Month: March 2024

How a gas purchase agreement (GPA) could help address your scope 1 emissions

Briana Amoroso, March 29, 2024

Companies that have already purchased renewable electricity to address their scope 2 emissions are increasingly turning to renewable natural gas (RNG) as a way to tackle their natural gas emissions. RNG is a more sustainable alternative to natural gas that is produced from organic waste materials like agricultural residues, landfills, or wastewater treatment plants. Although the RNG and fossil-fuel gas molecules are indistinguishable from each other, the former provides a less carbon intensive alternative to conventional natural gas.

Similar to organizations using power purchase agreements (PPAs) to procure large amounts of renewable electricity, organizations are signing gas purchase agreements (GPAs) to do the same for RNG. In fact, GPAs have recently gained popularity as a procurement tactic to promote the deployment of RNG plants at scale.

Although there are numerous benefits to GPAs, there are also associated risks that are important to consider. In this blog, we discuss what GPAs are, their pros and cons, the types of companies that stand to benefit from them, and emerging industry guidance related to GPAs.

A Brief Overview of Renewable Natural Gas (RNG)

RNG is bought and sold in voluntary and compliance markets in the US and in Europe (referred to as biomethane in Europe). When RNG is produced, both the gas molecules and an associated certificate are produced. These RNG certificates are referred to as renewable thermal certificates (RTCs) and can be procured using spot contracts or book and claim contracts — both allow a company to continue using their existing gas supply. Alternatively, a physical supply contract would include the gas in addition to the RTCs, or companies may also have onsite production of RNG by owning onsite digesters.

While all RTCs have a set climate benefit, the real world benefit of RNG could be enhanced through the choice of feedstock. Available RNG feedstocks vary, but include sources such as agricultural waste, livestock manure, municipal waste, and wastewater treatment facility effluent. The choice of feedstock impacts the sustainability and emissions reduction potential of the RNG and makes it possible for corporate buyers to select sources that align with their environmental and operational objectives. This choice can impact the price of RNG as it is determined by a number of factors, but is often tied to its emissions reduction potential.

To learn more about RNG feedstocks, carbon intensity, and other considerations for RNG, check out our recent blog post.

What is a Gas Purchase Agreement (GPA)?

A GPA is a contract through which companies can obtain RTCs from a specific renewable energy project or feedstock in a direct agreement with a project developer. There are many benefits to GPAs, which we’ll cover later in this blog, but to start, GPAs enable due diligence as the production process, site, and environmental impacts become visible to the buyer. To avoid double counting when procuring certificates from specific sites, the amount of RNG produced and its corresponding certificates must equal the amount claimed by the buyer.

As opposed to a one-off spot RTC purchase, GPAs are time bound and vary in term length (typically 7-20 years) — this can assist the buyer in procuring RTCs at a set price over that same time period.

Contract structures for GPAs are flexible and fall into three main categories:

Book and Claim: In these agreements, buyers use a direct contract to obtain the RTCs, or other certificates representing the environmental attributes, produced by specific facilities; however, the RNG is not directly delivered to the buyer. These virtual structures consist of a contracted amount of RNG to be injected into the grid.
Mass Balance: Under this structure, both the RNG and RTCs, or other certificates representing the environmental attributes, are delivered to the buyer. In this scenario, the buyer does not actually receive the RNG molecules from the facilities included in the GPA. Instead, the contracted volume from the facility is injected into the grid by the supplier and is mixed with the natural gas already in the pipeline. The buyer then withdraws an equal volume of natural gas elsewhere from the grid, while retaining the certificates.
Physical Separation: Similar to onsite solar, an RNG facility is developed on the buyer’s premises, or close by, so the physical RNG molecules from the plant are consumed in their operations, leading to immediate GHG emissions reductions as it displaces conventional natural gas in the buyer’s supply. In some cases, the RNG is produced nearby and is trucked or piped in directly to the buyer. No certificates are needed since the gas is directly consumed.

