon Removal. Both contribute to climate protection, but they function entirely differently – and are of varying relevance for long-term strategies.
In Carbon Offset, emissions that would otherwise occur are prevented. This can be the protection of existing forests that would be deforested without funding, the expansion of renewable energy sources, or projects that replace energy-intensive practices with more efficient alternatives. Offset projects primarily act preventively: they prevent additional burdens but cannot undo emissions that have already been emitted.
Carbon Removal, on the other hand, actively removes CO₂ from the atmosphere and stores it long-term. This can be achieved, for example, through Direct Air Capture, carbon sequestration in soil, or certain mineral processes, as well as through long-term reforestation and renaturation. Removal projects are particularly significant because they offset historical emissions and are essential for achieving real net-zero targets. Therefore, the SBTi requires that companies cover an increasing share of their compensation through Removal projects in the long run.
What types of compensation projects exist
The variety of climate protection projects is vast and includes nature-based and technology-based approaches. Nature-based projects – such as forest protection or reforestation – are relatively well-known and offer additional ecological benefits alongside CO₂ sequestration. However, they can be more vulnerable to risks such as wildfires, droughts, or other influences, as CO₂ storage can be naturally limited. Less known approaches include regenerative agriculture or the restoration and protection of peatlands or coastal ecosystems like mangroves, which can bind significant amounts of carbon in soil or substrate.
Technology-based projects are currently developing particularly dynamically. Biochar projects can produce carbon through the pyrolysis of organic materials and store it in soil for decades to centuries. Mineral binding processes (e.g., solidified carbon or mineralization) provide the possibility to fix CO₂ long-term and potentially very durably. Processes for directly removing CO₂ from the atmosphere (e.g., Direct Air Capture) are also part of these technology-based approaches: they function independently of natural ecosystems and are considered particularly predictable in terms of quantity and duration of storage.
Both types of projects have their validity: nature-based solutions often create additional benefits for biodiversity, soil fertility, water management, and local ecosystems — thereby delivering co-benefits. In contrast, technology-based projects ideally provide long-term stability and enduring CO₂ removal. Hence, many strategies combine both approaches to secure both short-term ecological benefits and long-term climate impact.
Why high-quality CO₂ certificates are crucial
The biggest challenge in CO₂ compensation lies not in the mechanism itself, but in the quality of the projects. In recent years, numerous programs have been critically scrutinized because promised emission reductions turned out to be overestimated or not durable. Several scientific analyses indicate that a significant share of the globally available certificates does not produce the expected climate benefits.
Therefore, quality assessment plays a central role. A high-quality CO₂ certificate is based on projects that have been comprehensively, transparently, and independently evaluated. Pure registration with established standards such as the Gold Standard or the Verified Carbon Standard is merely the first step, but does not guarantee effectiveness. Modern auditing processes analyze projects based on numerous criteria: whether the savings are indeed additional, whether CO₂ is stored permanently, how robust the project is against risks, and whether it is reliably monitored.
Furthermore, high-quality projects not only consider the pure CO₂ balance. They also examine what ecological and social effects a project brings – for example, whether it protects biodiversity, supports local communities, or contributes to the United Nations' sustainability goals. This holistic perspective not only enhances credibility but also makes climate protection more stable in the long term.
For companies, this means: using high-quality certificates minimizes the risk of later corrections or criticism and allows for transparent and resilient communication of climate strategies. At the same time, it ensures that the resources employed actually arrive where they can have a climate impact.
The market now offers specialized platforms that do not simply list projects but carefully assess them based on extensive criteria. Some of these providers utilize hundreds of data points, incorporate independent ratings from external analytics services, and accept only a small fraction of the globally available projects. One such example is Senken, which evaluates both nature-based and technology-based solutions, thereby providing companies access to rigorously verified certificates. Such platforms can assist companies in making informed decisions and establishing compensation on a scientifically sound foundation.
What quality criteria a compensation project must meet
For CO₂ compensation to genuinely contribute to climate protection, projects must meet four fundamental quality requirements that are embedded in international standards. Perhaps the most important of these is the so-called additionality. It describes that a project is only a real climate contribution if it would not exist without funding from compensation funds. If a project is implemented anyway – whether because it is economically profitable or legally required – then no additional benefit for the climate arises. The emission reduction would also have occurred without the purchase of a certificate, and thus a certificate would have no real value.
Equally central is the exclusion of double counting. Every avoided or removed ton of CO₂ may only be accounted for once – either to a company or to a state, but never to multiple actors simultaneously. Double counting would mathematically multiply the climate effect when, atmospherically, only a single effect has occurred. Particularly because many climate protection projects take place in countries pursuing their own climate goals, the clear allocation of emission reductions is indispensable.
