Energy

Frameworks must embrace carbon credits to spur transition to net zero

When effective, carbon credits should be used as a solution within a company’s wider decarbonization strategy. A large number of companies are, however, reluctant to use them. Concerns over quality and fears that claims about carbon neutrality based on them could be perceived as greenwashing continue to proliferate. 

There are also concerns about the disclosure requirements for those that do buy and retire credits, particularly about the lack of consistency or transparency regarding the types and amounts of credits retired. A recent report by Bloomberg NEF suggests that only one-fifth of voluntary carbon market (VCM) buyers self-reported credit purchases in 2021, making it hard for external stakeholders to assess the quality of a company’s net zero strategy. 

This summer has seen a flurry of new consultative initiatives launched — from the International Sustainability Standards Board (ISSB) to the Voluntary Carbon Markets Integrity Initiative (VCMI) — all focused on how to provide guidance that starts to address these two challenges: carbon credit quality and disclosure.

Reporting frameworks that improve quality and disclosure have the potential to spark real change. They could help to overcome the quality and transparency challenges that have traditionally plagued the market, build corporate confidence and in turn, accelerate the net-zero transition. But to do so effectively, they need to include a few factors. 

If done right, frameworks will raise the standards of reporting and data disclosure about carbon offsets.

First, these frameworks need to allow for flexibility and provide guidelines that are simple to understand and act on. Many emerging frameworks, such as the VCMI, look to other existing frameworks, such as the Science Based Targets initiative (SBTi), for guidance on how to set 1.5 degrees Celsius aligned corporate decarbonization targets. This could have the unintended consequence of excluding some of the highest-emitting and hardest-to-abate sectors, such as oil and gas and shipping, for which target methodologies haven’t yet been developed or approved.

A second factor is consistency of language. Carbon credits are still very new to many companies and have been hindered by skepticism; reporting frameworks need to be aligned when talking about how to use them. For example, the International Financial Reporting Standards’ definition of a certified carbon offset refers only to carbon removals credits, when both removals and avoidants credits are certified and available in the market. 

Thirdly, this also means moving away from the traditionally binary approach of “good vs. bad” that some frameworks have applied to carbon credits, often suggesting removal credits to be superior to avoidance. At BeZero Carbon, we have found in our analysis of more than 250 rated projects that the risk of additionality and other critical factors, such as permanence, overcrediting and leakage, varies highly from project to project. The efficacy of a carbon credit cannot be reduced simply to project type. Both avoidance and removal credits have a role to play in a corporate transition roadmap.

If done right, frameworks will raise the standards of reporting and data disclosure about carbon offsets. Carbon credit ratings have a complementary role to play in helping to improve standards and should also be part of a broader suite of standardized carbon credit disclosure requirements for companies. For example, highlighting a credit’s rating could bring an extra layer of integrity to the reporting process and a feedback loop to assessing net-zero transitions. Together, ratings and frameworks will help to improve corporate reporting on the quality of their broader climate strategy, as well as raising the bar for VCM disclosure standards. 

Frameworks have an important role to play in helping companies assess the quality of purchased carbon credits, communicate how their offsetting strategy fits within their net zero roadmaps and report effectively on their transition plans. All of this will help to grow the market, build corporate confidence within it and ultimately help us to drive the transition to a low-carbon economy. The prize is substantial, but only if we get the details right.

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