"Offset or offtrack? The role of carbon credits in the global dash for decarbonisation"

Douglas Ross,
Graduate Sustainable Finance Consultant,
EY

As the consequences of not reaching the Paris Agreement’s goals become ever clearer (and scarier), corporates and governments alike are getting hot under their collars, scrambling to make ambitious emissions reductions targets in the race to net zero. But that’s much easier said than done. Translating well-intentioned commitments into a credible decarbonisation pathway is hard. Really hard.

Despite an organisation’s best efforts to decarbonise, often there are emissions hidden away in their value chains that they just can’t get rid of. Think of an electric car, for example. Whilst that car has no tailpipe emissions, it still has an emissions footprint from mining the lithium that powers the battery. Such emissions are known as residual emissions.

It is at this point we welcome carbon credits to the scene. A carbon credit is a tradeable intangible instrument, representing a greenhouse gas emission reduction to, avoidance of, or removal from, the atmosphere, equivalent to one metric tonne of carbon dioxide, tCO2e [1]. You can think of reduced, avoided, and removed emissions like a bath: you can either turn off the tap, avoid turning on the tap, or pull the plug and drain some water.

The premise is basically that carbon credits can be used to offset (residual) emissions. But how do they work? Well [2],

• A carbon credit project is launched.

• Carbon credits are calculated, based on the amount of tCO2e removed, reduced, or avoided by the project.

• An organisation outlines their net zero strategy. They decarbonise what they can, then may acquire carbon credits to offset their residual emissions.

Great! But is it all just smoke and mirrors? Reuters, citing Britain's Committee on Climate Change, purports credits could be a cover for corporate inaction, with companies potentially exploiting credits to reduce their efforts in cutting emissions [3]. Sound familiar? Hint hint: greenwashing [4].

The Guardian isn’t exactly a fan of carbon credits either. Their explosive review of Verra [the leading carbon standard for the voluntary offsets market, where carbon credits are traded] found that over 90% of their rainforest credits were likely “phantom” credits and didn’t signify actual carbon reductions. Worse still, such low-quality credits could be worthless [2], contribute to global warming, damage biodiversity, and consume excess water [5].

Damning criticism - but would you want your money going towards emissions reductions that never actually materialised [6]?

So, are carbon credits just a hare-brained, cloak-and-dagger scheme, allowing corporates to continue polluting whilst hiding behind offsets? No. And I’ve got Dirk Forrister, President & CEO of the International Emissions Trading Association, to back me up. Dirk argues that the Guardian’s article damaged the reputation of the industry by focussing so intently on nitty-gritty, pernicious spats between academics studying carbon credits that they seemingly forgot the whole point: “…science-based methodologies drive quality, action and supply within carbon markets.” Verra’s methodologies are open for consultation and, as Dirk puts it, “achieving the Paris climate agreement’s net zero goal requires the rapid expansion of carbon [credit/offset] markets” [7], not noisy scientists squabbling about technicalities. Or, as a climate-based Elvis tribute band might say, a little less bickering, a little more [climate] action, please.

Dirk is not alone in his praise of carbon credits. Carbon Neutral Britain argues credits are proactive environmental action, helping us offset our current emissions [8]. You might like to think of credits as a steppingstone then, buying us some time whilst we get our decarbonisation ducks in a row.

But carbon credits are more than just a temporary solution. And they need to be. Why? Well, as we discussed earlier, some businesses/industries simply can’t eradicate all their emissions across their value chains. We can use carbon credits to offset these irreducible emissions [9].

Looking to global carbon budgets and Emissions Trading Schemes, carbon credits promote earlier and more ambitious net zero commitments, allowing those who decarbonise the most to sell excess carbon allowances, facilitating a better bottom line for them, and extra credits for those who need them most. An accelerated transition is good for business, good for the Earth, and good for you.

Even with radical global decarbonisation, capital must be channelled to credit projects to have a fighting chance of meeting the 1.5C global warming target [10]. The voluntary carbon market remains one of the best avenues to provide this capital. Without carbon credits a more erratic decarbonisation pathway emerges, with potentially destabilizing effects for the global economy [11].

And (high-quality) credits do more than just offset emissions. Carbon offset co-benefits can include supporting biodiversity and broader sustainable development goals, saving protected habitats and endangered species in the process [12]. A bit of a win-win, isn’t it?

