Carbon credits’ role in net zero

Jump to section

Key Takeaways

  1. Since 2019, there has been a 700% increase in businesses enquiring into carbon offsetting.
  2. Carbon offsetting shouldn't be seen as a 'get out of jail free' card; it should rather serve as an incentive for companies to pursue more cost-effective emission reduction strategies that are essential.
  3. Carbon credits are an essential part of the business toolkit, providing flexibility, control and significant cost savings. — EY
  4. Credits allow businesses to reduce their emissions now through offsets while taking cost-effective action to reduce future emissions through asset turnover and evolution of their business models.— EY
  5. Recent studies have found that companies who use carbon credits as part of their decarbonisation strategy, are 1.8 x more likely to decarbonise year on year -  Ecosystem Marketplace. This debunks the myth that organisations buy credits instead of reducing emissions; on the contrary, they do both. - Sylvera Report

In this chapter, we will take a look at how carbon credits can be used to help your company reach net zero more efficiently and effectively. First, we take a look at some key terms before we then dive into which emissions carbon credits can help compensate for or neutralise.

What are carbon credits?

The carbon market is full of confusing jargon sometimes, so let's get clear on some of the key terms around carbon credits.

Carbon Credits

  • A carbon credit is a tradable certificate or permit representing the right to emit one ton of carbon dioxide or an equivalent amount of a different greenhouse gas.
  • Carbon credits are the tool used to “do” carbon offsetting.
  • Carbon credits are essentially the “net” in “net zero”.

Carbon Offsets

  • Carbon offsets are the actual reductions in emissions of carbon dioxide or other greenhouse gases made in location X to compensate for emissions made in location Y. One carbon offset therefore represents the reduction of one metric ton of carbon dioxide or its equivalent in one location, to compensate for emissions made in a different location.
  • Carbon offsetting is the act of purchasing and retiring a carbon credit created outside your supply chain, to compensate for a metric ton of carbon dioxide or its equivalent created inside your supply chain.
  • Carbon offsets are crucial for companies aiming to achieve net-zero emissions. They allow organisations to take responsibility for those unavoidable emissions by supporting external projects that remove emissions and have a positive environmental impact.

Carbon Insetting

  • Insetting is an innovative approach to compensation or neutralisation where companies use carbon credits sources from within their supply chain or operational processes, rather than from external offsetting schemes.
  • These projects are directly connected to a company's operations. Examples include investing in renewable energy projects within your supply chain or improving the energy efficiency of your operations.

Carbon insetting vs offsetting

Type of use Insetting Offsetting
Definition Investing in carbon removal or avoidance initiatives within its value chain Investing in external carbon removal projects
Connection Directly related to business operations Not directly related to business operations
Impact Improves sustainability of own operations/supply chain. Compensates for emissions elsewhere
Scope Typically limited to own industry or operational sphere Broad and varied, can be global in scope, or national
Risk High risk and technicality Lower risk and technicality, especially with robust DD and use of trusted partners
Example Upgrading to energy-efficient machinery in production Funding a wind farm project in a different region

Why We Recommend Carbon Offsetting

  1. Sphere of influence offsetting: Offsetting can also influence a sector's specific supply chain’s sphere of influence, for example Marine Transport sector investing in ocean-based carbon removal projects.
  2. Complementary Strategy: Emphasise that offsetting is not a replacement for direct emission reductions but a complementary strategy to achieve net zero.
  3. Global Impact: Offsetting allows the company to contribute to global carbon reduction efforts, which is crucial given the global nature of climate change.
  4. Proven methodologies, lower risk. Insetting is still a newer method for carbon removal and has some way to go to build a reputation for impact and trust.
  5. Flexibility and Scalability: Carbon offsetting projects offer flexibility and can be scaled up or down depending on the company’s emission reduction progress and goals.

Carbon Removal vs Carbon Avoidance

  • Carbon removal involves strategies and methods that actively extract carbon dioxide (CO2) and other greenhouse gases (GHGs) from the atmosphere. Carbon removal credits represent the removal of one ton of CO2 from the atmosphere.
  • Carbon Avoidance involves actions that prevent the release of Carbon Dioxide (CO2) and Greenhouse Gases (GHGs) into the atmosphere, reducing future emissions. Carbon avoidance credits represent the avoidance of the release of one ton of CO2 into the atmosphere.

The difference between compensation and neutralisation

In the previous chapter, we described how carbon credits help companies meet their net zero goals, by compensating for hard-to-abate emissions and neutralising unavoidable emissions.

Carbon Credits are critical to companies due to their ability to compensate for emissions that are hard to remove, and their ability to neutralise those emissions that are unavoidable, or impossible to reduce. Let’s take a closer look:

Compensation is for hard-to-abate emissions

Compensation describes using carbon avoidance or removal credits, to reduce carbon emissions that are hard to abate, or which cannot be reduced yet, helping to align the company's net zero pathway with the IPCC net zero pathway.

Neutralisation is for Unavoidable Emissions

Neutralisation describes eliminating all remaining GHG emissions that cannot be avoided, removed or reduced using the various emissions reduction measures discussed in the previous chapters. Therefore, to neutralise unavoidable emissions and reach net zero emissions, a company must use carbon removal credits.

Companies who can calculate and project these emissions early on in the net zero journey can receive a competitive advantage due to the cost savings associated with engaging with the market as soon as possible before demand for carbon credits grows exponentially, and prices increase.

The below graph is a representation of the effect of Carbon Removal Credits on a Net Zero Journey

Example of a company's net zero pathway