Having a strategy-aligned approach to purchasing carbon credits on the voluntary
carbon market (VCM) is an essential part of being climate active for many companies.
Purchasing carbon credits should involve multiple executive stakeholders, as companies contribute to a global reduction in CO2 emissions and take on the challenges and risks that climate change brings.
Why do organizations procure carbon credits?
As regulatory, supply chain, financial markets and consumer pressures increase, companies and organizations will need to use every tool at their disposal to achieve greenhouse gas (GHG) emissionreduction goals. The Voluntary Carbon Market (VCM), for the use of carbon credits is one such tool that, used responsibly, helps achieve carbon reductions and removals.If your company has decided to purchase carbon credits on the VCM, there is a good chance that the reasons for doing include:
1. Climate Commitment – where your GHG emissions have been estimated, and there is a need to offset residual emissions as part of a carbon management strategy or corporate sustainability goal. These offsets would feature in your external reports as climate-related financial disclosures. However, a common misconception is that offsets reduce your reported total emissions. Not true. If you emit 3,000t CO2e and buy 2,000t carbon credits you cannot say your emissions were only 1,000t in the year. Climate commitments will vary based upon the maturity, size, sector and geographic location of the company.
2. Investment Strategy – carbon credits have characteristics of an evolving asset class, and may attractive for long-term investors or for purchasers that want to lock in future pricing.
The majority of VCM credits purchased today form part of a company’s climate commitment to reducing GHG emissions. It is good practice for a commitment to consider the following:
- An understanding of both current and future GHG emissions – the old adage, ‘you ‘can’t manage what you don’t measure’. Measurement of the company’s carbon footprint baseline will provide a reference point to understand and track changing emissions over time. This will enable the company to forecast how many carbon credits are likely to be needed year on year.
- A commitment to a time-bound emissions reduction target.
- Internal emissions reduction measures and the residual emissions that require additional action to neutralize.
- Alignment of decarbonisation pathways to a broader corporate level strategy and a portfolio strategy.
The actual quantity of credits will depend upon your overall short- and longer-term business strategy, ESG goals, and budgets. These interdependencies drive the need to involve c-suite executives and board, due to their link to capital available for future growth.
Corporates are well positioned to support carbon removals, and in an economy that increasingly values carbon, may also generate a return on their investment.
A robust transparent climate strategy that incorporates carbon credit procurement may provide:
- a perception of leadership amongst their peers and competitors.
- brand enhancement and increased market share.
- access to a lower cost of capital and additional investment.
- future proofing imminent costs and liabilities associated with carbon emissions.
What are the important factors to consider when developing a strategy to purchase carbon credits on the VCM?
- Procurement Strategy: Recognise that offsetting is not a tactical credit purchase; it’s a strategic approach that is aligned with your corporate vision and values.
- Quality: To avoid reputational risk, it’s advantageous to utilise high-quality offsets.
- Timing: Understand when to integrate offsets into your climate commitment. Do you offset immediately or try to transform (change operations to decarbonise) then phase in offsets?
- Technology: Implement the right technology to keep track of your carbon footprint, carbon credit volumes purchased, retired and needed.
- Capacity building: Develop a framework to identify and establish competent partners and planners across the company and your supply chain (i.e. in areas of strategy, sustainability, finance, marketing and procurement) to help mature the purchasing process.
- Communication: Establish appropriate messaging for the chosen approach, considering the long-term impact of language and how ‘greenwashing’ will be avoided.
The following is a deeper dive into these factors that should govern a company’s approach to carbon credits:
– When determining the procurement strategy, consider whether an investment in a project that has a logical connection to your business is more desirable. i.e. if you’re a food manufacturer, would screening biomass carbon offset projects make sense to your stakeholders over nature-based solutions (NbS) such as tree-planting? Or, if you’re a haulage company perhaps a project around fuel switching i.e., from diesel to biofuels might have a more logical connection?
There are two kinds of carbon credit projects:
- Avoidance projects: Projects that prevent carbon emissions that would have been released into the atmosphere. Project examples include forest conservation, renewable energy, fuel switch, and household devices.
- Removal projects: Projects that reduce emissions by absorbing them from the atmosphere. Project examples include afforestation, reforestation, improved forest management, and regenerative agriculture.
– Removal credits tend to trade at a premium to avoidance credits, not just because of the higher level of investment required by the underlying project, but because of the high demand for this type of credits. They are also perceived to be a more powerful tool in the fight against climate change because without the project, no carbon would have been removed3.
– Consider whether the location of the carbon offset projects your company invests in may be influenced by the geographic concentration of your GHG emissions, and the specific industrial sector in which your business operates.
– Companies need to view offset procurement strategies using cost-benefit assessments, balancing short-term gains with long-term risk, aligning with the broader business objectives and incorporate a review a cadence to regularly check the health of the system.
