As the FTSE 350 pump cash into carbon credits, Tommy Ricketts argues that offsetting projects can change the game – if we know what they’re buying.
The heavy lifting on climate change needs to come from the corporate world. Carbon credits should form part of the business’s Net Zero transition, and a flurry of market innovations are transforming the way we understand their effectiveness.
According to a report from the Carbon Disclosure Project, just 100 companies worldwide have been responsible for 71 per cent of the world’s industrial greenhouse gas emissions since 1988.
This realisation has sparked an impressive response from businesses. Since the UK Government’s Net Zero Commitment in 2019, 82 per cent of FTSE 100 companies have set a 2050 target for net zero emissions.
The lion’s share of this reduction to 2050 must come from emissions reductions, such as switching to renewable energy sources and low carbon supply chains. But, with the current rate of technological progress, we will not reach net zero through emissions reductions alone.
Carbon offsets – both avoidance and removal – will be necessary to address the large residual emissions not readily reducible if we are to hit the Paris Agreement, and stay Net Zero.
These schemes have come under criticism or been seen as a “licence to pollute”. But it is a mechanism the market understands. Over the last two years, the vast majority (96 per cent) of Britain’s FTSE 350 companies have already upped expenditure on carbon credits over the past 24 months, while almost half (47 per cent) intend to increase spending dramatically over the next two years.
For this market to grow sustainably and rid itself of the “wild west” label, it needs to be able to appropriately understand the quality of these credits and manage and price their riskiness. In the same way when consumers take on debt, there are different levels of exposure, the same is true of carbon offsets.
Understanding this and building transparency into the system will enable it to grow and form a core part of businesses’ climate plans, just as some firms consider ditching their green strategies as a recession takes hold.
This is where carbon ratings come in. By providing an independent assessment of the quality of carbon offset projects – as bond ratings do in financial markets – carbon ratings can help buyers evaluate the risk that a credit will return a tonne of carbon removed or avoided. In turn, carbon ratings can help with price discovery in the market, as buyers will be more willing to pay a premium for high-quality, independently verified carbon credits.
In time, ratings can provide a tonic for a key market failure: the lack of correlation between price and quality, i.e. price is not necessarily an indicator of a carbon credit’s climate credentials. Restoring confidence in that connection is vital to addressing so many of the doubts surrounding their use by businesses.
It will also mean more money funnelling into highest quality projects in terms of climate outcomes, such as nature-based solutions that protect and restore ecosystems, and high-tech carbon removal innovations, such as direct air capture.
If successful, McKinsey predicts the voluntary carbon market could grow into a meaningful new type of ecosystem asset class worth $100bn – $200bn by 2030.
Everyone agrees reducing emissions must be at the top of the priority list for corporate actions. But for those emissions that can’t readily be reduced, effective carbon credits are critical.