Business
Carbon Credit Confused? The buyer’s guide to carbon credits
Global Banking & Finance Review®
Company
By Hayley Moller, chief marketing officer and founding team member of climate tech startup Thallo
By Hayley Moller, chief marketing officer and founding team member of climate tech startup Thallo
Another week, another sobering climate news story. Time is running out to tackle global warming and prevent irreversible damage to people’s lives and livelihoods. Just in the last month, an eminent group of scientists warned that the tipping point for ecological collapse of ecosystems including the Amazon rainforest could happen within a human lifetime.
As society begins to focus on climate change and its consequences, businesses have a crucial part to play. There is a growing trend towards buying carbon credits to help offset the carbon that businesses emit, with the total value of the voluntary carbon market expected to reach between $10 billion and $40 billion by 2030.
However, the carbon credit market can appear complex and opaque, leaving business leaders struggling to understand different credits, certification processes and market dynamics. Wary of accusations of greenwashing and spooked by headlines about the forest carbon offsets approved by a leading certifier being worthless, companies don’t know where to start.
Here are six steps to consider:
Businesses often use carbon offsetting as the basis for a new sustainability programme or to market a product or service as ‘carbon neutral’. But carbon credits shouldn’t be used in place of other decarbonisation activities. Buying carbon credits should sit at the bottom of something called the mitigation hierarchy. This pyramid is the foundation of best practice within the carbon credit industry and tells us to buy carbon credits, effectively, as a last resort.
A carbon credit represents one tonne of carbon avoided or removed from the atmosphere. A carbon offset is simply a carbon credit that has been used to compensate for emissions. In addition to their environmental impact, carbon projects vary in terms of the additional benefits they bring to local communities. Companies need to consider their overall sustainability strategy and opt for the carbon credits that fit best with their goals, whether that’s ensuring gender equality or championing projects in specific countries.
Next, it’s critical that the chosen carbon credits are transparent, high quality, verified and deliver on their promises.
An independent governance body called the Integrity Council for the Voluntary Carbon Market created ‘Core Carbon Principles‘ to help define what gives a credit ‘high integrity’. It says that a high-quality carbon credit will add reductions that weren’t possible without it, reduce these emissions for a long time (including storing carbon in natural or geologic sinks like algae and forests), and be accurately measured and quantified scientifically. And they can only be counted once towards a carbon emissions target. Ratings agencies such as Calyx, Sylvera and BeZero can independently assess the quality of carbon credit projects.
Meanwhile The Carbon Credit Quality Initiative has a free methodology-based rating tool, which assesses the quality of a particular carbon project type.
Avoidance credits come from activities that stop carbon emissions that would have entered the atmosphere without the project activity (e.g. avoiding deforestation, switching from coal to solar). Removal credits pull carbon directly out of the atmosphere and can be nature-based (e.g. tree-planting) or engineered (e.g. direct air capture).
Experts disagree about which credits are best. Many advocate for avoidance credits because of the mitigation hierarchy mentioned above. Others prefer carbon removals since IPCC research shows humans will need to remove carbon – going beyond net zero – to reach the Paris Agreement aims. Carbon removals tend to be less available and more expensive than avoidance credits – though advocates hope to bring the cost of removal credits down quickly. Generally companies should consider using a mix of both avoidance and removal credits.
There’s another way to slice carbon credits, beyond removals and avoidance. Nature-based carbon credits use natural ecosystems such as forests, wetlands, and soils to capture and store carbon. Engineered carbon credits use technology like direct air capture and biochar to remove carbon dioxide from the atmosphere.
Nature-based carbon credits have come under criticism recently. Critics point out that nature-based credits are often avoidance credits, which means they rely on potentially squishy assumptions about what would happen to the land if the project activities didn’t take place. And they typically sequester carbon for a shorter term than engineered activities. But given the immediacy of the climate crisis, every action counts, and a tonne of carbon avoided or removed today is arguably more impactful than one avoided or removed down the line.
Companies must consider the carbon credit volume they are likely to need over the next three to five years. This means getting some idea of emissions during that period. When it comes to buying carbon credits, companies that can commit to a longer time frame may have a greater range of carbon credits to choose from. The price per credit also decreases when organisations buy at higher volumes or make a prepaid capital investment.
In terms of where to buy carbon credits, there are many options. Companies can choose to work directly with a project developer, but this is typically a lengthy process that needs lots of due diligence. Alternatively, they can buy from resellers and brokers. This can be a good way to outsource the buying process, although the mark-ups can be huge – our research suggests that on average 33% of the revenues from carbon credits go to intermediaries and investors rather than offsetting projects. Ultimately, companies should look for transparent and data-enabled platforms to receive assurances about the integrity of their purchase, while keeping costs low.
Once businesses have finalised their carbon offsetting strategy, they should make a public and transparent commitment to a science-based emissions reduction target and to report against it on a regular basis. The Voluntary Carbon Market Integrity Initiative (VCMI) has published a provisional ‘Claims Code of Practice’ to help businesses decide how to talk about their carbon credit purchases and avoid greenwashing.
While the planet is warming at an unprecedented speed, it’s not too late to change course. Carbon credits are just one of many tools businesses have at their disposal to slow and reverse the damage caused by excessive carbon emissions. But we must act now.
A carbon credit represents one tonne of carbon dioxide emissions that has been avoided or removed from the atmosphere, allowing businesses to offset their carbon emissions.
Avoidance credits are generated from activities that prevent carbon emissions from occurring, such as reforestation or transitioning to renewable energy sources.
Removal credits are generated from projects that actively remove carbon dioxide from the atmosphere, such as tree planting or carbon capture technologies.
The mitigation hierarchy is a framework that prioritizes reducing emissions first, followed by offsetting remaining emissions through carbon credits.
The voluntary carbon market is a marketplace where businesses and individuals can buy carbon credits to offset their emissions voluntarily, rather than through regulatory requirements.
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