– NbS are currently in vogue with some stakeholders, however the future supply of NbS credits is likely to wane due to the constraint of land space and the independent assessment of their quality (including permanence of their benefits) potentially affected by changing environmental conditions and evolving monitoring technologies
– Fluctuations in the year-to-year volumes of carbon credits generated over a project’s lifespan are normal and need to be factored into your calculations (i.e. you may have an under- or over-supply of credits based on both the variability in your annual GHG emissions as well as the project credits)
– Consider a shift from a volume-based, price-driven “spot” purchasing approach to a multi-year offset purchasing or investment strategy aligned with a climate commitment.
There are several mechanisms that allow you to purchase carbon credits:
- In some cases, project developers may have unsold credits issued from projects for which they are seeking buyers. Purchasing directly from a project developer can avoid some transaction costs. However, projects with unsold credits may sometimes raise quality concerns.
- As with other commodities, numerous firms act as brokers for carbon offset credits. Brokers procure offset credits and then transfer (or retire) them on clients’ behalf. Brokers can make it easier to identify a mix of offset credits from different project types. Some brokers sell credits from projects they have invested in, in addition to projects developed by others. This practice may provide efficiencies in pricing, but it can affect the ability of the broker to be impartial about the credits they sell.
- Another option is to purchase offset credits on an exchange. There are a number of environmental commodity exchanges – mostly in North America and Europe – that list carbon credits for sale and work with registries to enable transfers. Purchasing credits on an exchange can be relatively quick and easy, but it can be harder to obtain the information needed to evaluate the quality of these credits.
- For buyers looking to acquire only a small number of offset credits (such as small companies or individuals), the most feasible option is to go through a retailer. Retailers can provide access to offset credits from a range of different projects and will provide at least basic information about those projects. In most cases, the retailer will maintain accounts on carbon offset program registries and will retire offset credits directly on a buyer’s behalf.
NETZERO a Carnrite Company (NETZERO) is in a unique position to be able to offer a complete solution with Measurement, Advisory Services and Management of ESG performance and GHG emissions.
– Investing in low quality offsets undermines climate goals and reputation. Putting a strategy in place will provide the confidence to protect your organisation’s reputation and avoid public criticism or negative press resulting from a bad investment.
– The price of carbon credits varies widely from <$1 per tonne to >$50 per tonne. The price depends on the type of carbon offset project, the standard under which it was developed, the location of the offset, the co-benefits associated with the project, and the vintage year.
– Co-benefits are positive outcomes from a carbon offset project, beyond the actual GHG emissions reductions. Co-benefits may be social, economic, or environmental. Examples of co-benefits include jobs created, health benefits, pollution mitigation (other than carbon), supporting gender equality, renewable energy generation, biodiversity, and education. Co-benefits are often the deciding factor in carbon credit purchases. Many project developers list the project co-benefits in terms of how they contribute to the UN Sustainable Development Goals.
At NETZERO we connect institutional green capital with climate action projects that impact the UN SDGs and allow businesses across all sectors to lower their greenhouse gas emissions with high-quality carbon credits.
– It’s important to decide when to integrate offsets into your climate commitment. In general, you want to follow the mitigation hierarchy that prioritises or does not compromise internal reductions5. Hence, the strategy should be aligned to the business priorities and the ability to implement reduction technologies, processes, and governance i.e.,
- Does a company offset immediately or try to transform (change operations to decarbonise) then phase in offsets?
- Is there an immediate carbon neutrality goal across the company’s scope 1 and 2 emissions or is there a progressive use of carbon credits with a certain volume that are not retired and instead traded?
– A strategy that provides more optionality typically anchors on longer-term investments providing greater control over projects. Companies that are developing or funding their own projects are more likely to maximise economic, social and environmental value in the long term.
– Monitoring the legitimacy of the carbon offset projects will help save costs and reputational factors communicated to internal and external stakeholders. Carbon intelligence platforms (e.g. Sylvera and BeZero) deliver ratings and insights enhancing the transparency of the VCM. Projects are rated on aspects of carbon performance, additionality, permanence and their co-benefits. Key metrics that are also described in the core carbon principles provided by The Integrity Council for the Voluntary Carbon Market (ICVCM).
NETZERO recognizes that there is not a “one size fits all” solution to each company’s requirements. This is particularly true on a topic as complex and evolving as calculating emissions and carbon credit procurement. NETZERO is agnostic to technology solutions. NETZERO has experience supporting companies to define requirements, investigate alternatives in the market, select the optimal solution and support the implementation.
– Currently, corporates do not have access to guidance about how to approach the VCM, despite being critical stakeholders. Many corporates face capacity gaps regarding what carbon removal is.
