Author: Jacob Isaacson

Jacob Isaacson is a Manager on 3Degrees’ Energy and Climate Practice consulting team where he supports organizations around the world to reduce their greenhouse gas emissions and meet their climate goals.

Carbon credit buyers take more nuanced strategies amid market criticism

, April 5, 2023

In recent weeks, criticisms of the climate integrity of various types of carbon credits have surfaced in mainstream media, capturing the attention of many stakeholders. As a result, organizations looking to supplement their emissions reduction efforts by financing carbon credit projects are increasingly aware of the reputational risks associated with projects that may have less climate impact than they claim. Consequently, buyers are adopting more nuanced approaches toward engaging the voluntary carbon market to ensure that the projects from which they buy carbon credits have undergone sufficient due diligence. 

Not all registry-issued carbon credits are alike

The voluntary carbon market has structures in place to safeguard climate integrity, such as methodologies developed and approved by non-profit registries like Verra, Gold Standard, the American Carbon Registry, and the Climate Action Reserve. These methodologies provide guidelines for quantifying the climate benefits of carbon credit projects. Independent third-party verifiers must also certify a carbon project’s compliance with registries’ methodologies in order for the project to generate carbon credits. While both registries and verifiers play key roles in ensuring a credit’s climate integrity, not all registry-issued credits are created equal.

Credits generated from different project types, such as forest conservation, tree planting, energy efficiency measures, landfill gas destruction, and others, each reflect the unique benefits and risks associated with their underlying emissions reduction or removal activities. For example, improved forest management projects may provide co-benefits such as biodiversity conservation, but face challenges in demonstrating additionality and ensuring permanent climate impact. Although registries design their methodologies to address the risks associated with each project type, there is often inherent uncertainty associated with proving additionality; robustly and conservatively quantifying avoided, reduced or removed emissions; and/or ensuring adequate permanence. Additionally, new data sources and technologies are making it easier to track real-time climate impact and identify outdated assumptions under current quantification approaches. Ultimately, this means that all methodologies stand to benefit from cycles of continuous improvement to ensure they align with new scientific consensus and emerging best practices.  

Many reputable carbon credit project developers rigorously design their projects to safeguard climate integrity in line with registry methodologies and best practices. However, there are varying quality risks associated with all carbon credit project types. In some cases, methodologies have not yet been revised to adequately address these risks, which has in turn contributed to the recent wave of academic and media criticism of the voluntary carbon market.  

Shift in carbon credit product preferences

As awareness of carbon credit quality risks has grown, some buyers have been shifting their purchasing activity toward structures that offer transparency into the underlying projects. Buyers are increasingly making over-the-counter purchases of credits from individual projects or buying portfolios of credits from specific projects that have undergone due diligence by a third party, on top of the required registry verification process. While buyers often used to enter purchase agreements in which the individual projects would not be specified until delivery, they are now increasingly wanting the projects to be specified at the time of contracting. This trend has been reflected in the price gap between over-the-counter credits and standardized contracts, which has grown in recent months. For example, the N-GEO standardized contract, which can consist of any agriculture, forestry, and land-use credits issued by Verra with Climate, Community, and Biodiversity accreditation, has seen its 2023 futures price decrease more than 50% since the start of 2023. Over the same time period, prices for over-the-counter, project-specific transactions have either remained flat or decreased at a much slower rate.

Standardized contracts play a key role in providing liquidity to the entire voluntary carbon market, but end-buyers seem to be less interested in standardized products that filter carbon credits for only high-level criteria, such as project type, vintage, and geography. Instead, many end-buyers want to ensure that the specific projects from which they are purchasing credits meet rigorous standards for climate integrity. 

Professional procurement approaches reduce risk

Buyers should understand the risks associated with the carbon credits projects they are supporting. This could include knowing from which projects they are purchasing credits and conducting project-specific due diligence to ensure these projects will help them achieve their climate objectives, tell a compelling sustainability story, and minimize reputational risk. In cases where buyers lack relevant in-house expertise, trusted advisors can fill the gap by sourcing credits from reputable project developers and conducting project-specific red-flag analyses to identify potential reputational risks.

At 3Degrees, we remain committed to supporting clients with effective carbon credit strategies and procurements – both within and beyond our own portfolio of carbon projects – that uphold the integrity of the voluntary carbon market. If you have questions about your carbon credit strategy or are interested in discussing your procurement options, please reach out. 

Incorporating new UN guidance on best practices for corporate net zero strategy

, December 20, 2022

Corporations will play an essential role in transitioning to net zero emissions no later than 2050. With the size of their environmental footprints – and their capacity to reduce them – companies will be critical in scaling the action needed to ensure a sustainable future. The United Nations High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities recently published “Integrity Matters,” a report that aims to dispel greenwashing and support science-aligned, robust pathways to net zero emissions. 

Expanding on current credibility and standard-setting frameworks for net zero pledges, the UN’s report emphasizes setting targets with reputable third party organizations and reducing operational and value chain emissions before engaging in beyond value chain mitigation efforts. The group gathered findings from over 40 discussions with over 500 organizations worldwide to generate its recommendations. In this blog, we boil down the 44 page report into three key themes for companies looking to set and implement credible net zero targets.

Support For Existing Frameworks

The UN Expert Group offers an ambitious roadmap for corporations seeking to align themselves with a net zero future. It simultaneously acknowledges existing initiatives that have gained significant traction in the market, such as the Science-Based Targets Initiative (SBTi), Partnership for Carbon Accounting Financials (PCAF), and Voluntary Carbon Markets Integrity Initiative (VCMI), while suggesting a higher bar needs to be set when it comes to creating, disclosing, and tracking progress against robust net zero implementation plans. The report condemns targets that don’t live up to SBTi standards and implementation plans that do not clearly show how companies will achieve them. 

