Navigating the world of carbon credits is challenging, especially when trying to balance cost and quality. Often, traditional offsetting methods, which focus more on the quantity over the quality of credits, fall short in addressing the growing need for meaningful climate action. Then, sustainability managers are left with the pivotal task of maximizing their budget to enhance the environmental impact of their initiatives. Additionally, articulating a compelling narrative that aligns with a company’s compensation strategy and values is difficult, especially when purchasing higher-quality credits result in covering fewer compensated emissions due to budget constraints. 

This article explores how companies can build an effective, high-quality carbon credit purchasing strategy by aligning carbon credit types with the level of control over emissions, while also addressing financial challenges.

Strategizing carbon credit purchasing: navigating claims, budget, and communication

Is your company in the process of reassessing its carbon compensation strategy? There’s a growing consensus that traditional low-cost methods, which prioritize securing large volumes of affordable credits while overlooking their quality and true climate impact, are not generating the significant climate benefits once believed. Consequently, many enterprises are now reevaluating their carbon compensation approach, facing three primary challenges:

1. Going beyond carbon neutral claims: With increasing regulatory scrutiny and a decline in social acceptability for green claims, businesses need to implement credible carbon compensation strategies.
2. Balancing high-impact strategies with a set budget: For many companies, decarbonizing within their value chain presents several financial challenges,  such as the high costs of decarbonization efforts, difficulties in engaging the supply chain due to financial constraints, organizational capacity limitations, and the lack of access to necessary financing (VCMI). While internal decarbonization efforts should be prioritized, the emissions reduction might not be reached in the short-term. Meanwhile transitioning to purchasing higher-quality carbon removal credits seems like a sound alternative, buyers need to allocate these credits strategically with the constraint of predetermined budgets.   
3. Communicating a compelling carbon compensation strategy: How can companies communicate their commitment to climate in a way that resonates with stakeholders and aligns with company values? Beyond companies’ internal environmental initiatives, companies often find it challenging to articulate a clear and persuasive carbon compensation strategy. The challenges include addressing the reason behind their overall carbon compensation decision and projects chosen, as well as the amount of emissions being compensated. 

Companies can address these challenges in their carbon compensation approach by aligning their efforts with their degree of control over emissions.

Determining the degree of control over different emissions sources 

The greater the control a company has over an emission source, the more capacity it has to effectively reduce or mitigate carbon emissions deriving from this source. Thus, when these emissions are not mitigated or reduced—even when a company has the capability to do so—the carbon credit underlying the compensation should be particularly effective. 

Linking the compensation strategy with the degree of control over emission sources involves a systematic approach to categorizing emission sources. The categorization of emissions as defined by the GHG Protocol enables companies to determine the degree of control over an emission source: high for Scope 1 and 2, and medium or low for Scope 3.

High control: Scope 1 and 2 emissions

Companies have high control over Scope 1 and 2 emissions because these are directly linked to their operations and energy choices. Scope 1 emissions come from owned or controlled sources, allowing direct action for reduction. Scope 2 emissions, related to purchased energy, offer control through energy sourcing and efficiency decisions. 

Although decarbonization may be expensive and difficult, this direct control means companies need to fully assume responsibility for their emissions. If they are unable to reduce these emissions in the mid-term, they should consider beyond value chain mitigation (BVCM) strategies.

Medium or low control: Scope 3 emissions

Scope 3 emissions include all indirect emissions in a company's value chain. The control over these different emission sources varies greatly across the different Scope 3 categories, companies, and industries,  but can generally be classified either as medium or low. 

Figure 1 serves as useful guidance for determining the degree of control over Scope 3 emissions sources for your company. This shows the percentage of companies identifying a Scope 3 category within a given industry in the 2021 CDP climate change questionnaire. When emissions are reported as relevant, companies likely possess more comprehensive data, giving them more control over them.

For instance, in the financial services industry, business travel (category 7) emerges as the category where the highest proportion of companies (89%) report as relevant. In the forestry and cement sectors, the greatest reported relevance is in upstream transportation and distribution (category 4), with 88% and 93% of companies respectively indicating this. 

Figure 1: Reported relevance of Scope 3 categories (%) by industry 

Figure 2 links corporate compensation to emission control levels. CEEZER categorizes Scope 3 categories as medium or low control (across all industries) as follows: 

• Medium control is assigned to categories when over 50% of companies recognize its relevance.
• Low control when is assigned to categories when under 50% of companies recognize its relevance.

After classifying corporate emissions according to the degree of control, enterprises are encouraged to compensate them with the corresponding quality of carbon credits. 

Scaling carbon credit quality with control over emissions

The higher the degree of control a company has over an emission scope and category, the higher the quality of its compensation should be. Carbon credit quality is not easily defined, but a good proxy is permanence and risk of reversal, which is a key aspect of the quality and reliability of carbon credits. It ensures that the climate benefits are not temporary and will contribute to long-term climate change mitigation as laid out by the ICVCM’s Core Carbon Principles. Additional rationale regarding the assessment of credit quality is laid out towards the conclusion of this article.

Embracing permanence as a key indicator for quality, businesses should:

1. Prioritize high-permanence removal for Scope 1 and 2 emissions 

Emissions that companies have high control over should be compensated with the highest quality carbon credits available. This ensures that their most significant environmental impacts are addressed with the most effective and sustainable methods, demonstrating a strong commitment to long-term environmental responsibility. Scope 1 and 2 emissions, where a company has high control, should be compensated with high-permanence removal carbon credits. Credits classified as Oxford Category 5 feature the longest permanence. Enhanced rock weathering, biochar, or direct air capture are project types in this category. 

