As the effects of climate change become increasingly visible and the risks they represent for business become more relevant, the global economy is making efforts to reduce its carbon footprint. To achieve this result, both the public and private sector are encouraged to take bold and ambitious actions to reduce their greenhouse gasses (GHGs) emissions; one of the tools to do so is the use of carbon credits.
Carbon credits - what are they and who buys them?
The carbon credits market is born from the intuition that since the concentration of GHG in the atmosphere as a whole is the cause of climate change, a reduction or a removal of CO2 from the atmosphere can happen anywhere and it will benefit the entire planet, so a company can contribute to climate change mitigation even by investing in an emission reduction which has happened outside of its geographical area or business operations.
A carbon credit represents 1 ton of CO2 equivalent that has not been emitted or that has been removed from the atmosphere, which can be sold from one entity (the carbon reduction/removal originator) to another (a buying company). The generation and sale of carbon credits serves the purpose of creating a financial incentive for projects and activities that reduce emissions or remove carbon for the atmosphere, since each ton of CO2 which is reduced/removed can be sold for a profit in the form of a carbon credit.
Organizations like eAgronom develop projects to generate certified, high-quality carbon credits which will help companies achieve their decarbonization goals. Other companies like South Pole either co-develop projects or trade the credits issued by the projects, meaning that they manage the process of moving the credits generated by the projects to appropriate buyers at their targeted volumes; usually sellers will purchase a given amount of credits directly from the projects' developers and then resell them at a profit to companies in the process of decarbonizing their business.
For more information, see Vcmprimer.org or Carbonwise
Source: Markets and Markets
Why do companies buy carbon credits?
There are many reasons why companies buy carbon credits, e.g. achieving their net zero targets, aligning with the targets of the Paris agreement, being SBTi compliant, as part of their marketing strategy, to respect customer requirements, to align with industry trends, and to reflect consumer awareness of environmental issues.
Usually companies buy carbon credits as part of their sustainability strategy to reach a given level of emission reductions or removals. By accounting for the emission reduction values of purchased carbon credits in their GHG inventory, companies can make progress towards the Net Zero milestone, meaning that they are emitting as much CO2 from their business operations as they are reducing and/or removing through their decarbonization strategy, which can include the purchase of carbon credits.
Attention: the most trusted organizations setting out the standards and best practices for decarbonization strategies and GHGs accounting do not allow companies to count any purchased carbon credit as a reduction of their emissions. If the CO2 removals or reductions claimed through the purchase of a sum of carbon credits originated from a project outside the value chain of the purchasing company, these can only be counted as a compensation effort, and cannot be subtracted from the company’s emissions values. This is what is called an offset, i.e. a GHGs emission reduction or removal which happens outside the business boundaries of the company which pays for it (for example, by buying a carbon credit). Organizations like the Greenhouse Gas Protocol and the Science Based Targets Initiative clearly state that companies should follow a hierarchy of decarbonization actions, the first of which should be the reduction of the emissions directly associated with their own assets and operations, and resort to offsets only to compensate for residual emissions once their reductions targets have been met.
For this reason, the industry is turning more and more its attention toward insetting, which is the development of projects to reduce or remove GHG emissions within the value chain of the company which will pay for the reductions/removals.
Examples of companies that have bought credits
Companies who are purchasing carbon credits as part of their decarbonization strategy are for example Disney, Microsoft, Delta Airlines, Samsung and Google.
For example, here you can read how Microsoft recently struck deals with multiple project developers to purchase carbon credits from carbon removals through direct air capture (DAC) technology, and here you can read a white paper by Google which details the company’s due diligence process on the purchase of carbon credits and how they are accounted in its emissions inventory.
Microsoft is one of the companies that has bought carbon credits.
Voluntary carbon markets vs emission trading schemes
Carbon credits are tokenized reductions and removals of greenhouse gasses (GHGs) traded on the voluntary carbon market (VCM) with the purpose to incentivize climate action through a voluntary market mechanism which companies are free to participate in or not; this is not to be confused with emission trading schemes (ETS), which are mandatory, legally binding frameworks set up by national lawmakers with the aim to gradually reduce carbon emissions of high-emitting sectors by allocating a certain amount of emission allowances - i.e. the permission to emit 1 tonne of CO2 equivalent - which can be traded between companies to optimize the allocation of emissions; over time the total amount of allowances is lowered by the lawmakers, lowering at the same time the volume of emissions in the regulated sectors. In a nutshell, carbon credits traded in the voluntary carbon market reward GHG reductions and removals, while emission allowances traded in emission trading schemes aim to limit GHG emissions in the first place.
Low quality vs high quality credits
The quality of carbon credits is determined by the standards and methodology followed to realize the projects which are generating them. Some companies might decide to develop projects and generate credits using self defined methodologies or by claiming compliance with not very stringent standards for the certification of reductions and removals; these would be low quality credits. High quality credits are generated following severe and stringent methodologies which include multiple rounds of quality control and work with third parties to certify carbon projects; at eAgronom we chose to develop our carbon program by following the most stringent methodology for projects in the agricultural sector, i.e. Verra’s VM00042 2.0. Verra is a standard and methodology setting organization for environmental projects who also manages the world’s largest registry of carbon credits.
Carbon credits can also be generated in agriculture by applying methods of carbon farming.
Conclusions
In conclusion, carbon credits can significantly contribute to a company’s decarbonization effort, especially when used jointly with other carbon reductions and removals initiatives. Despite the recent criticisms driven against them, a recent report by Ecosystem Marketplace echoed by S&P Global and Time shows how companies purchasing carbon credits as part of their climate strategy are actually outperforming peers who don’t in terms of sustainability achievements, positioning themselves as climate action leaders.
