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Carbon Credit Strategies for Corporates

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Key takeaways

  1. Quality and Price of Carbon Credits are Key: High-quality credits ensure real environmental impact and minimise business risks, while diversification across various project types balances cost and enhances the climate impact narrative.
  2. Strategic Purchasing Approaches Vary by Need: Companies can use spot credits for immediate offset needs or enter into multi-year agreements for future emissions, balancing immediate action with long-term sustainability goals.
  3. Portfolio Diversification and Innovative Strategies Enhance Impact: Building a diverse portfolio of carbon credits and adopting innovative strategies like direct project investment or carbon-neutral products can spread risk and align with specific sector impacts.
  4. Preparation is Crucial for Effective Strategy Implementation: Before choosing a carbon credit strategy, companies should consider budgets, regulatory updates, procurement policies, and industry trends, and seek C-suite approval to align with broader net zero commitments.

What is a carbon credit strategy?

When considering purchasing carbon credits, a company needs to have a strategy that will guide it to pick credits whose attributes meet the company's specific requirements and objectives. The process of building a carbon credit strategy is like building other types of strategy, you must look at your options and decide on what you will do to achieve your desired outcomes.

When creating carbon credit strategies, the most important things to consider are:

  • The focus of the strategy: Cost, quality, or storytelling
  • Purchasing Strategy
  • Utilising Portfolios
  • The Oxford Principles For Net Zero Carbon Offsetting

Before you begin there is information that is essential to have to guide your decision making.

  • Budgets: If you don’t have a budget, talk to your finance and procurement departments to see where the money should come from.
  • Regulations: Do a scan of the regulatory environment to see if anything has changed since you started engaging with the prospect of a net zero journey
  • Policies: Review your company procurement policies to understand what your constraints are
  • Competition: Look at what your competitors or other net-zero committed companies in your sector are doing, this can provide you with some guidance on what best practice in your space is.

1. Decide on the focus of the strategy: cost, quality or storytelling

  • Quality driven. Opt for high-quality credits to ensure the lowest risk. Make use of the Carbon Credit Quality framework mentioned in the previous chapter. Some of the risks included in buying lower-quality credits are:
  • Lack of Real Environmental Impact
  • Reputational Damage
  • Regulatory and Compliance Risks
  • Market and Financial Risks
  • Ineffectiveness in Achieving Net Zero Goals: Relying on low-quality credits can mislead companies about their progress towards net zero or other climate targets, potentially delaying or derailing genuine emissions reduction efforts within their operations or supply chains.
  • Price driven. Carbon Prices vary across the various project types. Nature-based Solutions (NbS) are considerably lower priced than tech-based Solutions (TbS). This is because of the high cost of developing these technologies, as well as the durability (how long carbon can be stored, once captured) of the carbon removal provided by these tech-based projects. Diversification is yet again important, as it effectively creates a spread of price points across various project types and their associated costs.
  • Storytelling driven. Carbon projects can be selected from a broad variety of project methods and impact areas. Once a company has established its Net Zero strategy, the carbon projects selected as part of the neutralising approach can indirectly bolster the company's impact areas, thereby enhancing its climate impact narrative. By endorsing particular projects or curating a collection of projects with specific attributes, the company can become an impact-focused Climate Ambassador, enhancing both its internal and external storytelling efforts.

Once you have decided on your orientation between the three different focuses of a purchasing strategy, it's time to make some decisions about what projects and credits you want to source in line with that focus.

  • Type of Credits - Removal vs Avoidance: The decision-making process on which of the two to purchase can vary significantly depending on your company's specific sustainability targets and the stage of its net zero journey. There are two main considerations here:
  • Credits used for Compensation: The use of a mix of Avoidance and Removal Credits to offset those emissions that are not easy to reduce, or can only be reduced at a future date.
  • Credits used for Neutralisation: The use of Removal Credits to eliminate all emissions that are unavoidable.
  • Type of Projects: Once you have established whether your company needs to purchase avoidance or removal credits, you can now decide on the type of projects to support. It’s important to note here, that there is no “right or wrong” approach. By ensuring you adhere to purchasing the Highest Quality and the relevant Type of Credit for your journey, you are setting yourself up for success to reach Net Zero.
  • Diversification: Diversify the credits you buy, by buying credits from various Types of Projects. This helps to mitigate your risk, since any project-related risks are spread out across a collection of projects you bought credits from.(See more on this in Module 5)

Align with Oxford Principles For Net Zero Carbon Offsetting

When carbon credits are chosen poorly by a company, it risks being labeled as 'greenwashing' and this poses a huge amount of risk for a company: reputation, financial, and also environmental.

