The transition to a low carbon economy is on every CEO's agenda nowadays. The impacts of climate change and responses to it will transform every business sector in the coming decades. Although Climate change will affect a majority of companies, all will be expected to contribute to its solution.
Nevertheless, it is challenging for most companies to devise and implement a credible decarbonisation strategy. The transition requires new ways of doing business, including new ways of displaying capabilities and resources and new ways of thinking. But despite the challenges, companies around the world are scaling up their decarbonisation commitments.
We can see this trend with the number of companies committing to reducing emissions. More than 2000 companies have confirmed emissions reduction targets under the Science Based Target initiative (SBTi). Additionally, more than 370 have committed to The Climate Pledge, pledging to achieve net zero emissions by mid-century or sooner.
For most companies and investors, carbon credits play a crucial role in their Net-Zero strategy. They allow companies to make earlier and more ambitious commitments. Credits allow companies to reduce their current emissions through offsets, while taking cost-effective steps to reduce future emissions through asset rotation and business model development. In the long term, credits can play an essential role in offsetting difficult-to-avoid emissions from products for which no low- or zero-emission options exist.
The growing interest in recent years is also reflected in the Voluntary Carbon Market (VCM), which organises the pledging and trading of carbon credits. In 2022, the demand for carbon credits is at its peak. Prices have increased by more than 140% since 2021 and forecasts assume that demand for credits will increase 15-fold by 2030, to $50 billion per year.
But the voluntary carbon market has a problem. It cannot cope with demand. Access, which plays a crucial role in the global effort to combat climate change, is often limited to large organisations and is characterised by opaque pricing and market inefficiencies. Furthermore, due to a lack of transparency and credibility, it has faced a number of problems in recent years.
This report examines the key role for on-chain carbon credits as part of net zero strategies and the VCM. It was prepared by senken to help business decision makers identify and understand the best use of credits for their business.
What is CO2?
Carbon Dioxide (CO2) is a greenhouse gas that is produced both naturally and through through human activities. Despite being a vital component of life on earth, CO2 is also a major contributor to climate change - especially due to emissions from human activities. The primary source of human CO2 emissions comes from the burning of fossil fuels for energy and transportation, making it the largest contributor to global warming, accounting for over 75% of global GHG emissions.
CO2 and Greenhouse Gases (GHGs)
Greenhouse gases include carbon dioxide (CO2) methane (CH4), nitrous oxide (N2O), and fluorinated gases. Each of these gases possesses distinct properties with different effects on the climate. Methane, for example, has a much higher heat-trapping ability compared to CO2, whereas CO2 remains in the atmosphere for a significantly longer period than other greenhouse gases.
CO2e, or carbon dioxide equivalent, is a measure that is used to compare the emissions of various greenhouse gases based on their global warming potential. This standardised measure allows for a more comprehensive assessment of the impact of various emissions, which helps to better understand and mitigate the effects of global warming.
Converting GHGs to CO2
The conversion of different GHGs to CO2e involves multiplying the quantity of the GHG in question by its Global Warming Potential (GWP). GWP is a measure of how much heat a GHG traps in the atmosphere compared to CO2. For example, methane is 28-36 times more potent than CO2 over a 100-year period. This calculation provides a more accurate representation of the overall impact of GHG emissions.