A third criterion concerns permanence. Particularly nature-based projects such as reforestation or peatland protection often store carbon for decades; however, they are subject to risks such as fires, droughts, or land use changes. When fixed carbon is later released, the climate effect achieved is lost. Permanence thus does not mean absolute certainty but a careful risk assessment and suitable mechanisms to make long-term storage as reliable as possible.
Finally, regular verification plays an important role. Projects must transparently document over many years whether the planned emission reductions actually occurred. Independent auditors check whether measurements were conducted correctly, whether the assumptions are realistic, and whether the climate impact continues to match the originally promised values. This continuous verification guards against negative developments and ensures that climate protection is guaranteed not just at the beginning, but remains lasting.
Frequently asked questions about CO₂ compensation
How does CO₂ compensation fundamentally work?
Companies offset emissions by financing certified projects that avoid, reduce, or remove CO₂. For each verified ton, a tradable certificate is created.
When is compensation meaningful – and when is it not?
Compensation is intended only for unavoidable residual emissions. All realistic reduction measures must be exhausted beforehand.
What distinguishes Carbon Offset from Carbon Removal?
Offset projects prevent additional emissions, while Removal projects actively remove CO₂ from the atmosphere. For net-zero targets, Removals are becoming increasingly important in the long run.
How can one recognize high-quality CO₂ certificates?
By clear additionality, exclusion of double counting, permanent storage, and regular independent verification.
Why are many certificates criticized?
Studies show that many projects overestimate their effectiveness, are inadequately monitored, or store CO₂ only temporarily.
Are nature-based or technology-based projects better?
Both have advantages: nature-based projects offer co-benefits for ecosystems, while technology-based solutions often enable particularly durable CO₂ removal.
What role do platforms or standards play?
Standards like Gold Standard or Verra, as well as platforms with strict assessment processes, help companies select effective projects and minimize risks.
Sources:
Royal Society and Royal Academy of Engineering (2018): Greenhouse gas removal
IPCC (2022): AR6 WG3: Climate Change - 2022 Mitigation of Climate Change
Macintosh et al. (2025): Carbon credits are failing to help with climate change - here’s why. Nature. https://doi.org/10.1038/d41586-025-03313-z
Science Based Targets initiative (2025): SBTi Corporate Net-Zero Standard
The Gold Standard Foundation (2025): Principles & Requirements
Probst et al. (2024): Systematic assessment of the achieved emission reductions of carbon crediting projects. Nature Communications. https://doi.org/10.1038/s41467-024-53645-z
The global economy is under tremendous pressure to transition to a climate-neutral future. While companies today are taking various measures to avoid and reduce emissions, it is becoming increasingly clear that reduction alone will not be sufficient to limit global warming to below 2 °C. Various scientific institutions – including the IPCC and the Royal Society – point out that even with ambitious reduction strategies, unavoidable emissions will remain. This is where CO₂ compensation comes in: it aims to offset remaining emissions while also financing climate protection projects worldwide.
However, compensation is not just compensation. The quality of the projects determines whether a genuine contribution to climate protection arises – or whether a company ultimately finances ineffective measures. This article explains how CO₂ compensation works, what types of projects exist, why Carbon Removal is becoming increasingly important, and what companies need to consider when utilizing CO₂ certificates.
In a nutshell
Reduction first: Compensation is only intended for unavoidable residual emissions.
Quality matters: Only additional, permanently stored, and independently verified emission reductions without double counting are effective.
Offset vs. Removal: Offset prevents new emissions; Removal removes existing CO₂ – increasingly essential for net-zero.
Significant quality differences: Strict standards and verified projects are crucial to ensure genuine climate benefits.
Reduction before compensation
Essentially, the most important measure for companies remains the reduction of emissions throughout the entire value chain. Without massive reduction, the targets of the Paris Climate Agreement cannot be achieved. The Science Based Targets Initiative (SBTi) provides clear guidelines here: companies must first reduce those emissions that are avoidable or alterable – for example, through more efficient processes, low-emission energies, circular design, or changes in the supply chain.
Only when a company has exhausted all realistic reduction potentials does CO₂ compensation come into play. According to scientific assessments, this will remain necessary: processes in the cement or steel industry, parts of agriculture, and global transport chains cannot be made completely emission-free. These "residual emissions" should be offset by high-quality compensation projects.
How CO₂ compensation works
A central physical principle enables compensation: for the greenhouse effect, it does not matter where on Earth CO₂ is emitted or saved. Greenhouse gases are globally distributed in the atmosphere, and their climate effect is independent of the location of emission.
