Can companies achieve zero climate impact?

The VCMI platform designs the guidelines to make voluntary carbon markets robust and reliable, and prevent companies from falling into image washing.

Emissions offsetting is only justifiable if companies have climate neutrality plans aligned with the Paris agreement and go the extra internal mile to cut gases.

Are the announcements of companies that promise zero climate impact credible? or that they almost are? These are pertinent questions because large companies make repeated use of these types of statements. But do these ads have a real basis to sustain them?

Behind this debate is the operation of the so-called voluntary carbon markets (CVM), in which companies can buy voluntary rights or credits to offset the gas emissions of their activity.

However, the use of voluntary markets to meet their decarbonization goals is rekindling concerns about the image laundering of companies and investors.

Aligned with the Paris agreement and science

The action of companies in this field takes place in a context of social pressure for companies to design decarbonization strategies aligned with the Paris agreement and the latest scientific information on climate change, which requires achieving a balance of zero emissions by mid-century.

Strictly and comprehensively, this would lead them to focus their action on the use of renewable energies, the use of cleaner technologies and more efficient actions.

But many companies cannot reduce their gases or tackle that transformation, and, for various reasons, opt for emissions offsetting by turning to voluntary markets, sometimes seeing them as a practical shortcut. This is how they obtain the rights or credits that certify the existence of projects (afforestation and afforestation, clean energy, efficiency), located anywhere in the world, which avoid or absorb emissions, to achieve the guarantee that allows them to account for these discounts in their CO2 inventories.

A market to regulate

But the voluntary market is a system that is little (or nothing) regulated. It should be stressed that this is not the same as the European Emissions Trading System (ETS), set up by governments to incentivise the most carbon-intensive sectors to reduce emissions, a market in which the EU controls the (declining) availability of these rights and their prices. Through this system, some 12,000 facilities (cement, refining, steel, coal or gas thermal, glass, tile …) are tied hand and foot and must buy their emission rights to continue operating.

On the other hand, many other business sectors (telephony, oil, food, agribusiness, among others), not subject to legal regulations, act voluntarily.

Three motivations

Companies that go to voluntary markets do so convinced that in the future this activity will be regulated, so they want to explore what is coming. Sometimes they act moved by reasons of corporate responsibility or the will to present themselves as a green company before society; and others feel pushed in this direction by administrations that require this carbon calculation to be awarded certain public services, or before the demand for these reports by banks. Companies that act voluntarily can make a calculation of their carbon footprint (emissions in their facilities, energy consumption and the impact of their suppliers or even customers). Others have their own projects to offset emissions; and many go to the markets to justify that they have obtained these reductions.

But the fact that voluntary markets have an unregulated nature is the cause of many uncertainties and risks. It is worrying, in this sense, that these credits, instead of motivating and encouraging structural changes towards decarbonization, are only patches.

Boiling projects

Without standardized guidance or regulations, there is a risk that this is a fertile field for image washing.

The boiling of projects of all kinds in this market is so enormous and there are so many initiatives, that there is a risk that “many projects may overlap”; that is, that the same projects give rise to credits that are counted twice or that are even marketed in different markets. Or there may be projects that do not take into account the full scope of emission-generating activities that need to be offset. This would put in the pillory an effective reduction, according to Ismael Romeo, of Sendeco2, which sells both credits from the market protected by the UN and voluntary market certificates.

Marshy terrain

Many of these voluntary market rights or credits show weaknesses. For example, if they are certified that guarantee the protection of a forest that absorbs CO2 by fixing on the wood, how do you guarantee that there are no emissions and reverse the situation if there is a forest fire?

“We entered a swampy terrain because there are different projects to compensate; the prices depend on the project or the methodology used, or the support that the verification company has,” says Ismael Romeo.

To counter all this, many experts call for a global registry and for all available projects and credits to be tracked.

VCMI platform designs guidelines to make voluntary markets credible

“There is a risk that companies will use carbon credits to continue their usual activities rather than avoid, reduce or substantially reduce emissions, and that would undermine efforts to mitigate climate change, delay the adoption of new low-carbon technologies and erode trust,” said Mark Kenber, co-executive director of the Voluntary Carbon Markets Integrity Initiative (VCMI, for its acronym in English.

Precisely, the VCMI platform is working to ensure that these voluntary markets are transparent and robust and contribute to the global goal of limiting global warming to 1.5ºC. This platform was born with the will to be the germ that opens the way to a future regulation. It has multiple and prominent actors (such as the government of Great Britain, the US Special Envoy for Climate, John Kerry or the United Nations Development Program, UNDP).

Its first initiative is to draw up a commitment guide (to be presented next month) that will include the steps that companies must take and under what circumstances they should use carbon credits. It will be a practical manual with the requirements that must be given to make credible use of these credits, Kenber says.

Rising markets

Voluntary markets are growing exponentially and reached $1 billion in 2021, according to the NGO Ecosystem Marketplace.

A 2021 report by management consultancy McKinsey estimated that demand for voluntary carbon credits could increase fifteenfold by 2030, with a total market that would reach a value of US$50 billion.

The VCMI initiative was born with the aim of guaranteeing certainty, cohesion and coherence to guarantee how these commitments (which should be assumed by the world of advertising or governments) should be regulated, in order to give credibility to carbon markets.

“Our guidance will make it clear that a company can only use carbon credits if it has a credible, verified, science-aligned zero-emission path mapped out and is consequently reducing its emissions,” Kenber says.

“We are clear that voluntary carbon markets should only be used as an additional activity reserved for emissions that companies cannot reduce,” he adds.