Benefits of Gas Purchase Agreements

GPAs are proving to be instrumental in helping companies reduce their carbon footprint and achieve their sustainability objectives. The advantages of GPAs extend beyond emission reductions, offering six key benefits to companies that wish to further their climate action:

Reduced Scope 1 Emissions: With some important caveats regarding reductions claims from the GreenHouse Gas Protocol (GHGP), RNG enables organizations to significantly reduce their carbon footprints and associated scope 1 emissions by replacing fossil fuel-based natural gas with gas from renewable sources. This shift supports environmental sustainability efforts while aligning with emission reduction goals.
Supply Selectivity: Unlike spot purchases, GPAs allow buyers to choose specific RNG production facilities that best align with their objectives.
Long-Term Viability: GPAs support the long-term viability of new RNG projects, offering greater climate benefits than typical spot purchases. By committing to GPAs, companies contribute to the growth of clean energy infrastructure and directly impact the available supply of renewables.
Transparency and Accountability: GPAs facilitate direct engagement between buyers and producers, ensuring transparency in the procurement process. Buyers can conduct due diligence on selected RNG facilities, evaluating feedstock sources, operational practices, and environmental impacts for more accountable emissions reporting.
Mitigation of Price Volatility: Buyers can mitigate gas price volatility through mass balance or physical separation GPAs if the contract price is fixed, though not if they are indexed. Whereas, book and claim GPAs may offer a hedge against a buyer’s retail gas purchasing strategy if the GPA settles against the same index. These hedged positions are crucial for companies looking to manage and forecast energy expenses, while reducing uncertainty related to price fluctuations. Furthermore, these GPAs offer a hedge against market movements for RTCs or other certificates representing the environmental attributes.
Strategic Sustainability Planning: By aligning with reputable RNG suppliers, and selecting appropriate transaction structures and feedstock sources, companies can develop a strategic procurement strategy that aligns with their sustainability goals and operational requirements.

Overall, GPAs offer a holistic approach to RNG procurement, enabling companies to make tangible contributions to emissions reduction while supporting broader sustainability objectives. Although there are many benefits to utilizing GPAs, they might not be the ideal solution for every company. GPAs are best suited for organizations that have large scope 1 (direct emissions that are owned or controlled by the company) and have the funds to engage with the typically higher price point that RNG has over fossil fuel-based natural gas.

The Need for Certainty From Standards Bodies

Whether or not RNG can be used to address scope 1 emissions depends on how companies are procuring and using it. The Physical Separation method, where RNG is produced onsite, delivered via a dedicated pipeline, or transported by trucks (i.e., the RNG is not commingled with non-renewable fuels), is generally recognized by voluntary standards like the Greenhouse Gas Protocol (GHGP) and the Science-Based Targets Initiative (SBTi).

However, these groups have not yet finalized guidance on the use of certificates, like RTCs, to substantiate indirect RNG procurement. Initially, the GHGP stated that certificates or credits should not be used to address associated scope 1 emissions, but are now reconsidering their use in the future. SBTi currently does not allow the use of RNG certificates, such as RTCs. In the interim, organizations are advised by the draft guidance to report an average of the fuel mix in the pipeline (using a location-based approach) and report RTCs separately from the scopes.

There are three potential scenarios for the future of claiming RTCs and other RNG certificates against scope 1 emissions reductions. The GHGP could (1) permit the use of RNG certificates, (2) permit the use under strict conditions, or (3) prohibit the use of RNG certificates to reduce scope 1 emissions altogether. It is likely that whatever final decision the GHGP makes, other third-party frameworks like SBTi or RE100 will follow suit. Global agreement is that RNG is an important decarbonization tool for the future of our planet, especially for heating. Governments, consumers, and corporations want RNG, and GPAs in general, to be a more widely adopted solution.

For more on the implications of GHGP revisions on the use of RNG, see our related blog post.

A Crucial Net Zero Tool

RNG is increasingly recognized as a crucial tool for decarbonization, and GPAs are a large part of that solution. Companies considering sourcing RNG through GPAs should begin by developing a thoughtful procurement strategy. Buyers must engage reputable RNG suppliers, decide which transaction structure is right for them (e.g., physical or virtual), and choose feedstock sources that align with their sustainability goals and regional availability. Reviewing agreement terms, pricing, delivery schedules, and tenor is essential for making informed decisions – and expertise is required.

While the inclusion of different RNG procurement methods as acceptable GHGP scope 1 reduction tools depends on an organization’s reporting framework and evolving industry standards, buyers should stay informed about updates. 3Degrees is heavily involved in the voluntary and transportation markets, and is following the guidance around RNG closely.

Please reach out today to learn more about using GPAs to address your natural gas emissions or other RNG procurement strategies.