Therefore, companies can offset emissions by financing projects that avoid, reduce, or remove greenhouse gases from the atmosphere. For every verified ton of CO₂ that is saved or tied up by a project, a certificate is issued. Companies purchase these certificates and "retire" them; this ensures that the same emission reduction cannot be accounted for multiple times.
However, the prerequisite for this logic is that companies realistically and completely calculate their emissions. This can be complex, particularly in aviation: alongside pure CO₂ emissions, so-called non-CO₂ effects – such as contrails and altered cloud formation – have significant climate impact.
How the voluntary trading of CO₂ certificates works
In addition to the legally regulated emissions trading systems that primarily affect large industrial plants, energy suppliers, or aviation, there exists a separate voluntary market where companies can offset emissions without being required to do so. This so-called Voluntary Carbon Market follows clear processes to ensure that every issued certificate represents a demonstrable climate effect. The process always begins at the project level: a climate protection project must demonstrate the quantity of greenhouse gas emissions it can save or remove. These savings are verified by independent auditing organizations. Only after this proof is provided can certificates be issued – each representing a ton of CO₂ that the project has genuinely and additionally reduced or removed.
After verification, the certificates are recorded in public registries maintained by independent institutions. These registries ensure transparency: they show which certificates exist, who owns them, and whether they have already been used. When a company wants to offset emissions, it purchases the corresponding certificates and then "retires" or "cancels" them. This retirement is a crucial step because it prevents double counting: once retired, a certificate cannot be traded or counted again. Only with this cancellation is a certificate officially considered used – and the corresponding emission reduction is permanently attributed to a single company.
This process – from verification through registration to final retirement – is essential for CO₂ compensation to function reliably. It creates traceable transparency and gives companies the assurance that the certificates they purchase contribute to measurable global emission reductions.
The difference between Carbon Offset and Carbon Removal
For those looking to offset CO₂, two fundamental mechanisms quickly come into play: Carbon Offset and Carbon Removal. Both contribute to climate protection, but they function entirely differently – and are of varying relevance for long-term strategies.
In Carbon Offset, emissions that would otherwise occur are prevented. This can be the protection of existing forests that would be deforested without funding, the expansion of renewable energy sources, or projects that replace energy-intensive practices with more efficient alternatives. Offset projects primarily act preventively: they prevent additional burdens but cannot undo emissions that have already been emitted.
Carbon Removal, on the other hand, actively removes CO₂ from the atmosphere and stores it long-term. This can be achieved, for example, through Direct Air Capture, carbon sequestration in soil, or certain mineral processes, as well as through long-term reforestation and renaturation. Removal projects are particularly significant because they offset historical emissions and are essential for achieving real net-zero targets. Therefore, the SBTi requires that companies cover an increasing share of their compensation through Removal projects in the long run.
What types of compensation projects exist
The variety of climate protection projects is vast and includes nature-based and technology-based approaches. Nature-based projects – such as forest protection or reforestation – are relatively well-known and offer additional ecological benefits alongside CO₂ sequestration. However, they can be more vulnerable to risks such as wildfires, droughts, or other influences, as CO₂ storage can be naturally limited. Less known approaches include regenerative agriculture or the restoration and protection of peatlands or coastal ecosystems like mangroves, which can bind significant amounts of carbon in soil or substrate.
Technology-based projects are currently developing particularly dynamically. Biochar projects can produce carbon through the pyrolysis of organic materials and store it in soil for decades to centuries. Mineral binding processes (e.g., solidified carbon or mineralization) provide the possibility to fix CO₂ long-term and potentially very durably. Processes for directly removing CO₂ from the atmosphere (e.g., Direct Air Capture) are also part of these technology-based approaches: they function independently of natural ecosystems and are considered particularly predictable in terms of quantity and duration of storage.
Both types of projects have their validity: nature-based solutions often create additional benefits for biodiversity, soil fertility, water management, and local ecosystems — thereby delivering co-benefits. In contrast, technology-based projects ideally provide long-term stability and enduring CO₂ removal. Hence, many strategies combine both approaches to secure both short-term ecological benefits and long-term climate impact.
Why high-quality CO₂ certificates are crucial
The biggest challenge in CO₂ compensation lies not in the mechanism itself, but in the quality of the projects. In recent years, numerous programs have been critically scrutinized because promised emission reductions turned out to be overestimated or not durable. Several scientific analyses indicate that a significant share of the globally available certificates does not produce the expected climate benefits.
