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 are Nature-Based Solutions (NbS)?
Nature-based Solutions (NbS) make use of natural processes and ecosystems to mitigate climate change. Examples include reforestation, wetland restoration, and urban green spaces. These solutions are cost-effective over time, providing extensive co-benefits like biodiversity conservation and water regulation. That being said, NbS can often be slow to implement, while also being vulnerable to climate impacts.
What are Tech-Based Solutions (TbS)?
Technological-based Solutions (TbS) make use of engineered processes and innovative technologies to mitigate climate change. This includes carbon capture and storage (CCS), direct air capture (DAC), and renewable energy technologies like solar and wind power. TbS are characterised by their rapid scalability and high predictability, though they often require significant investment and infrastructure, with limited co-benefits beyond emission reduction/removal.
Key Differences between NbS and TbS
- Co-Benefits: NbS offer a range of environmental and social co-benefits, enhancing ecosystem and community resilience. In contrast, TbS primarily focus on direct emission reductions and removals.
- Implementation and Scalability: While NbS can be cost-effective and provide long-term benefits, they may take longer to implement and are subject to natural vulnerabilities. TbS offer quick, scalable solutions but come with higher initial costs and potential technical barriers.
- Availability and Pricing: Given the novel nature of the technologies behind TbS, many of them are not available at scale yet, meaning that supply of many engineered solutions is quite limited, and prices are often quite high. Conversely, NbS solutions make up the majority of the available project supply, making these types of projects easier to source at competitive prices.
- Permanence: NbS generally have a carbon sequestration period of up to 100 years, while TbS can store carbon for an indefinite period exceeding 100000 years.
Choosing the Right Projects for Your Portfolio
Selecting the right mix of NbS and TbS for a climate mitigation portfolio requires considering your organisation's goals, investment capacity, and the desired balance between immediate impacts, carbon storage period, and sustainable benefits. A diversified portfolio that leverages the complementary strengths of both NbS and TbS can offer a robust approach to addressing climate change and addressing Net Zero targets.
Not sure where to start? Get in touch with the Senken team and we will set you on the right path.