Can companies buy carbon credits and reduce emissions at the same time?

Key Takeaways

• Dual Approach to Emission Reduction:
  • Companies should not solely focus on reducing value chain emissions but also leverage the carbon market to compensate for unavoidable emissions. This dual strategy ensures that climate action is not delayed and demonstrates accountability during the global climate crisis.
• Importance of High-Quality Carbon Credits:
  • Investing in high-quality carbon offsets benefits the environment, supports Indigenous communities, biodiversity, and sustainable development goals, and helps companies decarbonise faster.
• Navigating Market Mechanisms and Standards:
  • Initiatives like the Science Based Targets initiative (SBTi) and the Voluntary Carbon Market Integrity Initiative (VCMI) provide frameworks for companies to use carbon credits credibly. These guidelines help companies avoid greenwashing accusations and ensure their investments align with global climate objectives.

How can companies buy carbon credits while reducing their emissions?

The current pressure on companies to reduce emissions within their value chain is undeniable. Despite this and the increasing climate change risk, businesses must earn profits and answer to shareholders. This means that for corporate leaders, there needs to be value in committing to net zero. To better understand this value, the pressures need to be understood.

While tightening national emissions budgets will drive governments to impose more stringent regulatory requirements on organisations over time, particularly in advanced countries, other forces are at play, such as eco-conscious consumers, employees, and shareholders. Today, an increasing number of corporate leaders recognise the impacts of these factors and how reducing emissions helps mitigate the risks associated with climate change.

The truth is evident when looking at the sheer number of the world's leading companies that have committed to drastic emissions reductions. Despite over one-third (34%) of the world's largest companies have already committed to net zero, nearly all of these companies (93%) will fail to achieve their goals if they don't at least double the pace of emissions reduction by 2030. - Source

One way to do so is to go beyond reducing value chain emissions by using the Voluntary Carbon Market (VCM) to compensate for those emissions that are not yet feasible to reduce. Furthermore, investments in carbon markets allow companies to go beyond offsetting and show accountability and responsibility for the global climate crisis and its related goals.

What is the status of the global climate crisis, and what role would the carbon markets play?

The world is not on track to meet Paris Agreement goals, and current policies put us on the path for 2.7°C of warming, which is well beyond what climate scientists say is safe for humanity. The Intergovernmental Panel on Climate Change (IPCC) states that to limit global warming to the needed 1.5°C pathway, businesses must immediately reduce emissions, aiming to halve them by 2030 and achieve net zero before 2050.

Alongside that, we need to collectively remove up to 10 Gigatons of carbon from the atmosphere every year until 2050. To put this into perspective, a single gigaton is equivalent to the weight of 10,000 fully loaded aircraft carriers. Therefore, we must remove the equivalent weight of up to 100,000 fully loaded aircraft carriers in carbon every year.

This can only be achieved by channelling capital towards carbon or climate projects that help remove carbon from our atmosphere, whether it be through tree planting, regenerative agriculture, or novel technologies such as Direct Air Capture (DAC). One would expect this to be the role of governments to invest in these projects, but this has led to very little impact and progress, leaving it up to the private sector to help restore the damage that it also largely contributes to.

Besides this direct impact of high-quality carbon offsets, these investments from the private sector are also essential due to the following contributing factors:

1. Engaging in the carbon markets is becoming a strategic business case. According to growing evidence, companies that use carbon credits decarbonise faster. The reason is simple: Putting a price on carbon creates an incentive to reduce emissions.
2. Meeting Paris Agreement climate goals. Carbon markets offer huge potential for mobilising private and public finance towards the Global South, as recognised in Article 6 of the Paris Agreement.
3. Carbon credits can also contribute to a wide range of co-benefits, such as biodiversity conservation, clean water and air, job creation, and energy access, as well as benefiting Indigenous people and local communities. Companies can use these additional benefits to show progress towards the UN Sustainable Development Goals and other facets of their ESG strategy.

With 55% of the global GDP depending on natural resources, it becomes even more apparent why investment into carbon markets alongside emissions reductions is vital for healthy supply chains and is no longer primarily a “nice gesture”. Carbon credits should incentivise companies to show their stakeholders that they are climate action pioneers while using credits to compensate for emissions that will still be emitted on the way to net zero. Similarly, they should not be seen as a 'get out of jail free' card where companies can purchase carbon credits and continue to emit. That is also why they need a high price for the right effect.

Navigating Scope 3 emissions

Carbon markets have matured significantly over the last two years. Part of this maturation involves many companies turning to voluntary organisations such as the Science Based Targets initiative (SBTi) to achieve ambitious climate goals. Scope 3 emissions arise from activities not directly under a company's control, such as their supply chain or consumer use. They often account for the most significant portion of most companies' overall climate impact. These emissions present some of the most difficult challenges for companies to address as part of their sustainability strategy.

SBTi's recent proposal to broaden the use of market mechanisms (including carbon credits) for reducing Scope 3 emissions has caused confusion and raised questions about its scientific basis. This has also sparked a crucial discussion on how companies can credibly achieve their Scope 3 reduction targets. Two distinct sides have fuelled this debate:

1. One argument emphasises using market mechanisms (such as carbon credits) to unlock essential capital for climate and nature initiatives, especially in developing countries.
2. The other side emphasises incentivising industry transformation to reduce overall value chain emissions.

While decarbonisation within the value chain is crucial for effective climate action, corporate investments beyond the value chain also play a significant role, as mentioned above. There are strong arguments in favour of both sides, so it is not necessarily a case where companies must choose between the two. In fact, companies are increasingly adopting a combination of the two approaches. These investments help protect essential natural carbon sinks while also supporting company and global climate goals. This is done by ensuring that carbon levels are reduced from today and not only at net zero target dates, which for most companies is only from 2035 onwards.

Guidelines to successfully reduce and use carbon markets

Companies can explore various innovative public and private finance options to facilitate these investments. These include the Voluntary Carbon Market Integrity Initiative (VCMI) and SBTi’s Beyond Value Chain Mitigation (BVCM) framework for climate investments. BVCM refers to actions or investments a company undertakes outside its direct value chain that contribute to reducing greenhouse gas (GHG) emissions or removing and storing them from the atmosphere.

This model enables companies to shift from a purely compensation strategy, which can make justifiable claims difficult, towards a contribution strategy. In the latter case, companies are asked to rise to the occasion and support high-quality projects that significantly contribute to climate change mitigation beyond their own value chain as part of a framework to contribute to global net zero.

The VCMI’s Claims Code of Practice, launched this year, will massively support companies in planning to use carbon credits by offering clarity, transparency, and consistency in defining commitments and claims. In this way, greenwashing accusations around the use of carbon credits would not be part of a company's reasons for doubting using carbon credits as part of their decarbonisation strategies.

Final Thoughts

While government regulation and policymaking remain vital, their current shortcomings necessitate that corporate investments in climate change mitigation be driven by scientific guidance and strong governance principles. Senken advocates for science-based, credible corporate climate action as a crucial mechanism for preserving a liveable planet for future generations.

Above and beyond the business case to reduce emissions, additional climate action cannot wait. So, if your company is planning to or is already reducing emissions, we hope that the dire need to reduce and engage in the carbon market is now seen as integral to corporate sustainability.