Navigating the Carbon Credit Maze: A Roadmap for Companies in the Net Zero Era
As companies grapple with growing pressure, choosing quality carbon credits becomes a strategic imperative.
Without stringent government regulations mandating drastic reductions in greenhouse gas emissions, companies worldwide are increasingly adopting "net zero" targets as part of their commitment to combat climate change. According to Net Zero Tracker, over one-third of the world's 2,000 largest publicly held companies have declared net zero targets, signifying a significant shift towards sustainability within the corporate landscape.
Many turn to carbon credits to offset their remaining emissions as these companies approach their net-zero target deadlines. The carbon credit market is anticipated to experience exponential growth, projected to surge from nearly $2 billion in 2022 to almost $100 billion by 2030 and potentially reach $250 billion by 2050, as reported by Morgan Stanley. However, amidst this burgeoning market, companies face a complex and immature landscape fraught with quality, transparency, and credibility challenges.
Activists and media scrutiny are intensifying, with concerns about companies "buying their way out" of meaningful decarbonisation through carbon credits. High-profile figures, such as John Oliver, have criticised carbon offsets, and some credits purchased by major corporations like Disney, Gucci, and Shell have been labelled as "largely worthless" by The Guardian, sparking accusations of greenwashing," a term used to describe environmental claims that exceed reality.
The voluntary carbon market holds immense potential, with the capacity to funnel billions of dollars into climate solutions. However, companies face critical decisions in navigating a market where carbon credits can range in price from a modest $2 per tonnene to a staggering $1,800 per The critical question becomes:
How can companies participate effectively in the carbon credit market while ensuring they choose high-quality credits that align with their sustainability goals?
Understanding Carbon Credit Projects: Nature-Based vs. Engineered Solutions
Carbon credits are generated from projects designed to either avoid the creation of greenhouse gas emissions or actively remove these gases from the atmosphere. There are two primary categories of projects: nature-based solutions, such as reforestation and regenerative agriculture, and engineered solutions, including carbon capture and storage and direct air capture.
Companies vary in their approach, with some, like Microsoft, focusing solely on carbon removal, while others, like Delta, create diverse portfolios spanning multiple project types.
Key Players and the Challenge of Standards
Compared to traditional stock exchanges, the carbon credit market lacks widely adopted standards and centralised marketplaces. Companies navigating this complex terrain must contend with many players, including carbon credit registries, standards bodies, verifiers, brokers, marketplaces, and rating agencies.
Some prominent entities in the carbon credit marketplace include VERRA's Verified Carbon Standard (VCS), Gold Standard, Climate Action Reserve, American Carbon Registry (ACR), and others. Initiatives such as the Voluntary Carbon Markets Integrity Initiative and the Oxford Net-Zero Aligned Offsetting Principles offer comprehensive guidance but must adapt to the evolving market.
Determining High-Quality Carbon Credits: Five Key Attributes
Due diligence becomes paramount as companies seek to engage with the carbon credit market. Understanding the dimensions that differentiate high-quality credits and mitigate brand risk is crucial. Five key attributes to consider include:
Additionality: ensuring that the project would only have occurred with expected revenue from carbon credit sales.
Quantification: Rigorous methods for accurately measuring the volume of carbon dioxide reduced, avoided, or removed.
Leakage: evaluating and addressing the risk that emissions are pushed outside the project boundary.
Permanence Risk: Assessing the likelihood of avoided or removed GHG emissions being temporary rather than permanent.
Vintage: Considering the year when credits were issued, favour recent vintages that align with evolving certification standards.
Co-Benefits: Enhancing Social and Environmental Impact
While focusing on these attributes, companies can also leverage carbon credit projects that offer co-benefits, such as job creation, biodiversity enhancement, and improved water quality. These additional benefits not only contribute to a positive environmental and social impact but can also enhance a company's reputation.
Strategic Decision-Making for a Sustainable Future
With the carbon credit market poised for significant growth, companies must strategically choose projects that align with their objectives and values. Purchasing high-quality credits reduces the risk of negative publicity and accusations of greenwashing and ensures a meaningful contribution to global decarbonisation efforts.
In conclusion, as companies chart their course towardss sustainability, the careful selection of carbon credits emerges as a critical component of their strategy, guiding them towards a greener and more sustainable future.