The use of carbon credits has become increasingly popular in recent years as companies strive to achieve their climate goals and reduce their carbon footprint. While some companies have the means to reduce their emissions, others simply do not. Carbon credits provide a solution for these companies by allowing them to offset their emissions through the purchase of credits. But how can carbon credits promote sustainable business practices and advance both corporate and global sustainability? In this article, we will explore the best practices for scaling up the voluntary carbon market (VCM) and how it can help businesses achieve their climate change goals.
The number of businesses pledging to help put an end to climate change by reducing their own greenhouse gas (GHG) emissions continues to grow. However, many of these companies find that they cannot fully eliminate their emissions, or even reduce them as quickly as they would like. This is particularly challenging for companies with net-zero emissions targets, meaning they must remove as much carbon as they emit. Carbon credits allow these companies to offset their emissions by investing in climate-related projects and initiatives that would not otherwise be developed or take off. These projects offer added benefits beyond just carbon reduction, such as job creation and biodiversity conservation. Carbon credits also have the potential to bring down the cost of emerging climate technologies by providing startups with enough capital. Most importantly, this market tool can help drive investments to places where nature-based emissions reduction projects are most viable.
Achieving climate goals is the ultimate objective for organizations today. This means limiting the rise in global temperatures to 2.0°C above pre-industrial levels, and ideally 1.5°C. To put this in context, it means cutting global GHG emissions by 50% of current levels by 2030 and bringing them to net zero by 2050. More and more businesses are aligning themselves with this global sustainable development agenda. In fact, the number of companies with net-zero climate commitments doubled in less than a year, from 500 in 2019 to 1,000 in 2020. However, reducing carbon emissions to be carbon neutral or net zero has major limitations. For instance, a significant portion of the pollution in the cement industry comes from processes that cannot be stopped. Carbon credits provide a solution for companies to reduce their emissions without stopping their business operations.
Carbon credits work like permissions allowing holders the right to emit a certain amount of carbon under the compliance market. Within the VCM, carbon credits represent the corresponding quantity of carbon that has been reduced or removed by an initiative. Each carbon credit is equal to one tonne of carbon removed or prevented from entering the atmosphere. Carbon credits have been in use for years now, but their voluntary use has grown immensely only in recent years. As seen in the chart from Katusa Research, buyers have retired (claimed the impact of the credit) about 150 million credits per year since 2020. As global efforts to transition to low-carbon and sustainable practices intensify, demand for carbon credits will also grow. Based on industry estimates, annual global demand for carbon credits can go up to 1.5 to 2.0 gigatons of CO2 by 2030 and up to 7 to 13 GtCO2 by 2050. That also means the VCM size can be between $30 billion and $50 billion by the end of the decade, depending on various factors such as price.
According to McKinsey analysis, the supply of carbon credits to meet such projected demand will come from categories such as avoided nature loss (including deforestation), nature-based sequestration such as reforestation, avoidance or reduction of emissions such as methane from landfills, and technology-based removal of carbon dioxide from the atmosphere. However, several challenges exist that may prevent VCM’s scale-up. If not addressed fully, these roadblocks can bring down supply from 8-12 GtCO2 per year to 1-5 GtCO2. Key challenges include the concentration of most nature-based supply of carbon credits in a few countries, difficulty in attracting enough financing, long lag times between capital raising and selling carbon credits, carbon accounting and verification methods that vary, and some confusion in the definition of the credits’ co-benefits (benefits beyond carbon reductions). Long lead times in verifying carbon credits quality are also crucial to achieve market integrity. Other problems include unpredictable demand, low liquidity, and limited data availability.
Although these challenges are daunting, they are not insurmountable. By adopting best practices in using and integrating carbon credits into climate change mitigation measures, the VCM can help secure the future of sustainable business. Here are the top four ways that could further develop the VCM and scale it up for more carbon reductions.
Firstly, uniform principles for carbon credit definition and verification are necessary to increase liquidity in the market. The credit attributes vary a lot, affecting the price of the credit, which depends on the specific project generating it. By having uniform principles, the market can transact efficiently, and trading can increase.
Secondly, the VCM should prioritize the development of high-quality carbon credits to ensure market integrity. Carbon accounting and verification methods that vary can lead to a lack of confidence in the market, which can result in a decrease in demand.
Thirdly, transparency and data sharing are essential to increase liquidity in the market. By providing more data on the carbon credits, buyers can make more informed decisions, and sellers can increase their chances of finding buyers.
Fourthly, technology can be leveraged to reduce transaction costs and increase efficiency. Blockchain technology, for example, can help streamline the verification process, increase transparency, and reduce the risk of fraud.
In conclusion, carbon credits can help promote sustainable business practices and advance both corporate and global sustainability. By adopting best practices in using and integrating carbon credits into climate change mitigation measures, the VCM can help secure the future of sustainable business. With the challenges of climate change looming, it is imperative that businesses take action to reduce their carbon footprint and invest in climate-related projects and initiatives.
