Carbon credits

Carbon credits: an essential part of corporate sustainability, or greenwashing?

Samuel Wrest

Given the range of opinions on carbon credits, how should corporate sustainability leaders approach them?

In September 2020, Carney, alongside Standard Chartered chief executive Bill Winters, launched the Taskforce on Scaling Voluntary Carbon Markets, an initiative to create a global carbon offset market.

Carbon credits allow buyers to offset their own polluting activities by paying for projects that reduce or prevent emissions elsewhere. Currently, the voluntary carbon offset market is worth about US$300 million per year, but Carney argues this figure could reach US$50-100 billion annually.

Yet, several environmental advocacy groups expressed concerns about Carney’s initiative, arguing that carbon credits will only give cover to polluting companies and do little to actually cut emissions. John Sauven, executive director at Greenpeace UK, said “Carney’s scheme will serve as a giant get out of jail free card for polluting companies.”

Given the range of opinions on carbon credits, how should corporate sustainability leaders approach them? Are they a practical and accessible way to reduce emissions, or merely a tool for ‘greenwashing’?

Carbon credits at a glance

Put simply, a carbon credit allows a polluter – whether it is a company, government, individual, or other entity – to pay another organisation to remove greenhouse gases from the atmosphere, or prevent them from being emitted in the first place. Projects that accomplish these goals are awarded carbon credits, which are then sold on a marketplace. One carbon credit is a certificate verifying the removal or prevention of one tonne of carbon dioxide equivalent.

Carbon offset activities include restoring forests and wetlands, distributing clean technology, and capturing methane from landfills, among innumerable others. Purchasers can buy credits from companies and non-profits in support of specific initiatives.

Carbon credits are based on the concept of ‘additionality’, meaning that greenhouse gas reductions are only counted if they would not have otherwise happened without the purchase of credits. If a polluter is aiming to attain net-zero or carbon-neutral emissions, they will buy an offset that is equivalent to their own polluting activities.

The global carbon credit market has grown rapidly over the past several years. McKinsey projects that carbon credit purchases in 2020 were worth 86 million tonnes of carbon dioxide equivalent – over double the amount from 2017.

Reaching carbon neutrality through carbon credits

The main advantage of carbon credits is their immediate accessibility – companies can instantly purchase them, regardless of their industry. Rather than rely on costly long-term investments that may not succeed, companies can contribute to projects that have immediate effects.

Carbon credits finance environmental projects around the world. A company based in the UK might, for example, determine that it can have greater impact contributing to reforesting in Brazil or Indonesia rather than be limited to its own operations.

This is especially important for companies facing constraints on their capacity to decrease emissions. For instance, an airline might find value in purchasing carbon credits because there is currently no viable alternative to the fuel their planes need.

Carbon credits are also valuable to companies aiming to become carbon neutral in their own operations. For many companies, adopting the practices, infrastructure, and technology to become carbon neutral is a long-term project, making carbon credits a useful bridge during the transition.

Do carbon credits lead to greenwashing?

Critics of carbon credits argue that, in practice, their implementation is inconsistent, and that they can disincentivise companies from adopting more sustainable practices themselves.

It is unclear whether some carbon-saving projects are actually effective, a problem made worse by inadequate oversight. For example, a ProPublica investigation found that several carbon credit projects did not offset near the amount of emissions they promised, while Verra – a non-profit that sets quality assurance standards for carbon credits – approved failed projects. Similarly, another report found that hundreds of millions of tonnes of carbon credits went towards low quality projects, such as those that were already completed or offered little or no additionality.

Further, up to 20 percent of the costs of carbon credits go towards operating costs rather than the actual carbon offsetting activities. There are also for-profit carbon credit retailers who re-sell credits in smaller portions at a markup.

Carbon credits may inadvertently allow polluters to escape climate responsibilities. Some analysts fear that national governments will consider voluntary carbon credit purchases by businesses as part of their national contributions under the Paris Agreement, leading to “double claiming” of projects and failure to lower emissions.

This issue is related to a deeper criticism of carbon credits – that they allow well-resourced companies to claim carbon neutrality, thereby reducing their incentives to adopt sustainable practices in their own operations and communities. In this sense, carbon credits may be a moral hazard that allow companies to appear carbon neutral while polluting just as much as before. Meanwhile, companies adopting structural changes to their operations may not immediately be carbon neutral, but could more sustainably reduce their emissions over time.

Adopting a holistic approach to offsetting carbon

While carbon credits have so far left a mixed legacy, the concept may still have untapped potential. Promoters of carbon credits, like Carney, envision a future marketplace that is more global, standardised, and transparent. A more mature and well-regulated marketplace, supporters argue, will solve the current system’s flaws, allowing the underlying logic of carbon credits to flourish.

Still, many companies value concentrating resources towards internal practices rather than carbon credits, including changing their governance structures, embedding sustainability into different functions, and finding innovative ways to cut emissions.

Sustainability Leaders recently spoke to a Sustainability Manager at an energy company who explained, “We could achieve our CO2 targets by investing heavily in carbon credits, but that would not really make us carbon neutral.” He continued, “Doing so would not reduce the greenhouse gases that exist in our scope 3 value chain, which account for about 80 percent of our footprint. To improve, we have to work closely with our suppliers and consumers.”

Sustainability practitioners who take a holistic view that includes not only a company’s direct emissions, but also those in upstream and downstream value chains, may discover opportunities to cut their carbon footprint that were not immediately obvious. For these companies, carbon credits may prove to be part of a broader strategy to spread sustainable principles throughout their own organisations and those of their partners.

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