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 Double Counting?
Double counting in the context of carbon offsetting occurs when a single emission reduction or removal is claimed more than once. This can happen in various ways:
- Claimed by Multiple Parties: When the same emission reduction is claimed by two different entities, such as a project developer and an end-user.
- Country-Level Double Counting: Occurs when emission reductions are counted towards both a country's national targets under international agreements and by another entity, such as a company, for their offsetting purposes.
Why is Double Counting a Major Problem?
- Double counting skews the actual impact of carbon reduction efforts. It gives a false impression of progress towards emission reduction targets, potentially slowing down real climate action.
- The integrity of the carbon market depends on the trust that each credit represents a unique and actual reduction in emissions. Double counting undermines this trust and can deter participation in the market.
- If unchecked, double counting can lead to an overall increase in emissions, as entities may rely on offsetting claims that don't correspond to real reductions in GHGs.
How to Avoid Double Counting
- Effective tracking systems and carbon registries like Verra, Gold Standard, Puro, and Ecoregistry ensure that each credit is only counted once. These registries assign unique serial numbers to credits and meticulously track their issuance, transfer, and retirement.
- Transparency in the reporting and verification processes is fundamental. This includes clear documentation of carbon credit ownership and retirement, which is publicly available on the registry that the project is registered on. This helps ensure that all parties can see the status and history of each credit.
- Compliance with international standards and agreements is key to avoiding double counting. Article 6 in the Paris Agreement outlines cooperative approaches, including a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development, with strict accounting to avoid double counting. The International Carbon Reduction and Offset Alliance (ICROA) also sets forth best practices in this field.
- Employing third-party verification services, such as those provided by TÜV or SGS, adds an additional layer of credibility that the project’s claims are valid and not double-counted. These verifiers assess the project's adherence to specific criteria and standards, confirming the authenticity of the carbon credits.
- Buyers of carbon offsets should be fully aware of double counting risks and undertake comprehensive due diligence. It's crucial to check that the credits they are purchasing are retired in a single registry and not claimed by another entity.