– Partners and planners will need a level of knowledge on the multiple standards, methodologies and registries in the VCM that can determine whether a project is generates high-integrity carbon credits and adheres to for example, the core carbon principles.
– Key internal stakeholders will need to understand why carbon removals have future value, implications for business growth, and how they might play a role in scaling the VCM to make a real difference in the challenge of climate change.
– Top-down capacity building is often required to allow corporates to identify and navigate risks and opportunities of investing in high-quality carbon credit projects. In parallel, there is a need for a bottom-up approach enabling engagement with sustainability, procurement, and finance teams within organisations.
NETZERO offers training programs that can be run with Sustainability and/or Carbon Management team(s), as well as other key stakeholders in order to develop internal capabilities.
– Clarify and communicate the commercial case for the chosen approach, in terms of avoided risks (transition, liability, and physical) and opportunities to be captured.
– Be transparent about challenges faced and issues that may need to be tackled further down the line.
– Host events to promote, plan, share learnings, further develop knowledge, build a network and establish partnerships for carbon removals
– Engage with shareholders, employees and customers to understand perceptions of the strategy. Loop back the positives and negatives to redefine the strategy if necessary.
– Assess impact using appropriate commercial metrics e.g., changes in share price, sales, social media engagement.
– Include updates and refinement in the strategy within the company’s annual/sustainability report.
All of the above has concentrated on the use of carbon credits for offsetting against a company’s GHG emissions. Scope 3 emissions (the upstream and downstream emissions within a company’s own supply chain), are often the majority of an organization’s total GHG emissions. Another element to your overall climate commitment could be insetting.
Insetting refers to the intentional reduction of Scope 3 emissions. Unlike carbon offsets, inset emissions are directly avoided, reduced, or sequestered within the company’s own value chain.
By way of an example:
- A shipping company substitutes fossil fuels with sustainable marine fuels and those customers wanting to reduce their emissions pay a fixed surcharge for every shipped parcel, which is then invested into biofuels.
- A customer wanting to ship a carbon neutral product estimates that it can reduce 100 tonnes of GHG emissions in their supply chain by purchasing about 30 tonnes of sustainable fuel. The vessel transporting the product does not have to be the same vessel using the purchased fuel. This customer can then claim their emissions reduction for the transport, and the emissions savings remain in the supply chain.
- An external auditor audits the process, and the customer receives an official certificate for the amount of biofuels purchased as well as the corresponding emissions reductions compared with bunker fuel. Issues such as additionality, double counting, leakage and co-benefits are accounted for.
- Freight buyers can invest in a freight-focused carbon inset, allowing some or all of a carbon offset budget to be invested within the freight sector.
Forward-thinking organisations have already begun taking action to tackle climate change by having a climate commitment and carbon management strategy in place to reduce their GHG emissions. An organisation should first focus on direct emissions, reducing its in-house carbon footprint and then look to reduce indirect emissions, within its supply chain. Identifying insetting opportunities should be considered. Only then as part of the carbon management strategy should a company look to offset its residual emissions through a focused procurement strategy for carbon credits.
Any investment in carbon credit generating projects for the purpose trading or carbon offsetting against company emissions should be aligned to corporate values, objectives and commitments. All stakeholders should be made aware of the carbon credit procurement strategy i.e. the executive team, HSE/sustainability, finance, legal, marketing and procurement, as well as through ESG strategy.
For offsetting purposes, companies should ideally use high-quality carbon credits that stem from projects that adhere to the core carbon principles. Due diligence, ongoing project monitoring and capacity building in-house will also help with the communication and transparency of the procurement strategy.
Using carbon intelligence platforms will also help avoid investments in poor quality projects that lead to negative consequences.
NETZERO provides advisory services and a tailored approach to procurement strategies.
Our business model is focused on acquiring, managing and growing a high‐quality and diversified portfolio of investments in projects and/or companies that generate or are actively involved, directly or indirectly, with voluntary carbon credits.
We co-invest capital through carbon credit streaming arrangements with project developers and owners to accelerate the creation of carbon offset projects by bringing capital to projects that might not otherwise be developed.
Our near-term projects cover primarily engineered carbon removal technologies,.
We are supported by our parent company, The Carnrite Group, which includes management consulting and venture-capital investments.
1. The Carbon Removal Corporate Engagement Guide – Foresight Transitions. Atkins – Member of the SNC-Lavalin Group. June 2021.
2. How to select carbon offsetting projects, ClimateSeed by Marine Campenon. June, 2022
3. Carbonomics 101: Top 3 factors you should consider when buying carbon credits. NatWest Sustainability – February 2022.
4. Purchasing Carbon Offsets FAQs – Second Nature
5. Reduce Or Offset? Do Both. Here’s How. – Engie Impact.
7. What is carbon insetting? – Mr. Sustainability