By Sarah Leugers, Gold Standard 

The voluntary carbon market emerged to fill a gap left by insufficient climate policy. When used properly, it is a powerful way to reduce global emissions.

Given the binary nature of the Kyoto Protocol, under which only developed countries took on emissions limits, a “carbon neutral” target has been a simple way for companies to set ambition and take action outside their boundaries – that is, beyond what would be included in their inventory reporting – and to unlock unique claims.

Today, the picture is more complex and dynamic:

• The nature of the Paris Agreement means all countries have targets – nationally determined contributions. These will expand over time, increasing the double claiming risk between project + carbon offset buyer claims and country inventory reporting.
• More companies and investors are initiating climate efforts in and around their value chains, introducing potential overlap or double claiming between “Scope 3” inventory reporting and carbon offset projects.

Remember that carbon neutrality as a headline claim and carbon offsetting – the action that underpins it – must, by definition, represent unique claims or attribution of the underlying emission reductions. This is because offsetting promises that the atmosphere is no worse off despite the continuation of emissions, thanks to them being offset. This cannot be guaranteed without a unique claim, as it is not possible to know the impact on the behaviour of the second claimant – whether that’s a country in the case of NDCs or another company for Scope 3 reporting.

What this means in practice, with expanding national targets and new efforts within value chains, is that the space for carbon offsetting is becoming increasingly limited. This is a good thing. The more emissions that are covered by national or corporate commitments and efforts, the better. But it inevitably means there is less space for a practice – carbon offsetting – that relies on a unique claim to an emission reduction.

“Carbon offsetting represents, by definition, unique attribution.”

That does not mean, however, that the voluntary carbon market is limited. Offsetting and the voluntary carbon market have becoming intrinsically linked, to the extent that carbon credits are often referred to as ‘offsets.’ But the act of offsetting is only one specific use of carbon credits. It need not be the only one. In fact, there is growing interest in uses of the carbon market that do not rely on unique claims.

Expanding the use of the voluntary carbon market to accommodate new claims can crowd in even more investment to help close the 32 GtCo2eq emissions gap[1] as well as the roughly USD $2-6 trillion climate finance gap[2], without being limited to a narrowing pool of options available for offsetting.

Addressing concerns about new claims

Some Gold Standard stakeholders have expressed scepticism about a new approach to claims, worried that efforts may retreat from some quality measures established by carbon offsetting. These concerns include providing sufficient incentives for the private sector to take action, setting ambition adequately, and ensuring that money invested leads to real impact. We appreciate and share these concerns, and yet we are confident we can mitigate any risks and build on success.

Let’s take them in turn.

To incentivise action, a compelling headline claim is certainly helpful. Fortunately, the Science Based Targets initiative (SBTi) has effectively paved the way, setting the standard for a headline claim – Net Zero. This allows companies to use carbon removals to neutralise their residual emissions using verified carbon removals, but only once a target year is reached. This is 2030 in more ambitious examples; 2040 or 2050 in many others.

This prompts the second concern. We shouldn’t let long term Net Zero commitments displace the urgency of taking action now, nor give a free pass for emitting today – both of which the offsetting model has addressed well. Indeed, companies should continue to take full responsibility for their unabated emissions along the way to Net Zero, which is also encouraged by SBTi in their Net Zero guidance as well as the Taskforce for Scaling the Voluntary Carbon Market.

This responsibility can be achieved via the voluntary carbon market, regardless of claims, preserving integrity measures such as additionality, robust quantification methodologies, and independent third party verification to provide certainty of impact delivered for the investment made.

This keeps ambition in line with today’s carbon footprint and provides motivation to further reduce in-boundary emissions. However, whether that incentive to reduce further is material or not depends on the price paid for carbon credits. To date, the voluntary market has largely failed to deliver a meaningful price, making it subject to claims of greenwashing or passes to pollute.

While prices for carbon credits may yet rise due to increased demand, and there has been merit in aiming for lower costs of abatement, this is no longer enough. Carbon pricing must better account for the cost of pollution, pay back the real costs of reducing it, and sufficiently motivate companies to continue to prioritise further internal reductions to reach their targets. In other words, carbon markets should be used not for low-hanging fruit that policy can reasonably be expected to cover, but for high-ambition action that policies are unlikely to address in the near term.

