Carbon Credits in 2024: Asset or Liability?
Every corporate sustainability leader who is now laying out a climate plan for 2024 or 2025 will wonder at some point: should I spend money on carbon credits?
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The traditional logic around companies and carbon emissions goes something like this: companies should reduce all of the emissions they can, and then turn to carbon offsetting to deal with the remainder. Carbon credits are at odds with reductions, so reductions should come first.
But there’s mounting evidence that companies aren't as good at reducing emissions as they claim to be, and old logic needs to be revisited. Nearly a decade of climate target setting has shown that companies are quick to make pledges and promises, but not as quick to make investments to meet them. Last month, the Science Based Targets Initiative pulled more than 200 companies from its list because of a lack of progress toward reducing emissions.
At the same time, research has shown that reductions and offsetting are not as counterposed as previously thought, and companies that buy carbon credits tend to show better reduction progress.
If you’re a potential buyer of carbon credits, last year’s upheaval in the voluntary carbon market (VCM) makes it tough to get excited. A mixture of tough news, high profile lawsuits, and market setbacks cast a dark shadow, and buyers are having a hard time seeing the path forward. It is now difficult to justify carbon credit purchases that two or three years ago would have been obvious.
The bad press will have you focused on all the reasons not to buy carbon credits: carbon credits cost money you wouldn’t otherwise spend, and some carbon credits are worthless. If scrapping carbon credits reduces your cost and risk, why not do it and become your CFO’s hero?
Many companies are unsure of what to do next. Some have canceled purchases altogether. Others have reduced their commitments and stopped talking publicly about them, fearing backlash. Some, however, are keeping right on with their plans to buy carbon credits.
Market analysts appear to be just as confused as buyers. In its latest carbon market report, BloombergNEF described an all-or-nothing future. The VCM could either be on its way to reaching $1.1 trillion in value, or we could soon see the “death of the broader market.” Equally possible is that the market continues to limp along as it did for more than a decade before the excitement of the last few years.
What buyers decide to do this year, and in the next few years, will shape which of those alternative fates becomes reality. If more companies decide to stick with the VCM rather than walk away, it will become a powerful climate mitigation tool. But to make that choice, people will need to feel more confident that the market has potential, and believe that it is necessary as a climate solution.
Fortunately, amidst the market disturbance, NGOs and investors have poured money into bolstering market quality. A massive oversight initiative known as the IC-VCM is now stamping standards and classes of projects that meet its integrity threshold. In addition, a new system of project-level quality ratings is now available from providers such as BeZero, Sylvera, Calyx, and Renoster.
There are signs that the U.S. federal government could also get in the game, with the CFTC proposing to regulate certain parts of the market. Longtime market rule-makers are reviewing and overhauling rules and processes for verifying carbon credits. And a notorious high volume, low quality standard known as the CDM is now all but obsolete – a good thing for the market.
These boosts in oversight have made it easier to believe in the future potential of the market. But is it even necessary?
Barring a technological miracle, global net zero is not possible without a large scale carbon market.
There is not a shred of evidence that the corporate sector is on track to meet science-aligned reduction goals across their supply chains – not in the data, and not when you talk with companies directly. Failure to make progress in these systems is the main reason why companies are falling well behind the net-zero-aligned pace of greenhouse gas reductions.
For some companies, the obstacle to reductions is simply a lack of investment. For others, however, it is a lack of options. It is not always obvious how to make decarbonization happen. This is especially true for smaller businesses, who have less control over their supply chains.
With just 26 years until 2050 and net-zero nowhere within reach, rather than fixating on the primacy of corporate reductions, the most climate-smart prescription is for companies to create budgets for decarbonization and then reliably spend them across a mix of reduction activities and carbon credits.
Using this approach would unlock billions of dollars for GHG mitigation. It would get investment flowing broadly and immediately into projects that accelerate carbon reduction and removal within complex energy and natural systems, without crowding out investment in operational improvements.
The VCM and supply chains share a common problem: they both have a massive need for decarbonization investment. Rather than trying to satisfy the traditional, rigid, either-or logic, the top priority for every sustainability leader should be to get investment out the door. Some years this may require buying carbon credits, alongside planning and investing in supply chain projects. Other years it may mean devoting all resources to reduction projects. Together, a portfolio approach to climate investments can draw a much higher level of finance for the net-zero transition than if internal spend and carbon credits are pitted as mutually exclusive.
To be clear, under no circumstances is a single carbon credit purchase ever “enough”. And buyers still must be choosy about what they buy, including thinking about constructing portfolios to deliver a combination of short term and long term benefits.
But as part of a long term commitment to decarbonizing, the VCM provides needed options to companies to round out a net-zero aligned investment strategy. With recent market improvements, those options have gotten substantially better. The right oversight plus higher investment levels will get the VCM to deliver the systemic transformation that is needed alongside supply chain investment.
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Austin Whitman is the CEO of The Change Climate Project. He started working on climate and clean energy 19 years ago and believes companies and individuals can make a huge difference for the climate if they're just shown how. When he's not engrossed in organization-building, he's probably with his family or being an amateur at one of his many hobbies.
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