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 Credit Retirement?
Credit retirement is the process of permanently removing a carbon credit from circulation after it has been used to offset/neutralise emissions. This action finalises the offsetting process, ensuring that the credit cannot be reused or claimed by another entity. It represents the actual achievement of an emission reduction or removal, and is essential for maintaining the integrity and effectiveness of carbon markets.
Prevention of Double Counting
The primary goal of credit retirement is to prevent double counting, where the same emission reduction or removal is claimed by more than one party. This practice can undermine the credibility and goals of carbon offsetting efforts.
Registries like Verra, Gold Standard, Puro, and EcoRegistry keep track of carbon credits through their lifecycle, including issuance, sale, and retirement. This tracking is crucial to ensure transparency and to prevent double counting, confirming that each credit is only used once.
When Should you Retire Credits?
Credits should be retired when an entity aims to neutralise a certain amount of emissions as part of its sustainability strategy. The timing usually aligns with the entity's reporting period for greenhouse gas emissions.
Timely retirement is essential for entities seeking to fulfil their environmental commitments or adhere to certain standards and certifications.
What Happens if You Don’t Retire Credits?
- If credits are not retired, they can remain active for trading. This provides a financial opportunity but can also lead to market volatility.
- Holding credits as investments carries risks, as their value can fluctuate. The non-retirement of credits can also attract scrutiny regarding the sincerity of an entity's commitment to genuine climate action.
- The environmental benefit of a credit is only realised upon its retirement. Delaying this process means postponing the actual emission reduction or removal, which can impact the entity's sustainability claims and overall climate goals, putting them at risk of greenwashing accusations.
- Non-retired credits risk being used in ways that don't contribute to genuine emission reductions, such as being counted multiple times or used to greenwash activities without real climate benefits.