Emerging framework of best practice

A number of international initiatives, such as the Voluntary Carbon Market Integrity (VCMI) Initiative are seeking to provide guidance and frameworks for companies to use the voluntary market responsibly, including through new claims. This is needed sooner rather than later, to guide corporate action and safeguard against misuse.

One approach, which Gold Standard welcomes, is that companies should price emissions in a material way, using not just a shadow price that helps manage risks but also a carbon fee that can be deployed to climate actions today. This carbon fee should increase steadily over time, approximating the social cost of carbon by mid-century. With proceeds from this carbon fee, the company may use the voluntary market to reduce emissions beyond its boundaries at least in a volume equivalent to its footprint, to have certainty that they have taken full responsibility for their climate impact today.

A percentage of carbon fee can then be allocated toward catalytic climate action. This can include activities that are too expensive to be competitive in high-trade carbon markets, unable to be quantified down to the tonne, or cannot be exclusively allocated to one specific financial contributor. These efforts can include, for example, collective action among companies in a shared supply shed, landscape-level conservation, adaptation efforts, or innovation for next-generation climate-smart technology.

With this approach, in line with the WWF Blueprint for Corporate Action on Climate and Nature, companies can support emissions reduction both within and beyond corporate boundaries, using a material carbon price to take full responsibility for unabated emissions and drive innovation for climate security.

1. Price emissions: Establish an ambitious carbon fee that increases over time toward the social cost of carbon
2. Reduce within: Set a Net Zero target, based on science, with near-term milestones
3. Finance beyond: Reduce emissions beyond boundaries in line with carbon footprint using the voluntary carbon market or other additional, robustly quantified results-based impacts
4. Invest in the future: Allocate funds toward conservation, adaptation, and catalytic change

Climate impact claims

For step 3, companies can credibly claim climate impact through their purchase of carbon credits or other investments resulting in verified impact, without corresponding adjustments being required, and thus without claiming offsetting or carbon neutrality.

This is already happening. Take Microsoft’s most recent climate pledge. They go further than Net Zero and commit to being Carbon Negative by 2030. In addition to this headline claim, they describe the actions they will take, including this:

“We will take responsibility for all our emissions, so by 2030 we can cut them by more than half and remove more carbon than we emit each year.”

Microsoft does not claim to be offsetting, yet they are using market instruments for their commitment to remove carbon.

Klarna have also recently announced an approach that follows the WWF Blueprint, using these same principles but adding a material carbon fee they use to channel finance to climate projects. They have published guidelines on how to allocate these funds, but the uncertainty of the per-tonne impact is also transparently disclosed.

The evolution for claims using the VCM can be just that simple. If your financial contribution made the change happen:

                       In corporate boundary -> Count in GHG inventory

                      Beyond boundary

-> When outcomes are additional, robustly measured, and independently verified: Claim to have made a climate impact; claim to have reduced or removed emissions

-> When clear outcomes aren’t possible: Claim the investment only, not the impact

Next frontier: Value chain reporting

As companies are increasing efforts to reduce Scope 3 emissions, so does the double claiming between a corporate Scope 3 target and carbon credits. Yet again, expanding beyond just an ‘offsetting’ claim can also be the solution. A company can invest in change and share the resulting low-carbon attributes (e.g., lower emissions factors for purchased goods) throughout their sourcing chain, making those goods more valuable.

This means that market mechanisms can now be leveraged for carbon offsetting and beyond, where they need not be limited by the requirements of unique ownership, or even permanence, which have haunted market-based land use projects since the start.

Next generation of claims for beyond-boundary climate action

With this evolution, we can build on success and expand to accommodate a new reality where beyond-boundary climate action is effectively limited to unique ownership of a single claim, toward a future where we crowd in actors who contribute to many forms of climate action – creating value that can be shared to the benefit of all. Companies deliver their own climate strategies while helping their value chain partners, AND local and national governments meet climate targets. In this way, rather than working in silos with increasingly acrobatic measures to avoid double claiming, markets and other corporate actions and investments can work together to deeply decarbonise the economy.

Sarah Leugers is Gold Standard’s Director of Communications.

[1] UN 2020 Gap report

[2] Green Bank Network – https://greenbanknetwork.org/portfolio/mind-the-gap-bridging-the-climate-financing-gap-with-innovative-financial-mechanisms/