2. Compensate Scope 3 emissions with short-term removal and avoidance credits

In an ideal scenario, a company would compensate for all residual emissions with the highest credit quality. However, budget constraints often necessitate a more strategic approach. Emissions over which a company exercises medium or low control might be compensated with credits with a different risk profile. This strategy ensures that priority is given to neutralizing emissions directly tied to the company's core activities. For instance, emissions under medium control could be effectively compensated through carbon sequestration initiatives, such as afforestation or soil carbon enhancement projects. Meanwhile, emissions falling under the low control category could be addressed by acquiring avoidance credits—supporting projects like the dissemination of improved cookstoves, or the destruction of refrigerant gasses—thereby ensuring a responsible and tiered approach to carbon compensation.

Thus, the greater the control, the higher the permanence of the carbon credits should be.  Moreover, adopting a strategy that emphasizes the permanence of carbon credits not only showcases a robust commitment to environmental responsibility, but also highlights the company's proactive stance in mitigating its most consequential environmental effects.

Navigating complexities in an emission control-based compensation strategy

Adopting an emissions control-based strategy, like any strategic approach, comes with a diverse array of benefits and challenges. Before implementing such a framework, companies should weigh several key considerations.

Taking budget considerations into account

The cost of a company's compensation portfolio, as per the outlined strategy, is linked to the volume of emissions per level of control, with higher permanence of carbon credits typically resulting in higher prices. When a substantial portion of a company's emissions is within areas of high control, opting for long-term permanence removal credits as compensation becomes more costly, and might be limited by budgetary constraints. Companies should consider establishing an internal carbon pricing program, to guide their internal emissions reduction strategy as well as climate investment beyond their value chains. For instance, Klarna set an internal carbon tax charging $100 per tonne for all Scope 1, 2, and travel emissions, and $10 / tonne for the remaining Scope 3 emissions.

Communicating lower compensation volumes

For companies with a set compensation budget, transitioning to higher-permanence credits could reduce compensation volumes due to the higher cost per credit. Effectively communicating this shift can be challenging because it requires stakeholders to comprehend that, despite the reduced volumes of compensation, the overall environmental benefit is greater due to the greater permanence. Greater permanence implies prolonged preservation of carbon storage or reduced emissions, resulting in sustained mitigation efforts and a more substantial climate impact. 

There’s more to credit quality than permanence

As explained throughout the article, CEEZER’s advice is to use high-permanence removal credits to compensate for the high-control emissions. Various parallels exist between direct emissions (Scope 1 & 2) and removal credits (Oxford Category 4 & 5). Most notably, removal credits typically provide greater certainty about the actual amount of carbon removed compared to avoidance credits (Oxford Category 1 & 2), which rely on modeled baselines. The same applies to Scope 1 & 2 emissions, where a company has more certainty about the data compared to its upstream and downstream emissions.

Although many high-quality avoidance projects exist, they inherently present significant challenges. That is, these credits rely heavily on modeled counterfactuals and always carry some degree of uncertainty. However, the effectiveness of removal approaches is not per se superior in terms of actual climate impact, adding complexity to the strategy. High-quality avoidance credits that can present compelling evidence to support their baselines can greatly reduce this uncertainty.

Ultimately, the choice depends on a company's desired impact and priorities. For instance,  avoidance projects often deliver additional benefits like biodiversity conservation, which some companies value highly. On the other hand, early-stage technologies behind most Oxford Category 5 projects need significant investment now, and purchases of those projects can be catalytic. To mitigate the worst impacts of climate change, we need to remove billions of tonnes of CO₂e by mid-century. Most removal technologies are still in development, so investing in them involves not only short-term effectiveness but also stimulating industry growth.

Aligning compensation strategies with leading market frameworks

Ensuring that this strategy aligns with the latest market developments, standards, and guidelines is essential for ensuring its relevance and effectiveness. 

Organizations such as the Science Based Targets Initiative (SBTi), the Voluntary Carbon Markets Initiative (VCMI), the Integrity Council for the Voluntary Market (ICVCM), the GHG Protocol, and the We Mean Business Coalition (WMB), provide integrity guidance for decarbonization and the use of voluntary carbon credits to compensate for residual emissions. Below, we have included the two most relevant frameworks for climate action strategies when it comes to carbon credits. 

VCMI – Claims Code of Practice

Aligning compensation efforts with emissions control is compatible with existing VCM best practices and can be used to meet the required carbon credit use and quality threshold. For more in-depth insights on this particular subject, this article is available for further reading.

SBTi – Beyond Value Chain Mitigation

For companies engaged in or contemplating investments in Beyond Value Chain Mitigation (BVCM) strategies, the approach outlined here provides a methodology for evaluating the scope and nature of their BVCM efforts in line with the SBTi Public Consultation on BVCM. 

Scale your climate impact – today

Companies can build an effective, budget-optimized, and high-quality CO₂ compensation strategy by aligning initiatives with the degree of control over emissions. Leveraging established methodologies and guidelines from renowned institutions such as SBTi, ICVCM, CDP, or GHG Protocol, this innovative approach not only enhances carbon credit purchase but also integrates cutting-edge research from the rapidly evolving Voluntary Carbon Market. 

As the reporting season approaches, this guide serves as a timely blueprint to revamp compensation strategies today. Managing a company’s carbon footprint is not only a question of putting together a strategy, but also a matter of execution. CEEZER’s proprietary algorithm selects an impact-optimized portfolio based on a given budget that is aligned with SBTi requirements, screened for quality, and minimized risk.

Planning to build a carbon credit purchasing strategy? Let’s talk or schedule a demo with CEEZER.