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 a Vintage?
In the context of climate projects and carbon offsetting, a vintage refers to the year in which the carbon avoidance or removal occurred and the carbon credits were issued. It essentially dates the emission reductions, much like a vintage dates a bottle of wine. The vintage of a project is important to look at, as it indicates when the environmental benefits from a climate project were realised.
How to Choose the Right Vintage
- The selection of a vintage should align with an entity’s climate goals and offsetting strategies. For instance, a company might prefer recent vintages to align their offsets with their current-year emissions.
- Some regulations or standards might dictate the use of specific vintages, especially in compliance markets.
- The vintage can also reflect the stage of development or impact of a project. Newer projects might issue more recent vintages, while established projects could have a range of vintages available.
- Projects with more recent vintages are more likely to be based on the most recent methodologies and technological advancements, increasing the likelihood of the project being of high integrity.
- Projects with older vintages might rely on outdated methodologies, so it is important to conduct thorough due diligence to make sure this is not the case.
Why Old Vintages Are Not Necessarily Bad
- It is easier to assess an older project’s performance since it has a proven track record.
- Older vintages can be more cost-effective compared to newer vintages.
- The benefits of a climate project, especially in terms of ecosystem services like biodiversity, often extend well beyond the year the credits were issued.
- Older vintages have often undergone more thorough verification processes, and the projects are likely to have matured and stabilised.
How to Use Vintages to Build a Diverse Portfolio
- A diverse portfolio should balance different types of projects, vintages, and locations to optimise impact and manage risk. Including a mix of old and new vintages can balance immediate and long-term climate goals.
- Older vintages can be used to offset past emissions or for cost-effective bulk purchasing, while newer vintages can be aligned with current or future emissions reduction strategies.
- By including a variety of vintages, an entity can support a broader range of projects, from early-stage initiatives needing support to well-established ones with ongoing benefits.
- Diverse vintages can help meet different objectives, from compliance with regulatory requirements to voluntary sustainability goals.