Update on the final SEC climate-related disclosures rule

Laura Vendetta, March 14, 2024

The Securities and Exchange Commission (SEC) has adopted the long-awaited rule on climate-related financial disclosures. With the global impact of climate change becoming increasingly evident, businesses and their value chains are facing growing impacts. This trend partly explains why 3Degrees has witnessed a rapid increase in corporations and businesses taking meaningful action to address the climate crisis by setting clean energy and other climate-related goals over the past two decades. In fact, a 2023 report showed a 40 percent increase in the number of companies with net zero targets over 16 months, now representing 66% of the annual revenue of the world’s largest 2,000 companies. At the same time, as companies are setting goals, investors are seeking decision-useful information on how a company evaluates and mitigates the risks associated with climate change and how these factors may impact its current and long-term financial performance and position.

The SEC points to previous rules and Supreme Court precedent in defining materiality. An impact or risk is considered material if there is a substantial likelihood that a reasonable investor would consider it important when determining investment or voting decisions. Materiality determination is fact specific and based on quantitative and qualitative considerations.

As an example, for disclosing GHG emissions, materiality is not solely determined based on the quantity of emissions but rather if a reasonable investor would consider the disclosure of emissions as important in making an investment or voting decisions.

The SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors aims to address investors’ needs by adopting rules that require registrants to disclose certain information about climate-related risks that have materially impacted (or are reasonably likely to impact) a company’s business strategy, profit and losses financial statement, or financial condition. Initially announced in early 2022, the proposed rule has undergone notable modifications from its original form after considering approximately 24,000 stakeholder comments over the past few years.

Following a review of the final rule, we will walk you through the key aspects, important details omitted, implementation timeline, and how the rule fits in with other global climate disclosure rules.

The SEC’s “Enhancement and Standardization of Climate-Related Disclosures” Final Rules

3Degrees has highlighted the specific components of the SEC final rule that may impact clients directly, including disclosure of material climate-related risks, details on climate-related targets or goals, the use of carbon credits and renewable energy certificates (RECs), and disclosure requirements for scope 1 and 2 greenhouse gas (GHG) emissions.

Disclosing climate-related risks with a material impact

The final rule creates a new subpart 1500 of Regulation S-K that requires registrants to disclose climate-related risks. It incorporates several modifications from the SEC’s initial rule in response to stakeholder concerns that the requirements were too costly, burdensome, and overly prescriptive. Based on the Task Force on Climate-related Financial Disclosures (TCFD), a well-established framework familiar to many registrants and investors, this approach aims to ease compliance burdens for registrants and help standardize climate-related risk disclosures for investors.

While the SEC adopted similar definitions to those in the the TCFD framework, they did modify the definition of climate-related risks to mean the actual or potential negative impacts of climate-related conditions and events on a registrant’s business, results of operations, or financial condition, including both physical risks and transition risk, that are material. Physical risk is defined as both acute and chronic risks to a registrant’s business. For example, acute risks would include shorter-term severe weather events such as hurricanes, floods, or tornadoes, while chronic risks would include longer-term weather patterns like sea level rise, drought, and extreme temperature changes. Transition risks include increased costs associated with climate-related changes in law or policy, reduced market demand for carbon-intensive products, or competitive pressures associated with the adoption of new technologies.

The SEC does not provide an exhaustive list of physical and transition risks but requires registrants to disclose those that are material. The final rule outlines the temporal standard for how to assess the climate-related risks with material impact by likelihood in the short-term (next 12 months), and separately, in the long-term (beyond the next 12 months).

Disclosing climate-related goals and targets

The SEC’s final rule requires that registrants disclose any climate-related target or goal if those commitments are reasonably likely to materially affect a registrant’s business, operations, or financial condition. This includes any information or explanation to help investors understand the material impact of them, including (as applicable) a description of:

The scope of activities included in the target;

Unit of measurement;

Defined timeline by which the target is intended to be achieved, and whether it is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization;

Established baseline for the target or goal, defined baseline time period, and the means by which progress will be tracked; and

A qualitative description of how the registrant intends to meet its climate targets or goals.

In the final rule, the SEC made several modifications to the proposed rule to ensure it was not overly prescriptive or burdensome. To that end, the items listed above are non-exclusive examples of the additional information that registrants must disclose if it is necessary to understand the material impact of the target or goal.

RECs and Carbon Credits

In addition to disclosing climate-related goals or targets, registrants must also disclose information related to the use of carbon credits or renewable energy certificates (RECs), if either is used as a material component of a registrant’s plan to achieve those targets or goals. It specifically requires the aggregate amounts of:

Carbon credits and RECs purchased;
Capitalized costs associated with carbon credits and RECs; and
Losses incurred on the capitalized carbon credits and RECs during the fiscal year.

