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 Leakage?
Leakage in carbon credit projects refers to an unintentional increase in greenhouse gas (GHG) emissions outside the project's scope, that takes place as a result of the project's implementation. It's a critical factor to evaluate alongside additionality and permanence when assessing a project's real-world impact on emission reductions.
Significance of Leakage in Carbon Credits
Leakage challenges the integrity of carbon credit projects. Without properly accounting for leakage, projects might overstate their net climate benefits. Just as additionality ensures that the emission reductions are a direct result of the project, leakage ensures that these reductions are not offset by increases elsewhere.
Measuring and Controlling Leakage
Similar to assessing additionality, leakage is estimated by examining indirect impacts of a project. For example, if a forest conservation project reduces logging in one area, does it inadvertently increase logging in another area?
Leakage is factored into the baseline scenario of a project. This scenario, like in the case of additionality, represents the 'business-as-usual' emissions.
Regular monitoring, as part of the project’s MRV (Monitoring, Reporting, and Verification) process, is crucial to track and address leakage over time.
Types of Leakage
Activity Shifting Leakage: Occurs when activities causing emissions are simply relocated to areas outside the project.
Market Leakage: Results from market-driven responses to a project, like changes in supply and demand of commodities.
What does this mean for Sustainability Leaders?
For leaders and organisations committed to credible climate action, understanding leakage is essential. It ensures that investments in carbon credits and climate projects achieve genuine emission reductions. Recognising and addressing leakage is crucial to avoid inadvertent negative impacts and to maintain the credibility of carbon offset initiatives. It is also important to not look at leakage alone. It is also critical to assess factors such as additionality and permanence when evaluating the quality of a project.