Carbon credits – a robust tool or a distraction?
In late June, Nestlé became the latest company to announce a move away from the use of carbon offsets to instead focus on emissions reductions in its value chain. This move follows similar announcements from companies including EasyJet and Leon, who have both withdrawn ‘carbon neutral’ products from their consumer offerings amidst an acceleration of such claims being disputed in the courts. Indeed, Nestlé itself is currently facing a legal challenge from a French consumer group over claims that its Nespresso brand is carbon neutral.
In a previous insight, Sancroft explored the role offsetting can play in a company’s transition to net-zero emissions, despite their shortcomings. We discussed how offsets can be a critical tool to balance companies’ greenhouse gas emissions that are emitted after all reasonable efforts have been made to reduce them, also known as residual emissions. However, most companies are not at a stage in their net-zero journey where carbon credits can offset residual emissions as significant reductions are still needed. Despite this, many have relied on offsetting schemes in their climate pledges in a bid to claim carbon neutrality. These claims are resulting in mounting reputational, regulatory and litigation scrutiny across the UK, US, and Europe.
Using carbon credits to claim the offset of emissions other than residuals carries inherent risks. Nevertheless, there are still opportunities for companies to engage with carbon credit projects and make positive climate contributions, making the question of whether or not to engage in a carbon credit strategy a difficult one.
The case against offsetting to claim carbon neutrality
The tide is turning against the use of offsets to claim carbon neutrality: adverts claiming neutrality through offsetting are likely being banned by watchdogs in both the UK and the EU. Regulators are also introducing legislation to protect consumers and promote competition, and even individual consumers are taking companies to court (link).
Criticism is normally based on the following:
- Offsets are seen as a dangerous distraction and a licence to pollute: offsetting may be used by companies to appear proactive in addressing climate change, but it often involves merely throwing money at the problem instead of taking the difficult, but urgently needed, steps to reduce emissions within operations and in supply chains.
- Not all credits are created equal, and many don’t deliver the impact they promise: the voluntary carbon market – which is self-regulated – is still immature, and many projects do not reduce or remove the emissions they promise to. The majority of carbon credits in the voluntary carbon market today are either renewable energy projects or nature-based solutions, both of which face criticisms:
- One of the key characteristics of a high-quality credit is its ‘additionality’ which means the carbon reduced/removed is greater than the ‘business-as-usual’ scenario. However, many renewable energy projects are not additional as such forms of electricity generation are now cheaper than fossil fuels in many developed countries, meaning there is already a strong incentive for investing in renewables without the need for carbon credits.
- For nature-based projects, such as avoided deforestation and conservation projects, there are severe difficulties in calculating the appropriate baselines from which carbon reductions are assessed, leading to many being criticised as ineffective. Additionally, nature-based solutions do not store carbon permanently and are susceptible to damage. For example, in June, intense wildfires in Canada damaged a forest carbon credit project, releasing carbon that had previously been claimed as an offset against companies’ emissions. As climate change impacts worsen, future such events may become more commonplace. Alternative projects with strong additionality and long-lived carbon storage – such as enhanced weathering and biochar projects – are still in limited supply and expensive.
- Neutrality claims often do not indicate the scope of activities and sources covered: carbon neutrality should refer to the neutralisation of all the emissions that are emitted with the carbon that offsets absorb. Unfortunately, many neutrality claims don’t clearly indicate the scope of activities covered and often only include emissions from operations – omitting emissions which originate from companies’ value chain (scope 3 emissions). Additionally, it is often not specified whether neutrality claims cover CO2 emissions only, or whether other greenhouse gas emissions or other warming effects are also included. Inconsistent claims may confuse consumers into thinking big strides have been made to compensate for all emissions produced, when often the vast majority have not been accounted for.
The value of carbon credits: Why they shouldn’t be disregarded completely
When used appropriately, carbon credits can be an additional tool for companies to enhance their positive climate impact. Carbon credits have the potential to mobilise climate finance towards projects that deliver significant value to people and the planet but would otherwise be commercially unviable. For example, mangrove restoration projects can provide jobs as well as natural sea wall defences for local communities, create habitats for biodiversity, all whilst rapidly absorbing carbon, thus supporting multiple Sustainable Development Goals. This financing mechanism can also incentivise innovation and the development of novel carbon removal technologies.
These benefits are most likely achieved when credits are of high-quality. While credits available on the Voluntary Carbon Market (VCM) vary widely in quality today, best practice is fast-evolving to ensure the integrity of carbon projects. The development of the Core Carbon Principles (CCPs) by the Integrity Council for the Voluntary Carbon Market or the Oxford Principles for Net Zero Aligned Carbon Offsetting are among new guidance developed in recent years to minimise risks and ensure high-quality credits throughout the VCM.
Best practice guidance should form the basis from which extensive due diligence is conducted to select high-quality credits, with the acknowledgment there can never be a 100% guarantee that the invested project will deliver the promised impact.
Exploring alternatives: unveiling the potential of credits beyond carbon neutrality claims
Given the many benefits that carbon projects can bring, companies can channel additional finance to high-quality projects and make climate contributions without claiming credits as offsets to their own-value chain emissions. By funding projects around the world that reduce, avoid, or remove GHG emissions through carbon credits, companies can support collective global efforts to reach net-zero. Supporting actions that fall outside a company’s value chain – also known as Beyond Value Chain Mitigation (BVCM) – has been encouraged by the Science-Based Target Initiative (SBTi) and the Voluntary Carbon Market Integrity Initiative (VCMI) due to the urgency of the climate crisis.
In light of the urgent need to tackle climate change, any tool that contributes to these efforts has importance and is worthy of consideration. Yet it is also important for companies to consider how financing a particular carbon project aligns with their overall sustainability strategy and the industries they operate in. How to credibly communicate such actions without greenwashing adds further complexity and requires due consideration of what other actions you are taking, as well as who your major stakeholders are and what their expectations are.
Should your company engage with carbon credits?
In short, whether companies should participate in the financing of carbon projects is not a simple yes or no answer and will depend on multiple factors. If carbon credits are desired, the necessary plan of action adds a further layer of complication. As we have discussed, it’s not just about the rights and wrongs of offsetting, but it is also understanding the different ways that any action may be perceived by stakeholders.
Sancroft has significant experience in helping our clients to identify the course of action that is appropriate for them regarding this complex and nuanced topic. With our 25-year history of providing trusted advice to leading companies and financial services businesses behind us, this isn’t the first controversial topic that we have helped our clients navigate, nor surely will it be the last.
If you are questioning what stance is most appropriate for your company, please contact: alex.miller@sancroft.com or noelle.smits@sancroft.com