In the lead-up to the first UNFCCC Global Stocktake later this year, countries’ and corporations’ net-zero pledges will be put under the spotlight. As part of this, much emphasis will be placed on the different tools stakeholders intend to use to achieve these commitments. One such tool, which is becoming increasingly popular amongst UK businesses, is the use of carbon credits and voluntary carbon markets (‘VCMs’) to offset their emissions.
Towards the end of last year, the Climate Change Committee published a Voluntary Carbon Markets and Offsetting Report, which focused on the opportunities presented to UK businesses by VCMs, as well as the damaging effects that unregulated VCMs could potentially have on the drive to net-zero.
A useful tool towards net-zero?
Fundamentally, the Report states that VCMs and carbon credits can help contribute toward net-zero targets, both globally and in the UK, if the credits traded are of high-integrity and are used in combination with, rather than instead of, direct emissions reductions.
A carbon credit is a tradable token which demonstrates that its holder has paid to have a certain amount of carbon dioxide removed from the environment. Carbon credits are generally purchased by a buyer - usually a company - to enhance their climate credentials and are sold by a seller to finance their emission-reducing activities. Carbon credits cover a range of activities which claim to reduce or remove emissions. Currently, the most common carbon credit purchases are for forestry or renewable energy projects.
VCMs are the markets on which carbon credits are purchased for voluntary use (i.e., independently of any law requiring them to be purchased). Such markets are currently estimated to be worth around $2bn globally. Whilst the market has rapidly increased in size between 2018-2021, it remains relatively small. Some estimations, however, suggest that demand for global carbon credits could grow up to a factor of 100 by 2050.
‘Offsetting’ occurs when a voluntary purchaser of carbon credits includes the emissions saving represented by that carbon credit in the ‘net’ emissions they report.
VCMs could help companies meet their net-zero targets by providing a funding mechanism for activities that support net-zero, especially where the emission-reducing activities are not yet investable or profitable, compliance markets are not yet established or public funding is lacking. Sectors that cannot reduce their direct Scope 1, 2, and 3 emissions in time to meet their 2050 targets (such as the aviation industry) could use carbon markets to fund, for example, engineered removals, forestry, or land-use based projects.
Low-income countries could also benefit from financial flows harnessed through VCM projects. Despite these opportunities, the Report stresses that VCMs should not be used as a ‘silver-bullet’, or as a replacement for international finance commitments.
Risks posed to net-zero by VCMs
The Report identified two main risks posed by VCMs in their current form, that are highly relevant to businesses looking to make use of them:
i) The impact of VCMs on direct emissions reduction. Low VCM prices (currently around $4 per tonne for Nature Based Offsets) means that carbon credits are often used as an easier or cheaper alternative to more expensive, or otherwise difficult steps companies could take to directly reduce their emissions. A lack of regulation or required disclosure requirements governing how carbon credits are used, and which activities they can offset, increases this risk.
To justify their net-zero business plans, companies may rely on offsetting without providing detailed information as to which of their activities are being offset. For example, at the time of the Report, 35% of FTSE 350 companies’ involved some use of ‘offsets’ in their emissions reductions plans. However, the vast majority of these companies have not yet outlined which specific activities they intend to offset. Some analysts claim that this opacity increases the likelihood that carbon credit use may undermine direct emissions reduction efforts, undermine the environmental integrity of climate policies, or facilitate greenwashing.
Following this, the Report concludes that there is a ‘clear risk’ that improper offsetting could indeed lead to slower direct emissions reduction from businesses. This could erode public trust in business and Government net-zero action. There is also some concern that the current lack of regulation may provide a competitive disadvantage to those companies which are currently seeking to deploy offsetting in responsible ways. With these conclusions, the Climate Change Committee aligns with the Science-Based Targets initiative’s attempts to guide corporations’ use of carbon credits, and the extent to which those credits should be counted toward corporate net zero targets.
ii) Integrity of Carbon Credits. The Report outlines detailed criteria for what should be considered ‘high-integrity’ carbon credits. It echoes similar efforts by other independent bodies - such as the Integrity Council for the Voluntary Carbon Market - to improve the supply-side integrity of carbon credits. According to the Climate Change Committee, ‘high-integrity’ credits include those which derive from projects that are measurable, verifiable and have long-lasting benefits, as well as those which encourage additional and permanent emissions reductions.
Carbon credits that are not ‘high-integrity’, but which are still used as substitutes for direct emissions reductions, may risk causing higher net global emissions. Clear policies and standards to ensure robust monitoring, verification and reporting can help prevent improper or illegitimate offsetting.
Recommendations from the Report
Given the risks posed by improperly governed VCMs, the Report calls for greater Government action to ensure that VCMs continue to grow with appropriate quality controls and guidance, and that companies only buy and sell high-integrity carbon credits.
The CCC makes three key recommendations to the UK Government:
1) Encourage businesses to prioritise direct emissions reductions, while providing mechanisms to support high-integrity removal projects;
2) Continue efforts to strengthen codes and standards to ensure integrity of carbon crediting projects; and
3) Support the modest, but useful, role VCMs can play in the UK Net-Zero pathway, in tandem with other climate mitigation measures. Fundamentally, the Report finds that companies should use carbon crediting as an ancillary strategy toward achieving corporate net zero targets.
VCMs and carbon credits will have a small, but important part to play in helping businesses meet their net-zero targets. As markets grow, greater government intervention and regulation will be needed to help ensure that credits are used to fund additional emissions reduction activities, rather than as an easy way out for companies looking to bolster their climate credentials. Ultimately, carbon crediting should be viewed as a supplement, not as a shortcut, to more substantial business action to achieve net-zero.