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Carbon Credits – current Trends and Best Practices for Companies

11/19/2021 | Reading time: 6 minutes

Companies are increasingly being held accountable to ensure a climate-compatible future. In order to compensate for their unavoidable remaining emissions, carbon credits are a popular ingredient of climate strategies. But what effects do carbon credits actually have on the climate transformation, and how can companies use them properly and ensure their offsetting approach is credible? In the CHOICE Event #30, Adele Marie Grundmann and Julia Hunziker from South Pole explained the basics of building a successful carbon portfolio and explained current trends in the offset market. In the following, you can find the most important key takeways.

Best Practice in Corporate Climate Action

Although the global community has just recently agreed on new plans and pledges for climate protection at COP26 in Glasgow, these government pledges are currently not enough to keep us within +1.5 degrees warming. Therefore, it is key for the private sector to act, and more and more companies are taking their responsibility seriously and setting themselves climate targets. 

However, companies are committing to different climate actions, and it is important to understand exactly what each of these means. The three targets of companies are:

Climate Neutral – Reducing and compensating the company’s GHG emissions with any type of certified carbon credits resulting in no net increase of global GHG emission in the atmosphere. 

Net Zero – Reducing emissions in line with science to as close to zero as possible while ramping up carbon removal to balance out any remaining emissions. These solutions can be natural and technical (WRI, 2020). 

Climate Positive – Doing more than becoming climate neutral and net zero, meaning removing more emissions than the company is generating.

Companies can gradually achieve each of these goals as follows. 

  1. First, they should measure their own Scope 1, 2 and 3 emissions and provide a detailed overview of their holistic corporate climate performance.
  2. Based on this, companies can develop and implement effective measures to reduce their own carbon footprint. These reduction measures should always be the number one priority in their climate strategy. 
  3. By investing in carbon avoidance projects, companies can afterwards compensate for their unavoidable remaining emissions and become climate neutral. 
  4. Over time, the residual emissions that could not be reduced are neutralized with carbon removal credits. If all residual emissions are addressed, the company has reached net-zero.

Carbon Credits 101

To understand exactly how carbon credits can help achieve these goals, let’s take a look at the basics and define what a carbon credit actually is: A carbon credit is a tradeable certificate that represents the avoidance or removal of one tonne of carbon dioxide emissions resulting from a specific project activity. One carbon credit is equal to 1 tonne of CO2 being reduced or removed from the atmosphere.

In order to acquire carbon credits, an organisation invests in a project which is aligned with its values. That project generates a carbon certificate which in turn can help the organisation to become climate neutral or reach net-zero. 

These carbon projects must meet certain criteria. One of the most important ones is additionality. This means that the project would not have been established and would not be viable without the income from the carbon credit. Simply put, there is no business case behind the project. Also important is that the projects need to be verified by several third parties.

What to consider when purchasing carbon credits?

When buying a carbon credit, there are several important factors to consider. First: What category falls the project in? There are avoidance projects and removal projects. Avoidance projects avoid or reduce GHG emission in comparison to a baseline scenario. For example you could develop a renewable power generation by a solar power project instead of the “average” power plant technology using fossil fuels. Removal projects on the other hand actually remove CO2 from the atmosphere and durably store it. These projects can either be technical – e.g. direct air capture and storage – or natural in the form of natural sinks – e.g. planting trees.

Next to the categories, there are also different types of carbon projects. These can for example be subdivided into household projects that reduce the amount of fuel needed for household tasks, innovation in industry that promotes green growth through energy efficiency or clean water projects that reduce fuel needed to boil water for purification.

The next question you want to ask yourself: Is the project certified with an internationally recognized standard? The two most important standards are The Gold Standard and the  Verified Carbon Standard (VCS). The Gold Standard is endorsed by more than 80 NGOs and has 1400+ certified projects in over 80 countries. Gold Standard certified projects need to fulfill 3 Sustainable Development Goals to assure social co-benefits. The Verified Carbon Standard (VCS) is the world’s most widely used voluntary emissions reduction standard. It was developed and is managed by Verra, a registered not-for-profit organization founded in 2005. 

Voluntary Carbon Market Trends

A lot is happening at the moment on the carbon market. Most recently, at COP26 there was a great deal of discussion and ultimately also a decision that transferring carbon credits between countries would still be possible. However, the COP agreement concerning the voluntary carbon markets for organization is purposefully vague, and it will be up to voluntary carbon standards, governments, and market participants to determine whether the voluntary use of carbon credits needs corresponding adjustments.

Beyond the regulatory changes, there is currently a strong increase in demand. Since 2020, the annual retirement of carbon credits has grown 56% with a specifically high demand in nature based avoidance projects. Accordingly, prices have also risen significantly, and this trend will continue in the near future. According to the results of a survey conducted by the Taskforce on Scaling Voluntary Carbon Markets, the volume and price of carbon offsets transacted is expected to soar in the coming decades, to 3.6 GtCO2 and US$ 54/tCO2e by 2050. Other market sizing models suggest the voluntary carbon market could even grow to 7 GtCO2e per annum. 

Source: Taskforce on Scaling Voluntary Carbon Markets (2020), Kick Off / Workshop 1

What to remember

In summary: In order to reach the targets set under the Paris Agreement (Net Zero), it is vital for organisations to invest in climate action projects. The voluntary carbon market is transparent and helps organisations to really measure their impact today and show their efforts. Nevertheless, in a successful climate transformation, carbon credits must only be treated as a complementary measure. The first priority should be to analyse and understand one’s own climate performance, then to set science-based targets and implement appropriate reduction measures, and finally to achieve climate neutrality with the help of carbon projects. Only with this approach and a holistic climate strategy is your company credible and able to actually reach the net-zero target. 

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