Proponents of such initiatives are aware that in order to banish the risk of accusations of image laundering, it is critical that this guide discloses decarbonisation progress before using markets.

Buying voluntary loans of low cost on the market can end up being a counterproductive formula, and gives a bad image, if it is not accompanied by real action efforts)

It’s about ensuring at the same time that “companies that actually go the extra mile are properly recognized.”

“These voluntary markets offer flexibility in the action of companies to act. Welcome to them. But they should only be used when the other options to reduce emissions with direct and real measures have been exhausted. They should be used only as an additional action,” says Mikel González-Eguino, a researcher at the Basque Centre for Climate Change.

Before offsetting emissions by going to the voluntary market, “wouldn’t it be better to change your transport fleet, switch to electric motors, or just take the car less?” asks González-Eguino, who repeats his slogan. “They must be additional projects and with a correct verification.”

Provide facilities to companies and establish credible methodologies

Mark Kenber considers it necessary to give facilities (“gateways”, he says) to companies so that they have enough confidence “to invest in carbon credits and, in parallel, offer society the assurance that these investments are really aligned and keep alive the objective of curbing warming to 1.5 ºC”.

Kenber is a strong supporter of voluntary markets meeting a dual objective: “to generate emission reductions and investments in the countries hosting projects.”

Therefore, it advocates applying a criterion of environmental integrity, which implies, on the one hand, that “projects must generate carbon savings that would not be given otherwise, and, on the other, respect the rights of indigenous peoples and local communities, and provide them with additional benefits”

The platform is also working to establish global thresholds for high-quality carbon credits “that will help determine which carbon credit programs and methodology are credible.”

Projects that lack guarantees

Emission reduction projects do not in all cases offer the same guarantees; they lack a follow-up for their verification and, above all, they offer different prices.

For this reason, Ismael Romeo believes it is necessary to homogenize them.

“There are many products and very different, and they don’t have the same quote. Voluntary certificates do not have the “seal” of the United Nations, although they do have the endorsement of private certifiers who accredit their quality. That’s why it’s important to know who has validated that certificate in each case,” says Romeo. There may be certificates that do not have that required quality, but they are also sold in the market.

Different prices

That disparity makes prices different too, Romeo adds. While the emission rights subject to the European emissions trading directive, protected under the UN umbrella, cost about 82 euros per ton (CO2 not issued or neutralized), voluntary credits are worth between 2 and 20 euros per ton, but they have come to be worth 0.2 cents: a price so ridiculous that it does not move companies to act with preventive actions.

Companies can have these credits from the voluntary market as a formula to reduce emissions, but they are not interchangeable with those of the regulated market, recalls María José Sanz, director of the Basque Centre for Climate Change.

Science Based Targets (SBTi)

María Mendiluce: “10% of emissions must follow the path of compensation”

“That companies act voluntarily in climate protection without being required by the regulator is a very good thing,” says María Mendiluce, CEO of We Mean Business, a coalition that includes more than 7,000 companies (from multinationals to SMEs). This platform has created voluntary standards for those companies with climate neutrality goals. The coalition is made up of seven major international organizations (BSR, The B Team, CDP, Ceres, CLG Europe, Climate Group and the World Business Council for Sustainable Development).

María Mendiluce explains that this organization assumes the goal of net zero emissions by 2050 (in line with the new scientific reports) through its Science Based Targets (SBTi) initiative. His organization estimates that companies can reduce their emissions by an average of 90%, so the remaining 10% must follow the path of compensation, since there are sectors (aviation, steel …) that lack immediate alternatives.

“The SBTi was created precisely to create the rules that guarantee that these commitments are reliable and generate emission reductions,” says Mendiluce.

To estimate their emissions, companies can make a calculation of the carbon footprint of their activity. In many cases there is a clear incentive to reduce emissions in their facilities (scope 1) or in electricity consumption (scope 2), but it is more difficult to reduce emissions from their value chain, which includes thousands of suppliers and customers (scope 3), and these are the emissions that companies would like to compensate with the voluntary market.

María Mendiluce firmly believes in the voluntary market and defends it against criticism of image washing. “There is criticism against companies that do things, and very little criticism against companies that do absolutely nothing,” she says, convinced that this is a field in continuous evaluation and learning that will benefit carbon markets and the climate.

María José Sanz points out that the great debate is whether or not projects subject to the voluntary market are an effective instrument to reduce emissions. “And this depends on each project,” he says.

“Voluntary markets are one part of the solution; the problem is that they tend to be a means to become a fi in itself pampered, “he says.

In his opinion, projects that result in emission reduction certificates offer guarantees if they are small but present many uncertainties if the scale increases.

The voluntary market is not covered by the UN Kyoto Protocol, which sponsored emission reduction certificates (the result of clean development projects). “Above all, they were very limited in size forestry and reforestation projects.” These rights have been cancelled; they have not been inherited or dragged into the current Paris Agreement. “We did not want to flood the markets with credits that were very cheap,” recalls María José Sanz.

UN Concern: Avoid double counting of emission reductions

UN Secretary-General Antonio Guterres expressed concern at the Glasgow summit about the lack of guarantees offered by announcements of decarbonisation strategies for companies. “Who is going to certify that all these announcements of decarbonization strategies are true?” asks María José Sanz.

The emission reduction pledges that countries make are reviewed every two years and that is the best indicator that allows us to know if their gas inventory goes up or down. But in the case of the private sector there is nothing similar. “There are multinationals working in several countries; their reductions are already sometimes accounted for in national inventories, and cannot be separated,” says Sanz, pointing to the risk of double accounting of these reductions.

Source: The Vanguard