With carbon credit projects critical in achieving corporate decarbonisation strategies [13], well-functioning carbon markets are essential. With urgent reform to data gathering and governance practices (such as the use of space data to monitor and verify credit projects [14]), alongside increased standardisation, we can ensure carbon markets function as intended. These improved practices would bring much needed transparency to a precariously opaque industry and provide organisations with greater confidence to pursue net zero by mitigating fears around carbon offsetting.

So, whilst carbon credits should not replace organic emission reductions, they remain a key part of the solution.

Bibliography

[1]

The Integrity Coucil for the Voluntary Carbon Market, "Core Carbon Principles, Assesment Framework and Assessment Procedure," ICVCM, 2023.

[2]

P. Greenfield, "The Guardian: Climate Crisis. Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows," 2023. [Online]. Available: https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe. [Accessed 13 September 2023].

[3]

S. Twidale, "Reuters Commodities: Carbon credit use could curb company climate action, warns UK advisers," 2022. [Online]. Available: https://www.reuters.com/markets/commodities/carbon-credit-use-could-curb-company-climate-action-warns-uk-advisers-2022-10-12/. [Accessed 14 September 2023].

[4]

G. Smoot, "Is Carbon Offsetting Greenwashing? The Big Picture," Impactful Ninja, 2023. [Online]. Available: https://impactful.ninja/is-carbon-offsetting-greenwashing/#:~:text=Carbon%20offsetting%20is%20considered%20greenwashing%20when%20companies%20do,three%20levels%20of%20zero%2C%20moderate%2C%20and%20severe%20greenwashing.. [Accessed 15 September 2023].

[5]

S&P Global, "Global Commodity Insights," 2023. [Online]. Available: Voluntary carbon credit buyers recalibrate market strategies, tighten scrutiny | S&P Global Commodity Insights (spglobal.com). [Accessed 14 September 2023].

[6]

P. Trendafilova, "The Carbon Herald on Companies," 2023. [Online]. Available: https://carbonherald.com/the-guardian-investigation-of-verra-carbon-offsets-shows-90-are-worthless/. [Accessed 14 September 2023].

[7]

D. Forrister, "The Guardian: Letters. Carbon Offsetting, Carbon credits: towards net zero or zero credibility?," 2023. [Online]. Available: https://www.theguardian.com/environment/2023/jan/27/carbon-credits-towards-net-zero-or-zero-credibility. [Accessed 14 September 2023].

[8]

Carbon Neutral Britain, "Become a Carbon Neutral British Business," 2023. [Online]. Available: https://carbonneutralbritain.org/pages/become-a-carbon-neutral-business?kw=business-carbon-neutral-phrase&utm_source=bing&utm_medium=cpc&utm_campaign=novi---carbon-neutral-britain---carbon-offsetting---phrase&utm_term=business-carbon-neutral&msclkid=a0c74. [Accessed 14 September 2023].

[9]

C. L. P. M. D. P. Christopher Blaufelder, "McKinsey Sustainability," 2021. [Online]. Available: https://www.mckinsey.com/capabilities/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge. [Accessed 14 September 2023].

[10]

ACT Sustainability, Gold CDP Accredited Solutions Provider, "CDP, The journey toward net-zero emissions – how can carbon credits contribute to climate action?," 2021. [Online]. Available: https://www.cdp.net/en/articles/companies/net-zero-how-can-carbon-credits-contribute. [Accessed 14 September 2023].

[11]

J. K. C. L. D. P. J. W. Christopher Blaufelder, "McKinsy Sustainability: How the voluntary carbon market can help address climate change," 2020. [Online]. Available: https://www.mckinsey.com/capabilities/sustainability/our-insights/how-the-voluntary-carbon-market-can-help-address-climate-change. [Accessed 13 September 2023].

[12]

D. B. Teresa Hartman, "World Economic Forum, Forests," 2020. [Online]. Available: https://www.weforum.org/agenda/2020/11/carbon-credits-what-how-fight-climate-change/. [Accessed 13 September 2023].

[13]

I. P. o. C. C. (IPCC), "Sixth Assessment Report: Headline Statements from the Summary," IPCC, 2022.

[14]

J. Hailstone, "Forbes, Innovations, Sustainability: Can Satellite Technology Make The Carbon Credit Market More Transparent?," 1 December 2021. [Online]. Available: https://www.forbes.com/sites/jamiehailstone/2021/12/01/can-satellite-technology-make-the-carbon-credit-market-more-transparent/?sh=df280c314400. [Accessed 18 September 2023].