Therefore, quality assessment plays a central role. A high-quality CO₂ certificate is based on projects that have been comprehensively, transparently, and independently evaluated. Pure registration with established standards such as the Gold Standard or the Verified Carbon Standard is merely the first step, but does not guarantee effectiveness. Modern auditing processes analyze projects based on numerous criteria: whether the savings are indeed additional, whether CO₂ is stored permanently, how robust the project is against risks, and whether it is reliably monitored.
Furthermore, high-quality projects not only consider the pure CO₂ balance. They also examine what ecological and social effects a project brings – for example, whether it protects biodiversity, supports local communities, or contributes to the United Nations' sustainability goals. This holistic perspective not only enhances credibility but also makes climate protection more stable in the long term.
For companies, this means: using high-quality certificates minimizes the risk of later corrections or criticism and allows for transparent and resilient communication of climate strategies. At the same time, it ensures that the resources employed actually arrive where they can have a climate impact.
The market now offers specialized platforms that do not simply list projects but carefully assess them based on extensive criteria. Some of these providers utilize hundreds of data points, incorporate independent ratings from external analytics services, and accept only a small fraction of the globally available projects. One such example is Senken, which evaluates both nature-based and technology-based solutions, thereby providing companies access to rigorously verified certificates. Such platforms can assist companies in making informed decisions and establishing compensation on a scientifically sound foundation.
What quality criteria a compensation project must meet
For CO₂ compensation to genuinely contribute to climate protection, projects must meet four fundamental quality requirements that are embedded in international standards. Perhaps the most important of these is the so-called additionality. It describes that a project is only a real climate contribution if it would not exist without funding from compensation funds. If a project is implemented anyway – whether because it is economically profitable or legally required – then no additional benefit for the climate arises. The emission reduction would also have occurred without the purchase of a certificate, and thus a certificate would have no real value.
Equally central is the exclusion of double counting. Every avoided or removed ton of CO₂ may only be accounted for once – either to a company or to a state, but never to multiple actors simultaneously. Double counting would mathematically multiply the climate effect when, atmospherically, only a single effect has occurred. Particularly because many climate protection projects take place in countries pursuing their own climate goals, the clear allocation of emission reductions is indispensable.
A third criterion concerns permanence. Particularly nature-based projects such as reforestation or peatland protection often store carbon for decades; however, they are subject to risks such as fires, droughts, or land use changes. When fixed carbon is later released, the climate effect achieved is lost. Permanence thus does not mean absolute certainty but a careful risk assessment and suitable mechanisms to make long-term storage as reliable as possible.
Finally, regular verification plays an important role. Projects must transparently document over many years whether the planned emission reductions actually occurred. Independent auditors check whether measurements were conducted correctly, whether the assumptions are realistic, and whether the climate impact continues to match the originally promised values. This continuous verification guards against negative developments and ensures that climate protection is guaranteed not just at the beginning, but remains lasting.
Frequently asked questions about CO₂ compensation
How does CO₂ compensation fundamentally work?
Companies offset emissions by financing certified projects that avoid, reduce, or remove CO₂. For each verified ton, a tradable certificate is created.
When is compensation meaningful – and when is it not?
Compensation is intended only for unavoidable residual emissions. All realistic reduction measures must be exhausted beforehand.
What distinguishes Carbon Offset from Carbon Removal?
Offset projects prevent additional emissions, while Removal projects actively remove CO₂ from the atmosphere. For net-zero targets, Removals are becoming increasingly important in the long run.
How can one recognize high-quality CO₂ certificates?
By clear additionality, exclusion of double counting, permanent storage, and regular independent verification.
Why are many certificates criticized?
Studies show that many projects overestimate their effectiveness, are inadequately monitored, or store CO₂ only temporarily.
Are nature-based or technology-based projects better?
Both have advantages: nature-based projects offer co-benefits for ecosystems, while technology-based solutions often enable particularly durable CO₂ removal.
What role do platforms or standards play?
Standards like Gold Standard or Verra, as well as platforms with strict assessment processes, help companies select effective projects and minimize risks.
Sources:
Royal Society and Royal Academy of Engineering (2018): Greenhouse gas removal
IPCC (2022): AR6 WG3: Climate Change - 2022 Mitigation of Climate Change
Macintosh et al. (2025): Carbon credits are failing to help with climate change - here’s why. Nature. https://doi.org/10.1038/d41586-025-03313-z
Science Based Targets initiative (2025): SBTi Corporate Net-Zero Standard
The Gold Standard Foundation (2025): Principles & Requirements
Probst et al. (2024): Systematic assessment of the achieved emission reductions of carbon crediting projects. Nature Communications. https://doi.org/10.1038/s41467-024-53645-z