If material registrants would also be required to disclose the following:

The amount of carbon avoidance, reduction, or removal represented by the credits or the amount of generated renewable energy represented by the RECs;

The nature and source of the credits or RECs;

A description and location of the underlying projects;

Any registries or other authentication of the credits or RECs; and the cost of the credits or RECs

GHG emissions disclosure requirements

Unlike the proposed rule, the final version requires only registrants classified as large accelerated filers (LAF) or accelerated filers (AF) to disclose their scope 1 and/or scope 2 GHG emissions on a phased-in basis, if such emissions are material.The final rule exempts “smaller reporting companies” (SRCs) and “emerging growth companies” (EGCs) from reporting these emissions. There are a number of qualifications that define an SRC and an EGC, which can be found in the footnotes on Page 17 of the final rule.

When material, registrants will be required to disclose any described scope of emissions in the aggregate in terms of carbon dioxide equivalent (CO2e), which is the amount of metric tons of CO2 emissions that have the same global warming potential as one metric ton of another greenhouse gas. If any constituent gas in the disclosed emissions, such as methane, is individually material,, andthen it must also be disclosed disaggregated from other gasses.

The final rule requires registrants to describe the methodology, significant inputs, and significant assumptions used to calculate their disclosed GHG emissions. However, as with other parts of the final rule, this disclosure is less prescriptive than it was in the proposal, aiming to provide greater flexibility and present the information in a manner that best fits with their particular circumstances. The proposed rule would have required registrants to use the same scope of entities and other assets in its consolidated financial statements when determining the organizational boundaries for its GHG emissions disclosure. The final rule allows for different organizational boundaries; registrants must only provide a brief explanation of this difference in sufficient detail for a reasonable investor to understand.

Additional aspects of the final rule include requiring an attestation report for registrants disclosing their scope 1 and/or scope 2 GHG emissions and safe harbor provisions for forward-looking statements in connection with certain disclosures, such as goals and targets.

Disclosure of scope 3 emissions not required by SEC’s final climate rule

Most notably, the final rule eliminates the requirement to disclose scope 3 emissions for all registrants. The SEC cited concerns over the potential burden this requirement could impose on some companies, as well as uncertainty regarding the robustness, reliability, and accuracy of data required for scope 3 emission calculations.

Timing for the final SEC climate-related disclosure rule to go into effect

The final rules will become effective 60 days after they are published in the Federal Register. Once effective, the rule will be phased in according to the registrant type of the business – LAFs, AFs, SRCs, EGCs, and non-accelerated filers (NAFs).

The timing also provides several accommodations, such as:

Additional phase-in periods for disclosures related to material spending, GHG emissions and assurances, and electronic tagging
Safe harbor from private liability for climate-related disclosures
Exempting SRCs and EGCs from the GHG emissions disclosure requirement
Allowing scope 1 and/or scope 2 emissions disclosure to be filed on a delayed basis with specific guidelines for domestic registrants, foreign private issuers, and those filing a Securities Act of Exchange Act registration statement

A view of how the SEC climate-related disclosure rule will be phased in.

Interoperability with other climate-disclosure rules in CA, EU, and ISSB

The SEC’s final climate-related disclosure rule enters a crowded field of other climate-related disclosure frameworks and regulations, such as the International Sustainability Standards Board (ISSB)’s climate-related disclosures (IFRS S2), California’s Climate Corporate Data Accountability Act (SB-253) and Climate-Related Financial Risk Act (SB-261), Corporate Sustainability Reporting Directive (CSRD) in Europe, and more. These regulations all incorporate recommendations similar to that of the TCFD framework. For registrants preparing to comply with other regulations, the burden of adhering to the SEC final rule may be minimal. Despite being a watered-down version of TCFD to reduce costs for registrants, the SEC’s final rule is still intended to work with other climate-related financial disclosures. Each of the rules has similar requirements, which can make filing for each easier.

As can be seen from these laws and regulations – along with the many jurisdictions that are considering adopting the ISSB standards, like Australia, Canada, Hong Kong, the United Kingdom, and more – the importance of climate-related disclosures and corporate compliance is rapidly increasing. 3Degrees supports the disclosure of consistent, comparable, and reliable information to help businesses and investors better assess climate-related risks.

