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 the Mitigation Hierarchy?
The Mitigation Hierarchy is a structured approach for companies to minimise their greenhouse gas emissions. It provides a framework for prioritising actions that reduce emissions, aligning with the path to achieving Net Zero targets.
Stages of the Mitigation Hierarchy:
Avoid: Prioritise activities and strategies that avoid emissions
Reduce: Focus on reducing absolute emissions within operations and the supply chain
Offset: Compensate for unavoidable emissions through quality carbon credits, focusing on removal projects
Importance of the Mitigation Hierarchy for Net Zero:
The mitigation hierarchy is critical in guiding businesses towards efficient and effective climate plans.
It emphasises reducing emissions, especially Scope 3 emissions, as a primary goal for businesses in their Net Zero transition.
Challenges and Considerations:
Balancing Different Steps: Successfully implementing the mitigation hierarchy requires balancing various strategies to achieve a comprehensive approach to emissions reduction.
Quality of Carbon Credits: When compensating for emissions, the quality of carbon credits is vital to ensure genuine climate benefits.