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 Paris Agreement?
The Paris Agreement is a landmark international treaty on climate change, adopted at COP21 in Paris on 12 December 2015, and implemented in November 2016. The agreement marks a collective commitment of 196 parties to combat climate change and adapt to its effects.
The core objective is to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. Its innovative approach involves Nationally Determined Contributions (NDCs), where each country sets its own emission reduction targets and strategies.
Brief History and Updates Since 2015
The Paris Agreement builds on the legacy of the Kyoto Protocol, which first established legally binding obligations for developed countries to reduce greenhouse gas emissions in December 1997. Unlike the Kyoto Protocol, the Paris Agreement involves both developed and developing countries in the climate action framework.
Since 2015, the Paris Agreement was rapidly ratified by parties, signifying global recognition of the urgent need for climate action.
A significant update has been the push for countries to submit more ambitious NDCs by 2023, reflecting the escalating urgency of the climate crisis.
The Agreement introduced five-year cycles for countries to update and enhance their climate actions, ensuring ongoing progress.
How Well Have Countries Been Sticking to It?
The compliance with the Paris Agreement varies significantly among countries. Global greenhouse gas emissions have continued to rise, though there is evidence of a decoupling of emission growth from economic development in some regions.
Municipalities and the private sector have been playing crucial in driving climate action, often filling gaps in national efforts thanks to frameworks such as the IPCC and SBTi.
Future Considerations and Predictions
The immediate focus is on countries enhancing their NDCs to align more closely with the 1.5-degree target.
Increased support for developing nations is vital, both in terms of finance and technology transfer.
Advancements in renewable energy, energy efficiency, and green technologies are expected to play a critical role in meeting the Agreement’s goals.
More countries and companies are likely to set Net Zero emissions targets, aligning long-term strategies with the Paris Agreement.