In future content, we’ll be investigating how these climate-related financial disclosures relate to one another, so sign up for our newsletter for updates. If you need any assistance navigating this new climate guidance, please contact us.

3Degrees’s Tyler Espinoza in REnews on “New dawn rises on European wind PPAs”

Jeroen Meertens, March 12, 2024

RenewableUK has reported Europe hit a record high last year with over 16GW of new renewables capacity contracted via PPAs – a 40% increase on the year before. The resurgence has come despite several challenges in the sector, and in onshore wind in particular. According to the 3Degrees Market Insights Report the surge in commodity prices and inflation following Russia’s invasion of Ukraine, coupled with permitting and grid hold-ups, has directly impacted the supply of wind deal offers across the continent.

“A key dynamic at present in Europe, and globally, is that wind projects are in short supply. Most developers are building solar sites because they cost less to construct. That has been helped by the reduction in solar panel prices,” said senior director at 3Degrees Tyler Espinoza.

Read the full article here.

An Introduction to Biochar: Exploring This New Carbon Removal Technology

3Degrees Staff, March 7, 2024

In a time where the urgency to combat climate change has never been greater, innovative solutions are rising to the forefront of the voluntary carbon market (VCM). Among these, biochar has captured the attention of organizations, policymakers, and sustainability advocates alike, not because it’s innovative and relatively new to the market, but for its ability to remove and store carbon from the atmosphere. This carbon-rich material, derived from organic waste, is making waves for its simplicity and effectiveness, offering a scalable solution to one of the most pressing challenges we face today.

Biochar is now recognized as a new ally in our pursuit of net-zero emissions, while also playing a key role in rejuvenating exhausted soils, mine reclamation, and much more, thus reshaping our approaches to environmental stewardship and sustainable development.

The Science of Biochar

Biochar’s journey from organic waste to carbon sequestration begins with pyrolysis. This process thermally decomposes organic materials such as agricultural residues or forestry waste at high temperatures in an oxygen-deprived environment, preventing combustion or the release of CO2.

Normally, the carbon captured in the biomass would re-enter the atmosphere as CO2 through the decay of the raw material, which is key to biochar’s effectiveness, offering a form of carbon storage that can last hundreds of years in the soil.

Additionally, the heat generated through the pyrolysis process can also be utilized as a renewable energy source, positioning biochar production as a true circular solution, removing CO2 from the cycle and locking it away while simultaneously providing clean energy.

Beyond Carbon Sequestration

While a formidable ally in the fight against climate change, biochar offers a range of benefits that extend far beyond its carbon sequestration capabilities. Incorporating biochar into a corporate climate strategy not only addresses immediate sustainability needs but also aligns with broader sustainability goals. Remarkably, biochar projects have the potential to contribute to 12 of the 17 United Nations Sustainable Development Goals, underscoring their multifaceted value in fostering a more sustainable and equitable world.

Environmental Benefits of Biochar:

Enhances Soil Health: Biochar enhances agricultural productivity by improving soil’s ability to retain water and nutrients, making it especially valuable in restoring vitality to degraded soils.
Economic Upside for Farmers: Introducing biochar into agricultural practices can provide additional income streams for farmers, opening up new job opportunities in rural areas.
Site Remediation: Its ability to absorb contaminants makes biochar an effective solution for cleaning up polluted sites, safeguarding ecosystems and communities.
Water Treatment: As a natural sorbent, biochar can be employed in water treatment processes to remove impurities and pollutants, ensuring cleaner water sources.
Renewable Energy Source: The pyrolysis process used to create biochar can generate renewable energy, contributing to the reduction of fossil fuel dependence.
Reduces Air Pollution: By converting biomass into biochar, we can avoid the air pollution typically associated with open biomass burning, leading to cleaner air for the surrounding communities.
Waste Management: Biochar provides an innovative way to divert organic waste from landfills, reducing methane emissions and contributing to a true circular economy.

Carbon Projects and Methodologies

Although it is estimated that biochar was used for agriculture for over 1000 years, it was not until recently that methodologies in the VCM were approved and biochar began becoming widely accepted as a powerful tool to mitigate climate change.

The turning point came with the Intergovernmental Panel on Climate Change’s (IPCC) 2018 Special Report, which highlighted that merely reducing emissions would be insufficient to limit global warming to 1.5°C. This revelation prompted a surge in interest in carbon removal technology, with biochar emerging as one of the leading candidates.

