Carbon credit offset demand growing up

As organisations head towards beyond net-zero, COP26 in Glasgow delivered a “gift” that broke a six-year deadlock on article six of the Paris Agreement.

Negotiators agreed on the rules on global emissions trading and established a UN-controlled marketplace. The outcome is a new carbon credit programme that will run parallel with existing voluntary markets.

Carbon credit or “offset” means a unit of value to a reduction, avoidance or capture of greenhouse gases (GHGs) emissions achieved by a certified project. One unit of carbon credit is equivalent to one tonne of carbon dioxide equivalent (CO2e).

A carbon credit can be used by a business, organisation or individual to compensate their carbon footprint by financially rewarding an activity that has reduced or sequestered GHGs, and which also brings other sustainable development benefits

Companies having a climate strategy with the objective of emission reductions will need to consider the use of carbon credits as a means towards their beyond zero strategies. The value add to the offset schemes is that they also create other sustainable development benefits such as jobs or improved health, among many others.

Globally, demand for offsets is soaring and this is expected to have a ripple effect on our economies. According to BloombergNEF, more credits were traded in 2021 compared to 2020. This trend is expected to continue in the future considering that COP26 negotiation provided an enabling environment for the same.

More and more companies and governments are expected to spend billions of dollars to meet net-zero emissions targets and as they continue to improve their green credentials.

As companies navigate how best to take advantage of the offsets, it is critical that they estimate their GHG emissions. This should be done based on credible standards and a good example would be the ISO 14064 GHG Protocol Corporate Accounting and Reporting Standards, which is globally recognised.

When selecting the right standard, it is important to ensure that it specifies the significant sources of GHG emissions and the correspondent scope that an organisation should consider when measuring the carbon footprint. There is need to define clearly the scope one, two and three emissions as companies determine their emissions.

Scope one emissions arise from the generation of electricity and heat, non-electric, business travel by company-owned vehicles as well as the industrial processes emissions.

Scope two will include purchased electricity and heat and steam that a company may be using among other purchased elements. On the other hand, scope three will cover business travel both public and private as well as flights, waste and wastewater management and food consumption as examples.

Based on the trio, organisations will need to reduce their GHG footprint as much as possible to ensure the credibility of their climate actions.

Once an organisation has measured its GHG emissions and recognised significant GHG emissions sources associated with its activities, actions to reduce and avoid the GHG emissions from those activities as much as possible must be identified and implemented.

With a proper baseline, it will be easier for companies to figure out areas where they can take actions to reduce GHG emissions up front and come up with strategies for reducing GHG emissions. In many instances, it will not be possible to go beyond a certain point when it comes to the reduction of GHGs emissions and hence the need to have an offsetting system.

This is a tool of taking responsibility and encouraging a further reduction in emissions globally, while also bringing other sustainable development benefits such as reduced pollution, increased health, access to energy and job generation among others.

As we move towards 2050, the offsetting of emissions will evolve towards long-term carbon capture projects. I expect that organisations will need to continue indefinitely “compensating” or “offsetting” unavoided emissions through capture and storage technologies if they are going to achieve beyond net-zero emissions.

As firms consider the offsetting model, it is critical that they avoid the compensation or offsetting with carbon credits that come from projects that avoid, reduce or capture GHGs temporarily.

The carbon credits offsets need to be certified under a recognised standard that follows best international practices. This is even a bigger challenge when it comes to the voluntary markets for carbon credits which has little oversight and hence carries the risk for abuse.

Another way of resolving the integrity challenge is where the Glasgow decision allows but, at the same time, does not oblige countries that host offset-generating projects to authorise credits for use towards climate targets abroad.

Such authorisation would ensure that the same emissions-reduction unit will not be claimed twice: by the nation where the offsets were generated and by the company that bought them.