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 a Corporate Carbon Footprint?
A Corporate Carbon Footprint refers to the total amount of both direct and indirect Greenhouse Gas (GHGs) emissions by a company/organisation. It is generally measured in tons of carbon dioxide equivalent (CO2e), which factors in all GHG emissions associated with the business' operations. This includes Scope 1, Scope 2, and Scope 3 emissions.
Scope 1, 2, and 3 Emissions
- Scope 1 Emissions: Direct emissions from sources owned or controlled by the entity.
- Scope 2 Emissions: Indirect emissions from the generation of purchased energy sources.
- Scope 3 Emissions: All other indirect emissions that occur in a company's value chain, including both upstream (e.g., purchased goods and services) and downstream (e.g., transportation and distribution, use of sold products) activities.
Scope 3 emissions generally make up the largest portion of a company’s emissions and are the most complex to work out. Even a large portion of companies in the DAX-40 struggle with reporting on their Scope 3 emissions, meaning that companies who manage to do this successfully really can stand out as sustainability leaders in their respective industries.
Importance of Measuring Corporate Carbon Footprint
Companies looking to fully understand their environmental impact need to begin with measuring their corporate carbon footprint. This helps uncover areas with room for emission reductions, and forms a critical step in developing an effective climate strategy. This can also inform external figures about the company's sustainability commitments, which can influence investor and consumer decisions.
Strategies for Reduction and Management
Strategies to reduce a corporate carbon footprint include activities such as optimising energy efficiency, using more renewable energy, redesigning products & processes, and investing in carbon removals. In addition to this, setting science-based targets and maintaining transparent reporting and verification practices are both important practices for effective carbon footprint management.
Regulation Around Reducing Carbon Footprint
There are several layers of regulation affecting companies, including international agreements like the Paris Agreement, national and regional policies (such as carbon taxes and cap-and-trade systems), sector-specific regulations, and voluntary standards like the Science Based Targets initiative (SBTi). These regulations and standards vary by region and industry but collectively push for lower carbon emissions in corporate operations.