In 2019 biochar became widely acknowledged in VCM, as Puro.earth launched the first methodology, and carbon credits from biochar became available.

Currently, the market now has three approved methodologies for biochar, with more than 150 projects either operational or in the pipeline. Given biochar’s rising prominence, we anticipate a rapid increase in these numbers, signaling an exponential growth in biochar initiatives in the coming years.

Getting Started

Biochar stands out not only for its remarkable carbon sequestration capabilities but also for its broader environmental advantages, from rejuvenating soils to reducing waste.

As we further understand the importance of carbon removals in hitting net zero climate goals, 3Degrees is here to be your guide in this journey. Contact us today to learn more about carbon removals or biochar, and how you can begin incorporating them into your organization’s long-term sustainability strategy.

What SBTi’s new Beyond Value Chain Mitigation Guidance Means for Companies with and without SBTi Targets

3Degrees Staff, March 1, 2024

Almost 2.5 years after the Science-based Targets Initiative (SBTi) first introduced the concept of “Beyond Value Chain Mitigation” in its Corporate Net-Zero Standard, this week the prominent climate standards organization released its detailed Beyond Value Chain Mitigation guidance, totaling nearly 200 pages.

To contribute to “Beyond Value Chain Mitigation” (BVCM), companies support efforts to reduce emissions that do not sit within their value chains. Companies might choose to do so in recognition of risks that greater climate change may soon pose to their businesses, to attract and retain sustainability-minded customers, employees, and investors, to leverage tax incentives, or even to shore up certain parts of their supply chains, such as farms and forests. Historically, the purchase and retirement of carbon credits has been the default way companies have carried out BVCM, then measured and reported the impacts of their efforts. But given the urgency of ratcheting up mitigation ambition on all fronts, as well as scrutiny and criticisms of carbon credit use in recent years, a clear need has emerged for further guidance on how companies can effectively and transparently advance mitigation beyond their own footprints.

The new SBTi BVCM guidance outlines processes companies can apply to effectively design and implement high-integrity and high-impact BVCM strategies. It then provides supporting detail in the form of case studies and a proposed “toolbox” for diverse actors (e.g., policymakers, investors, customers) to help lower outstanding barriers to greater BVCM action. Overall, the new guidance provides a much-needed positive endorsement for corporate use of high-quality voluntary carbon credits as one component of a credible climate mitigation strategy.

How should I use this guidance if my company has an SBTi target (or will have one soon)?

To align with SBTi guidance, companies can leverage the new BVCM reports to act upon SBTi’s recommendation (optional, but encouraged within the Net-Zero standard) that companies “should take action or make investments outside their value chains to mitigate GHG emissions.” SBTi has noted it does not plan to validate BVCM claims, particularly given that other initiatives are already working to define high-quality BVCM-related claims, such as the Voluntary Carbon Market Integrity Initiative (VCMI). More broadly, companies with SBTi targets can use this guidance to build a business case for further climate action beyond their value chains, including the use of high-quality carbon credits, backed by one of the most prominent voluntary climate standards organizations in the world.

How should I use this guidance if my company does not have an SBTi target?

Companies choosing not to engage with the SBTi target-setting guidance and validation process but still striving to mitigate emissions can also look to this guidance for help developing effective BVCM strategies or more specific carbon credit strategies. They can also leverage this guidance, particularly drawing upon SBTi’s credibility and backing of high-integrity carbon credit use, to help build a strong case for the use of quality carbon credits as part of an effective climate strategy. However, the BVCM guidance clarifies that all companies should get their own house in order (i.e., set, plan to implement, and begin pursuing their own scope 1, 2, and 3 emission reduction targets) before turning their attention to any mitigation beyond their footprints, such as carbon credit procurement.

What does the new guidance say about taking action on BVCM?

For companies ready to establish a BVCM pledge, SBTi lays out two goals to inform overarching BVCM strategies, as well as four principles to guide more detailed design of portfolios of BVCM activities.

Goals to inform BVCM strategy

Principles to inform BVCM portfolio design

As is clear from this sample list of activities, SBTi’s definition of BVCM is flexible enough to encompass many different mitigation aims and ways of achieving them. While several provided examples of high-quality BVCM goals implicitly or explicitly promote carbon credit use, several other, non-carbon credit examples of effective BVCM actions are included as well.