The Oxford Principles For Carbon Offsetting developed by Oxford University is a best practice guideline that companies can follow to reduce risk and can ensure the effectiveness and integrity of carbon offsetting initiatives.

What are the Oxford principles?

  • Prioritise Emission Reductions: Focus on reducing emissions first to lessen the need for offsetting.
  • Use High-Quality Offsets: Offsets should be verifiable, correctly accounted for, and ensure additionality.
  • Shift to Carbon Removal Offsetting: Gradually move from using avoidance credits to increasing the use of carbon removal offsets to develop the market.
  • Long-Lived Carbon Storage: Invest in nature-based solutions like reforestation and technologies for long-term storage, such as CO2 injection into geological reservoirs.
  • Transparency: Declare emissions, accounting methods, net-zero targets, and offset types publicly.
  • Market Development Support: Foster Net Zero-aligned offsetting through long-term agreements, sector alliances, and ecosystem restoration.

2. Procurement Strategy

2.1 Per year strategy

—> Purchasing To Offset Previous/ Current Calendar years, using Spot Credits.

Spot credits refer to carbon credits that are available for immediate purchase and use as offsets. Utilise Spot Credits to offset current or previous year's emissions, while developing your longer-term strategies.

It’s important to remember that this is only possible for carbon projects that are selling ex-post carbon credits (i.e. the emissions reduction or carbon removal has already taken place).

Insight: Carbon credits are seen as financial assets and buyers apply many of the same practices to reduce risk, for example, hedging against predicted rising prices by buying cheaper credits now to retire in years to come

Advantages

  • Ensuring a secure inventory of Carbon Credits for multiple years.

Risks include

  • Overpaying for credits
  • Miscalculating your company's projected emissions, therefore buying too little or too many credits.
  • Double counting of older vintages. This is when a project mistakenly or knowingly sells the same credits to more than one buyer.
  • Quality errors might show face in the years after the spot credits purchase took place.
  • A project might start under-delivering on promises in the years after your spot purchases, adding reputational risks to buyers of their carbon credits.

2.2 Multi-year strategies

—> Purchasing Carbon Credits In Advance, To Offset Emissions Of Future Years

This is achieved through Offtake and Forward(pre-purchasing) Agreements.

What does this entail?

  • Investing for the long-term, in projects that provide sustainable and ongoing emission reductions, providing buyers price and volume securities.
  • Assists in aligning carbon credit purchasing with net zero targets and long-term sustainability goals, rather than a short-term fix.
  • Future-proofing against supply and price fluctuations and uncertainties.

Advantages

  • Securing supply for years to come. Supply of projects is projected to be outperformed by demand.
  • Price certainty by locking in price points for years to come.

Risks

  • Projects might not deliver in terms of credit quality, issuance schedule, and credit volumes
  • Prices actually decrease over the coming years. Although this forms part of rational thinking, the forecasted demand, supply, and pricing scenarios point to the opposite outcome. More info on this at the end of this module.

Important takeaways when considering a year-on-year or multi-year strategy:

  • Spot credits are still relevant for companies who need to take action now through buying while planning for the future years using advanced market commitments
  • As the market is maturing, spot credits are becoming less popular due to company decision-makers wanting to see risk mitigation strategies, such as those presented by long-term carbon offsetting strategies.

Insight: Carbon credits are seen as financial assets and buyers apply many of the same practices to reduce risk, for example, hedging against predicted rising prices by buying cheaper credits now to retire in years to come

Other strategies to consider

  • Project Development and Ownership: Some companies invest directly in the development of carbon offset projects, either independently or through partnerships.
  • Sector-Specific Projects: Select projects that have a direct relation or positive impact on the company's sector.

3. Portfolios

In the previous section, we gave some insights into important purchasing considerations, in which Diversification plays a role in reducing risk through buying a range of different credits from different projects. Just like in the financial world, the set of carbon credits (assets) you purchase and hold is referred to as your portfolio.

A Carbon Credit Portfolio is a collection/ bundle/ combination of carbon credits from various project types. It could for example be made up of Reforestation, Biochar, Blue Carbon, and Direct Air Capture Credits. The goal is to diversify one’s investments to spread the risks and rewards.

Ideal mix for carbon credit project portfolio

Nowadays, a similar approach is taken by carbon credit buyers. They are looking to make use of Carbon Credit Portfolios, which many marketplaces and carbon credit sellers offer, to achieve the same spread of risk and reward/ impact that is achieved by portfolios in the investments industry.