Rising demand will require greater transparency and oversight
The current market value for carbon credits exceeds $2 billion. McKinsey predicts that the market value could exceed $50 billion in 2030 as carbon credits gain importance closer to 2030 and 2050. After the scandal of the forestry-related carbon credits, their demand experienced a drop from 380 million in 2021 to 359 million in 2022. However, interest in other forms of carbon credits continues to increase. The interest in carbon credits is also reflected in research, which grew more than 30-fold from 2000 to 2022. With rising demand for carbon credits, improvements to their viability need to be implemented. Like any supply chain, transparency, traceability, and monitoring of the carbon market are key to its success. Advancements such as using blockchain technology to help improve transparency in the carbon market have not yet materialized. Meanwhile, satellite imaging is already being used to monitor carbon credits generated from forests and rice paddies to ensure the fields and agricultural practices which correspond to those credits are maintained in the future. Moreover, groups such as the Integrity Council for the Voluntary Carbon Market have already started working on publishing a set of Core Carbon Principles to test the verification process used by carbon credit standards such as Verra. The principles will act as a reassurance to the validity of the carbon credits bought.
The need for more regulation to audit the use case of carbon credits
Against this backdrop, several companies are starting to change their minds on how to use carbon credits in their sustainability strategies. According to a sustainability manager in one multinational company: “The big change in mentality is going from offsets to insets.” The fight against climate change will not be won if organizations offset their emissions instead of decarbonizing their own value chains. The rising trends and high records of global carbon dioxide from energy combustion pose a question on whether firms are truly reducing their emissions or will eventually rely on the carbon market to achieve their net zero targets. It is therefore important to have independent sustainability-auditing organizations that analyze the use case of carbon credits in a firm’s emission reduction journey.
On one hand, if the firm’s use of carbon credits is to offset emissions that are unavoidable and cannot be reduced by other means, then the carbon credits can be counted towards the firm’s net zero target. On the other hand, if carbon credits are merely used as a tool for a firm to buy itself out of its carbon impact and continue business as usual, audits should ensure that these credits are not counted towards the firm’s net zero target.
With an increasing interest in carbon credits and their trade, the reason behind the increasing number of firms investing in more agricultural and forestry practices seems somewhat questionable. Are these firms investing in such practices for the greater good, or is it an investment to generate carbon credits that will eventually be traded with high profit returns in the future? With a projected increase in carbon credit prices, the latter seems to be a very attractive investment opportunity. Therefore, comprehensive governance and regulations must be imposed on the carbon market to avoid it turning into another commodity traded more or less exclusively for profit.
What next for firms?
It is crucial for firms to start analyzing trajectories of their emission reductions. Based on their trajectories, they can decide on whether they can truly achieve net-zero operations given their respective timelines by using the available levers, or whether they need to invest in other alternatives such as carbon credits. Due to economic, operational, or procedural constraints, companies may still have residual emissions after aggressive internal decarbonization. If purchasing carbon credits is the only way forward after exhausting all other emission reduction strategies, firms must ensure that the credits they are investing in truly reflect the amount of reduced emissions.
By being transparent in their reporting and claims, and prioritizing internal emission reductions, firms can achieve credibility for using carbon credits. A recent report by Carbon Market Watch shows the transparency and integrity of several companies by assessing both their emissions reduction and offsetting claims. While Maersk ranks the highest in overall transparency and integrity compared to the other companies listed, they show only moderate transparency for their future offsetting plans, meaning they were only ranked reasonable in overall transparency and integrity in the Corporate Climate Responsibility Monitor 2023 assessment.
Naturally, profitability is important to firms and they can purchase the credits that are deemed necessary before prices are expected to increase. Firms that see investment in credits purely as a mere trading opportunity, however, will need to reflect on how this might negatively affect their image even if they manage to reach their emissions targets.