In addition, SBTi does not lay out any specific requirements for tracking the impacts of this wide range of non-carbon-credit based BVCM activities the guidance allows. While the guidance does explicitly call for annual disclosure of BVCM investment amounts and third-party verification of claimed outcomes, it leaves additional specific approaches to measurement, reporting, and verification largely up to the reporting company.

In contrast to its flexible treatment of BVCM activity and measurement options, SBTi does include a more prescriptive definition of best practices when it comes to setting a BVCM budget and then allocating part of this budget towards carbon credits.

How much budget should my company allocate to BVCM?

While drafting this guidance, SBTi sought feedback on how best to estimate the “right” amount of resources companies should allocate to BVCM. Should companies set aside funds in proportion to their profits or revenues (money-for-money), in proportion to estimated costs of intervention efforts needed to neutralize their unabated emissions (ton-for-ton), or in a pre-set proportion (using a consistent cost of carbon as a multiplier) to their unabated emissions (money-for-ton)?

In the final guidance, SBTi lays out all of the above options as methods companies can use to determine the scale of their BVCM pledge, recognizing companies have different abilities and willingness to pay for BVCM, and provides fictionalized case studies of companies using each one of these options. Across the four illustrative examples provided, regardless of the selected allocation approach, each company pledges between 1% and 2% of annual profits for its BVCM activities of choice.

SBTi also specifies one allocation option as “best practice” for defining the scale of BVCM pledges: the “money-for-ton” approach, using an internally agreed carbon price. Specifically, SBTi recommends that companies “apply a science-based carbon price to unabated scope 1, 2, and 3 emissions” to determine a BVCM budget, then use a portion of this calculated budget to purchase high-quality carbon credits matching at least 50% of unabated emissions each year.

Are any kinds of BVCM claims or investments not allowed by SBTi?

Surprisingly few types of claims and investments have been carved out by SBTi as illegitimate ways of pursuing BVCM. Approaches the guidance does discourage include:

Low-integrity claims, as defined by Voluntary Carbon Markets Integrity Initiative (VCMI) Principles for Climate Mitigation Claims Credibility (i.e., claims that are misleading, inaccurate, or not traceable / verifiable)
Use of carbon credits with vintages older than 2021 (i.e., that represent mitigation outcomes that occurred before 2021), in pursuit of the near-term mitigation goal
Use of low-quality carbon credits, as defined by prominent standards and guidelines in the market (the guidance references the Integrity Council for Voluntary Carbon Markets’s Core Carbon Principles, the Tropical Forest Credit Integrity guide, and the Carbon Credit Quality Initiative as recommended resources to identify high-quality credits).

In addition, while the guidance cautions against compensation (i.e., offsetting or neutralization) claims based on BVCM activities, noting they have been “increasingly the subject of public scrutiny and regulation,” it does not rule these out as legitimate BVCM claims.

What’s next for companies with SBTi targets or carbon credit procurement plans looking to align with this new guidance?

First, companies with SBTi targets already purchasing carbon credits can now rest assured that carbon credits (including avoidance credits) can play a credible role, as defined by robust guidance, within a science-aligned climate strategy. Further, companies with or without SBTi targets interested in making compensation-based claims (e.g., claiming that emissions from a given product / service have been “neutralized” or “offset” by carbon credits, perhaps to help make an internal business case for procurement), can leverage SBTi’s guidance on how to set a high-impact BVCM strategy that encompasses such volumetric matching claims while still maintaining transparency and integrity. Lastly, all companies (with or without SBTi targets) can leverage SBTi’s endorsement of using high-quality carbon credits as one part of an effective climate strategy to help build their business case for further investment in the voluntary carbon market.

If you are considering investing in carbon credits or other beyond value chain mitigation actions, making associated claims, shifting your existing carbon strategy to consider impact and contribution more broadly, or have any questions about what evolutions in guidance mean for your existing or forthcoming climate commitments, please reach out.

Tory Hoffmeister is a Manager on 3Degrees’ Energy and Climate Practice consulting team

Elizabeth Geller is a Director on 3Degrees’ Energy and Climate Practice consulting team

CFS and Transportation Markets Report

3Degrees Staff, March 15, 2024

With transportation electrification rapidly expanding, driven by legislation, incentives, and clean fuel standards like California’s LCFS and Oregon’s CFS, navigating the evolving market and regulations is challenging.

To keep you informed and ahead, 3Degrees offers a quarterly newsletter covering the latest in transportation decarbonization, regulatory updates, and market insights. Download the latest report below.