The Voluntary Carbon Market: A Valuable Addition To Your Decarbonization Strategy
Each year, there are more opportunities for meaningful corporate climate action and greater global risks of corporate inaction. Companies start their climate work quietly at first: working internally to set the foundation - accounting for, and coming to terms with, their Scope 1, 2, and 3 emissions; tracking annual emissions fluctuations, eyeballing absolute and intensity based targets, prepping (often reluctantly) for climate disclosures..and then companies take the plunge. They publicly commit to near-term targets (next five to ten years) and publish a net zero commitment. This may sound formulaic but it’s incredibly complex; companies need agility and endurance - they need hurdlers and long-distance runners.
And companies need multiple achievement pathways. One supplementary pathway for companies to address climate change is by participating on the voluntary carbon market – by purchasing carbon credits: RECs and offsets. (Cue the song “Who will buy,” in Oliver.)
Renewable Energy Credits (REC)
When your company buys and retires one “REC” it is taking credit for the generation of one megawatt-hour of renewable electricity. The generation of that electricity (fueled by wind, solar, hydropower, or biomass) and the generation site is often hundreds of miles away from the company’s site (unlike the local or state utilities that supply the actual electricity being used at the company’s facilities).
One of the major corporate decarbonization objectives is for each facility to be powered by 100% renewable energy - reducing your Scope 2 emissions to nearly zero. But if your company operates in a regulated state or has an existing long-term utility contract, you can’t shift away from the fossil-fuel-generated electricity supplied by your utility. While you are securing internal buy-in and funding for an onsite renewable installation, your company can purchase and retire (use) RECs to demonstrate commitment. Important considerations:
It’s simplest for companies to purchase unbundled RECs, but they are less likely to drive new renewable energy projects than bundled RECs.
There is a complicated timing widow (21 months) of when you can purchase and use / retire the credit.
Carbon Offsets
When a company purchases an offset, they are funding environmental projects that lower or sequester CO2 emissions (sequestration is a naturally-occurring process that essentially pulls carbon out of the atmosphere and stores it). Offset projects include reforestation, building renewable energy, agricultural activities that sequester carbon, and methane-capturing waste and landfill management investments. Companies can buy offsets but must report them separately from their Scope 1, 2, and 3 emissions - which means they cannot hide behind their purchases of offsets: they are accountable for their direct, indirect, and value chain emissions on their public reports to stay in conformance with the Greenhouse Gas Protocol.
On the global voluntary carbon market, carbon reduction is the currency, and here’s the permanent exchange rate: One carbon offset represents the reduction of one metric ton (2,205 lbs) of carbon dioxide emissions. Offsets vary in quality and type. Carbon offsets are verified by certain groups and NGOs, and the offsets market is undergoing a much needed assurance transformation spurred by investigations and intense media criticism in 2022. Check out our previous article about the new integrity standards (Core Carbon Principles) for carbon offsets.
Recap on Using RECS and Offsets to Address Residual Emissions
Each year, companies must do the hard work to see real (absolute) carbon reductions: prioritizing, funding, and executing projects that reduce their Scope 1, Scope 2, and Scope 3 emissions. However, decarbonization generally takes place over decades. To address “residual” emissions, companies can purchase the carbon credits described above to demonstrate commitment and conceptually cancel out a portion of their emissions footprint.
Net Zero
Taking a long-term view: it’s expected that our society will be able to achieve 95 percent decarbonization, leaving that 5 percent – which is why we have the “net” in front of zero for the global 2050 goal (net zero). By stating net zero (rather than absolute zero), we are accepting that there will always be hard-to-abate emissions. So certain environmental projects and multiple reduction pathways are critical to help us achieve a global steady state: the amount of greenhouse gases emitted is equal to the carbon being captured or canceled out by an offsetting project.
When companies strategically purchase high quality offsets and renewable energy credits (REC) to address their residual emissions, and transparently demonstrate how they are integrating those credits into their decarbonization strategy, it is a positive indicator of a company’s commitment and sustainability vision.
Carbon Markets - Voluntary versus Regulatory
A voluntary market is one that is optional; there is no government regulation requiring companies to purchase offsets or RECs to address their corporate emissions. The voluntary carbon market allows companies to funnel money to environmental projects and take credit for the (estimated/conceptual) emissions reductions that result from the work. The environmental projects include forest protection, capturing methane and landfills, implementing lower-carbon agriculture, and another growing industry for carbon markets is carbon removal technology.
Cap & Trade Programs - Mandatory Regulation-based Systems
The non-voluntary version of this is a compliance carbon market - such as the EU’s emissions trading system (EU ETS), where carbon credits are bought and sold for the purchase of meeting regulatory requirements. Each year, a new and lower “cap” is placed on the market - establishing a maximum total amount of carbon available to all actors in that system. In the US, we have the Regional Greenhouse Gas Initiative (RGGI) which establishes a carbon cap for the power plants in ten US states, and California’s Cap-and-Trade Program. Because these programs are focused on reducing the emissions produced by power plants, the investments made to meet the regulatory limits benefit companies’ Scope 2 - each year they procure lower and lower car bon electricity to light and operate their facilities.
Trading Systems versus Carbon Credit Markets
In the case of trading systems, states can trade their carbon credits - how much they’re allowed to emit. In the case of voluntary markets, brokers can buy and trade RECs to companies. For companies, there are a wide variety of options for both RECs and carbon offsets - so as a company, you can shop around (at the national market for RECs and global market for offsets).
Conclusion
Carbon credits can be valuable tools for companies to demonstrate a commitment to sustainability and have a positive national and international impact. However, it's critical to buy carefully, scrutinize your options, think long-term, and position this tactic as supplementary within your overall decarbonization roadmap.
If your company is looking for guidance on how to responsibly participate in the carbon market to meet corporate sustainability goals, contact Uplift. Our team of experts can help you assess your emissions, identify opportunities for emissions reductions, and develop a strategy for using credible carbon offsets and carbon credits to achieve sustainability objectives.
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Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
We know how to navigate the road ahead because we’ve already been down it – 90 percent of our team has led environmental or social programs in corporations or nonprofits. Because ESG is all we do, our services are more comprehensive and integrated than most firms.
