Commentary
Companies and Carbon Credits: From Anecdote to Evidence

Last week, the Board of Trustees of the Science Based Targets initiative (SBTi) announced that they will recognise the responsible use of carbon credits and other environmental attribute certificates toward a portion Scope 3 emissions for achieving net-zero targets. This is a significant milestone for the market, not just for companies with ambitions to decarbonise, but for nature and project stakeholders who will benefit from the increased funding that this decision should initiate.

But the announcement is already rekindling the debate between market proponents and critics. Proponents argue that it could give companies much-needed flexibility on their net-zero journeys, which will ultimately accelerate climate action. Critics fear that this flexibility will give companies a “get out of jail free” card that allows them to maintain business as usual; or at least delay other steps they could be taking to reduce their emissions.

So what does the evidence say? Well, to date, this debate has been largely anecdotal – what do we think or feel is happening? The good news is, thanks to new research and analysis, we now have a clearer picture of not only how companies currently use carbon credits, but about what role carbon credits can and should play in credible and responsible climate action moving forward.

The findings? In short, the SBTi Board of Trustees is following the evidence, which points to the VCM being a valuable decarbonisation tool to support companies on their journey to reach net-zero targets. With the appropriate guardrails, carbon credits enable responsible businesses to immediately accelerate their action on climate, and can ultimately support more climate action than a focus on internal emissions reductions alone.

Here are three recent studies and their findings:

1/ Ecosystem Marketplace – The Role of Carbon Credits in Corporate Climate Strategies

In October last year, Ecosystem Marketplace released new research that suggests that companies that participate in voluntary carbon markets (VCM) are leading across a range of measures of robust climate action, accountability, and ambition—across the board, outperforming companies that do not buy carbon credits.

Findings include:

• Companies engaging in the VCM are reducing their own emissions more quickly than their peers. They are 1.8 times more likely to be decarbonizing year-over-year and the median voluntary credit buyer is investing 3 times more in emission reduction efforts within their value chain.
• Voluntary carbon buyers are more likely than non-buyers to have targets to address climate change, and their targets are more ambitious. They are 3.4 times more likely to have an approved science-based climate target and are 3 times more likely to include Scope 3 Emissions in their climate target

This reinforced earlier findings from Trove Research (now MSCI) that found that companies that use material quantities of carbon credits are decarbonising at twice the rate of companies that do not use carbon credits.

2/ We Mean Business – Accelerating Corporate Climate Finance Through Carbon Markets

In March this year, We Me Business – together with the Intercontinental Exchange (ICE) and Bain & Company – published research that suggests companies would substantially boost their climate investments (more than double them) if the corporate net-zero architecture recognizes and rewards investments in transparent, high-integrity carbon credits.

Findings include:

• 71% of companies say the VCM allows them to do more to decarbonise (not less).
• 61% of companies say purchasing quality carbon credits incentivises decarbonisation.
• 51% of companies say climate finance is “use it or lose it”. That means if they are dissuaded from offsetting, they are absorbing the funds.

3/ AlliedOffsets – High Integrity Demand in the VCM: Forecast Analysis

 The International Emissions Trading Association (IETA) commissioned AlliedOffsets, as part of its recently issued VCM Guidelines, to consider whether the volume and pace of emission reductions could be increased through different compensation ‘use cases’ for carbon credits. Published in April this year, the modeling looks at the role carbon credits can play in compensating for corporate greenhouse gas (GHG) emissions where there is a high risk of such corporates missing their climate targets, or where such corporates are struggling to reduce their GHG inventory at the pace physically required by climate science to achieve the Paris Agreement goals.

Findings include:

• 81% of companies have not yet set climate targets. This represents 63 gigatons CO2e and should be a greater focus of our attention.
• Among companies who have set targets, Scope 1 and 2 emissions have exceeded reduction targets by 26%, and Scope 3 emissions by 62%, per year on average (1.5 gigatons CO2e) that should be addressed through carbon credit purchases
• Assuming this rate of under-delivery on targets continues, this could represent 4.5 gigatons CO2e in 2030 (14 Gt CO2e in 2050).

A similar report from last November by MSCI found that if only firms that are on-track to achieve Science Based Targets initiative (SBTi) Scope 1 & 2 emissions targets can use carbon credits to bridge the Scope 3 gap, this could create a demand for carbon credits of 640 megatons today and 2.2 gigatons CO2e in 2030. This would require an additional expenditure of $19 billion today and $65 billion in 2030, assuming a $30/t carbon price.

Taken together, these pieces of analysis paint a compelling picture that carbon credits are not only currently being used as part of more ambitious overall climate plans, but that there is an important opportunity to boost corporate climate investments and accelerate corporate climate action through carbon markets. This of course assumes alignment with some fundamental guardrails, such as ensuring that carbon credits are not seen to be, or used as, an alternative to internal emissions reductions.

Why does this matter for nature? Well, simply put, the voluntary carbon market has the potential to fill a significant portion of the funding gap. In 2022, US $200 billion was directed to nature-based solutions, but this must triple to reach US$542 billion per year by 2030 and quadruple to US$737 billion by 2050.

A high-integrity voluntary carbon market has the potential to mobilise, at speed and scale, billions of dollars a year in additional climate finance that removes carbon or cuts emissions that help the world stay within the 1.5 degrees C limit of the Paris Agreement, and that benefits communities and ecosystems more broadly.

With high-integrity standards in place, the VCM can also build resilience and transfer wealth to the world’s most vulnerable countries and support sustainable development and the livelihoods of Indigenous peoples and local communities.

The value of the global VCM topped $1 billion in 2021 and could be worth between US $5 – 30 billion per year by 2030.  Nature-based credits made up 46% of VCM market share in 2022, and credits connected to nature-based solutions were a primary driver of high market value. Perhaps as much as two-thirds of market growth could be channelled into NBS.

There is now a growing body of evidence to show that the VCM has evolved and continues to evolve, and that we are moving forward into a VCM2.0 era. We are putting the days when companies could wash their emissions away with weak claims in the rearview mirror. With the support of science-backed guidelines and strong standards, the VCM is proving itself as a valuable tool, available now and at scale, for companies with an existing commitment to decarbonising and those who are yet to start their decarbonisation journey. Additionally, and perhaps more importantly, it is also providing a vital source of finance for nature and the stewards of nature.