According to the UN Expert Group, an organization should be considered net zero-aligned only if its targets are validated under a robust third-party standard, such as the SBTi. Furthermore, the UN Expert Group’s report and SBTi’s Net-Zero Standard align closely, with both requiring coverage of scope 1, 2, and 3 emissions under a net zero target; alignment with an IPCC or IEA 1.5C pathway; setting of interim targets; and neutralization of residual emissions with removals-based carbon credits. 

Both the UN Expert Group and SBTi recommend that companies prioritize emissions reductions over offsetting and state that carbon credits cannot be used to achieve interim targets; however, both strongly encourage purchasing high-quality carbon credits to mitigate beyond value chain emissions, and the UN Expert Group specifically points to the Integrity Council for the Voluntary Carbon Market (IC-VCM) to establish a global quality standard for credits used in a net zero strategy. With such strong parallels between the UN Expert Group’s guidance and the SBTi standard, 3Degrees is encouraged that the market is continuing to coalesce around a unified definition of net zero and expects corporations to continue to increasingly opt for SBTi-validated rather than self-defined targets.

Misleading targets that aren’t aligned with science slow down the crucial work required to achieve zero emissions globally. Even if a target is rooted in science, companies should publish progress reports on work towards pledges in which independent third parties can periodically verify and compare against industry peers based on publicly available data. 

Net Zero Implementation Best Practices 

When setting net zero targets, organizations need to be ready to hit the ground running — robust net zero transition plans should be developed during the target setting process so that companies understand the activities, resources, and budget necessary to achieve their goals before setting them publicly. However, authors of the UN Expert Group’s report suggest that companies are falling far short on their net zero transition planning. According to the report, about one third of the world’s largest publicly-traded companies have made net zero commitments, but only half of those have outlined how their targets are embedded in their corporate strategy. Many net zero transition plans do not reference trusted sector pathways or include enough detail to be credible.

The UN Expert Group’s recommendations for developing credible net zero transition plans go far beyond current standards in the market. According to the report, clear transition plans should be all encompassing, including details of how planned emissions reduction activities will enable achievement of targets across all three scopes, and the role beyond value chain mitigation efforts, such as carbon credits, will play in the strategy. Considerations for climate justice and the rights of local communities and indigenous peoples, the company’s lobbying efforts, and plans for phasing out fossil fuels should also be taken into account. Furthermore, one recommendation reiterated throughout the report was that these plans should include interim targets for 2025, 2030, and 2035 and be updated at the same cadence. Given the wide-ranging nature of elements to be included in net zero transition plans, as recommended by the UN Expert Group, these roadmaps should be developed through engagement with a variety of stakeholders, both internal and external. 

Another key theme throughout the report is the need for public disclosure of net zero transition plans and companies’ progress towards their targets. Since climate change is a global issue impacting numerous facets of society, the UN Expert Group stresses the need for transparency into the actions taken to address it. That includes not only disclosing comprehensive net zero transition plans, but also obtaining third-party verification of greenhouse gas emissions data and publishing it annually through the UNFCCC’s Global Climate Action Portal where it can be compared side-by-side against other companies’ data. Additionally, carbon credit transactions should be transparently reported, and related claims should be easily understandable and verified (e.g., based on the forthcoming VCMI standard). 

Paris-Aligned Lobbying & Fossil Fuel Phase Out

According to the IEA, we’re at an inflection point that can shift the globe away from fossil fuels. Now is the time to accelerate the energy transition to a renewable energy future. To do this, authors of the UN Expert Group’s report emphasize that investors must move away from funding fossil fuel infrastructure and instead invest at scale in clean energy.

It’s imperative that global emissions peak before 2025 and are cut in half before 2030, and corporations can play a leading role in bringing this to fruition. The UN Expert Group recommends that companies cannot claim to be net zero while continuing to build or invest in new fossil fuel supply, as these resources account for more than 75% of GHG emissions worldwide. Decommissioning or canceling construction of existing carbon intensive assets is highly encouraged, and immediate attention should be paid to establishing fossil fuel close out dates, in line with guidance from the IPCC and IEA. Lastly, companies should include specific targets for ending the use of (and support for) fossil fuels, and for reaching 100% renewable energy usage. 

The UN Expert Group also offers a series of recommendations on aligning companies’ lobbying activities with their net zero claims. The authors recommend that companies disclose all of their lobbying trade association affiliations, encourage these groups to advocate for pro-climate policies, develop an escalation strategy for addressing groups that fail to do so (up to and including leaving groups that do not advocate for pro-climate policies), and state the specific policies and regulations that would enable them to meet their net zero goals. They should also actively push for ambitious and forward-thinking net zero policies in all the countries and industry groups in which they operate.

How We Can Help

While the standards laid out by the UN Expert Group for development and disclosure of corporate net zero transition plans and progress towards net zero targets are likely to be highly challenging for most companies to meet, 3Degrees encourages organizations to strive towards these best practices. Regardless of the current status of a net zero transition plan, companies can always begin laying plans for building out new components of their net zero strategy over time such as climate justice, standardized disclosure, and reporting progress against targets. 

Companies should review their net zero commitments against these recommendations, but keep in mind there isn’t just one pathway to achieve a net zero emissions goal. No matter your organization’s journey, 3Degrees offers a full suite of global solutions to help you set and meet goals. For guidance on designing a credible net zero implementation plan or to learn more about how our team can support your organization in decarbonization, get in touch today.