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Five considerations when compensating emissions for 2022

Time flies and the end of the year is approaching quickly. For many companies, this coincides with the end of the fiscal year. With increased urgency for climate action, many are looking to compensate for their 2022 emissions now. With the voluntary carbon market (VCM) moving fast, finding the right portfolio of carbon credits can be daunting. The status quo of previous years is no longer a reality, with prices increasing across many carbon credit categories, some scarcity of supply, and more scrutiny from stakeholders regarding issuing project quality. Based on our day-to-day view across large-scale transactions and portfolio plans, we have summarised five key learnings for buyers to keep in mind when locking in negative emissions via the VCM today:

1. Select credits aligned with your overall, long-term climate strategy

There are thousands of different carbon credits out there, but depending on the intent, the target taxonomy, the legislative environment, and the individual mitigation strategy, some might be more suitable than others. Knowing what exactly you need is crucial to optimize both climate impact and the cost-per-ton. To further complicate things, there are still some unknowns. Here are some pressing issues that we’ve observed:

  • Applicability of carbon credits under leading Net Zero standards: Rightly, the Science Based Targets initiative (SBTi) urges companies to extensively decarbonize their operations as well as neutralize residual emissions at the net zero target date. As outlined in a recent article, SBTi further recommends taking immediate action to reduce emissions outside the company’s value chain, including upstream supplier and downstream customer activities. SBTi suggests focusing on critical natural ecosystems, such as tropical forests and peatlands, and scaling up nascent technologies, including quality biochar, enhanced weathering, mineralization, direct air capture (DAC), and biomass carbon removal and storage (BiCRS) projects. In shaping their carbon credit portfolios, companies following SBTi guidelines should therefore target suitable ecosystem avoidance and removal credits to address interim emissions in the short term while beginning to secure removal technology credits (currently scarce in supply) for when their residual emissions period materializes. While it sounds trivial, there is no global standard for what qualifies as avoidance versus removal nor the applicability of carbon credits to established Net Zero standards — a science-based approach to voluntary carbon credits remains crucially needed. At CEEZER, we are working with the scientific community to map this differentiation for every tradable carbon credit so that we are well-positioned to provide initial guidance.
  • Corresponding adjustments: Double claiming can occur when an emission reduction outcome is simultaneously claimed by a project’s host country as well as another country or entity. The main safeguard, introduced under the Paris Agreement, to prevent double claiming are “corresponding adjustments” (or “CAs”), meaning that a country transferring a reduction outcome must adjust its emissions balance to reflect the transfer. As countries are only in the process of setting up systems to define and manage CA requirements, companies must keep an eye on ongoing developments and weak signals. Decisions regarding prospective carbon credit portfolios should include consideration of potential CA requirements, which could make some carbon credit supply non-claimable in the future. At CEEZER, we help track whether a credit’s underlying activity is part of the host country’s Nationally Determined Contribution (NDC), which provides an early indication that CA’s might be required. That said, it is up to the host country to decide to what extend a CA will apply — and these decisions have not yet been clarified.
  • Consumer claims: In B2C cases, the use of claims is still widely debated. While there is no golden rule, the kinds of credits usually accepted do differ across jurisdictions and regions (see our article on claims here). Usually, the recommendation is to only use ex-post, issued, and retired carbon credits from ICROA-certified standards to compensate for a certified product carbon footprint (PCF). Absurdly, this currently excludes many of the credits that would qualify for ambitious target systems like SBTi (e.g., most of the technical removal credits that are available in the market today are not issued by an ICROA certified standard). Hence, compliance does not always equal impact. At CEEZER, we work closely with our customers to ensure that their portfolios are built around the highest quality carbon credits to realise carbon impact — and we can support the definition of transparent communication around negative emissions portfolios.

2. Move fast to secure the right supply

Once you have clarity around the specific quality, vintage and delivery criteria for carbon credits in your portfolio, it’s time to engage effectively with project developers to secure supply. The VCM is moving fast with increased demand and tightening targets. For a few carbon credit types, supply is becoming particularly scarce. This applies to high-quality nature-based removals and verified technical removal credits of 2022 and 2023 vintages. Companies buying carbon credits hence need to make fast decisions and accept market reality in their purchasing strategy. Price commitments over 6 months with full off-take flexibility (deal terms that used to be possible) are hardly realistic anymore. Market power lies increasingly with the supply side. Companies with the most successful portfolios tend to lock in a share of their core “bread-and-butter” supply in advance through concrete payable purchases, while maintaining some flexibility to secure new supply coming online in future months. All in all, this leads to the next issue…

3. Don’t only buy credits for now

The fast-moving VCM and increasing “future shift” of transactions also imply that buying ahead and having a long-term portfolio strategy in place is crucial. Companies should use this current year’s requirements as a first basis to plan ahead for future years. It is high time to consider which suppliers you want to work with in the long run, which project types are relevant for you now compared to the future and how you can mitigate price and supply risks. Many projects are expected to increase carbon credit prices in the long run, so buying today to secure stable volumes and prices for the future is highly recommended.

4. Don’t accept “cosmetic” certificates

Once you’ve purchase your selected carbon credits, it is important to ensure that you get the right deliverable. With a high variability of carbon credit quality and opacity of multiple layers of resellers, the practice of issuing “cosmetic certificates” is still thriving. It is risky for companies to accept self-proclaimed certificates from resellers. To be audit-ready and revision-proof companies must obtain real, proof-of-origin, certificates issued by the respective qualified registries. With new carbon credit types outpacing development of certifying methodologies, should you decide to go beyond traditional credits, make sure you have visibility into the supplier’s registry to verify your own transactions. As investments in the VCM increase, transactions and holding will be under increasing scrutiny.

5. Action counts more than doubt

Taking climate action is urgent — yet, there is a long way to go in perfecting the inner workings of the VCM, and not all the facts will be on the table when compensating for unavoidable 2022 emissions. Concerns over the integrity of carbon credits risk limiting the VCM’s contribution to climate action. However, while internal decarbonization should be the first priority for companies, there is still a wide consensus that complementary acceleration via the VCM is a key requirement to meet virtually any climate target. Inaction is hence no option.

At CEEZER, we take a pragmatic viewpoint: Companies make decisions under uncertainty every day. They use data to optimize risk and return. When we think about any other financial investment (e.g. on the stock market), there is never 100% certainty that every stock purchased performs well, but there are reasonable, well-documented risk factors that make some safer investments than others. Likewise, there are inherent, traceable and verifiable quality metrics that can be considered to make informed decisions about carbon credits based on price, impact and risk. To ensure that funds flow to the highest quality projects globally, companies should focus on maximizing impact at a minimum shortfall risk, through rationally designed and well-balanced portfolios that combine carbon credits from multiple project categories, including nature-based an technology-based solutions.

Even for those holding back from “per-ton” compensation, there is no excuse to stand still. For those who choose not to engage in the VCM (and for those who are engaging but want to do more), there are options to contribute to other climate action initiatives. The Climate Transformation Fund, set up by Klarna is one example where contributions to proven, scientifically-backed climate change mitigation go beyond the carbon credit system. Such mechanisms are becoming as accessible as the VCM and may prove a valuable and often complementary component of corporate climate strategies.

CEEZER is helping companies to navigate the complex VCM. By cutting out the middlemen, our platform enables easy and fast transactions of avoidance and removal credits directly from project developers. Every purchased carbon credit is issued with the original certificate, allowing customers to reliably trace the credit back to its source. We guide leading companies in devising an optimized, long-term carbon credit portfolio.

Please get in touch if you would like to know more: https://www.ceezer.earth/

Photo: Unsplash.