Corporate decarbonisation: where do voluntary carbon markets fit in?

Decarbonisation has come to the forefront of corporate, national and international agendas with increasing public pressure for climate action. Some of the largest companies in the world have responded to these demands by publicly declaring that they are ready and willing to transition to a decarbonised future. US tech giant Apple recently announced that by 2030 it will be 100% carbon neutral across its business operations and supply chain, including all of its products[1]. Microsoft has vowed to go beyond carbon neutrality and remove all the carbon the company has emitted since its creation in 1975[2]. Even multibillion-dollar oil and gas majors such as Shell[3] and BP[4] have acknowledged their responsibility to combat climate change and pledged to become net zero energy businesses by 2050. Such ambitions indicate that there is a real push from the corporate sphere for companies to be recognised as environmental leaders within their sectors.

Over the last 40 years, corporate engagement with carbon management has changed dramatically. In the 1980s, opinions were very divided: there was opposition from many businesses who disputed climate science and lobbied against regulation; whereas others supported regulation and promoted environmental action, particularly through corporate social responsibility programmes[5]. Following the adoption of the 1997 Kyoto Protocol, an international treaty in which industrialised countries committed to reduce their individual greenhouse gas emissions[6], corporate interest in decarbonisation strategies increased[7]. Some opposition still remained, however, many companies saw potential opportunities associated with climate action[8]. Since the international adoption of the 2015 Paris Agreement[9] to combat climate change, which recognises the role of sub-state and non-state actors such as cities and corporations[10], very few corporations dispute the science behind climate change and most recognise their exposure to material climate risk factors[11].

The International Panel on Climate Change (IPCC) defines decarbonisation as the “process by which countries, individuals or other entities aim to achieve zero fossil carbon existence”[12]. There is a variety of tools available to facilitate the transition from carbon intensive operations. Options can be grouped into three strategic priorities:

• internal carbon reduction,

• external carbon reduction, and

• carbon compensation[7].

Internal carbon reduction, which focuses on reducing emissions generated from company operations, processes and product creation, includes activities such as alternative energy inputs, end-use energy efficiency and carbon capture and storage. External carbon reduction focuses on upstream and downstream supply chain emissions through actions including replacing carbon intensive inputs and ensuring circular product design. Carbon compensation usually involves companies engaging in carbon markets, either voluntarily by purchasing carbon offset credits or to meet regulatory obligations under compliance carbon markets such as the EU Emissions Trading System. The actions and investments undertaken by companies are highly dependent on the operational sector, level of regulation and views of senior managers[13]. Whilst many companies operating in the same sector may have similar strategies, there is no simple ‘one-size-fits-all’ approach to decarbonisation[14].

Voluntary carbon offsets have been referenced in many of the recent company sustainability commitments[2, 15, 16]. An offset credit is a certificate indicating the avoidance or removal of one tonne of greenhouse gas emissions, generated from project activities such as afforestation, avoided deforestation and renewable energy[17]. Voluntary markets, which operate in parallel to compliance markets, are composed of a network of actors including: project developers who create and monetise credits; voluntary offsets standards who ensure the credibility of issued credits through rigorous verification; intermediaries who retail or broker credits to customers; and end buyers who purchase credits to claim the emissions reductions[17]. Multinational companies are the most common buyer type within the voluntary market, however, offsets are also purchased by individuals, organsiations and governments[18].

While offsetting is becoming more common as a tool to aid decarbonisation, many critics are concerned that the offset rhetoric gives organisations a way to justify continuing to emit carbon rather than focusing on reducing their carbon footprints[19]. Offsetting should only be used to deal with residual emissions following progressive efforts to reduce both internal and external emissions[20, 21]. However, there is no clear definition of residual emissions which creates uncertainty for companies wishing to engage in the voluntary market and jeopardises the credibility of offsetting. It is unrealistic to assume that companies will be able to transition to zero fossil carbon emissions immediately, even for the most progressive companies. This is where offsets via the voluntary carbon market can play a crucial role.

References:

[1] Apple. (2020). Apply commits to be 100 percent carbon neutral for its supply chain and products by 2030. Available from: https://www.apple.com/uk/newsroom/2020/07/apple-commits-to-be-100-percent-carbon-neutral-for-its-supply-chain-and-products-by-2030/ [Accessed on 05/09/2020]

[2] Microsoft. (2020). Microsoft will be carbon negative by 2030. Available from: https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/ [Accessed on 05/09/2020]

[3] Shell. (2020). Shell’s ambition to be a net zero emissions energy business. Available from: https://www.shell.com/energy-and-innovation/the-energy-future/shells-ambition-to-be-a-net-zero-emissions-energy-business.html [Accessed on 05/09/2020]

[4] BP. (2020). BP sets ambition for net zero by 2050. Available from: https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bernard-looney-announces-new-ambition-for-bp.html [Accessed on 05/09/2020]

[5] Ihlen, Ø. (2009). Business and Climate Change: The Climate Response of the World's 30 Largest Corporations, Environmental Communication. 3 (2), 244-262. Available from: https://doi.org/10.1080/17524030902916632

[6] UNFCCC, United Nations Framework Convention on Climate Change. (n.d.). What is the Kyoto Protocol? UNFCCC. Available from: https://unfccc.int/kyoto_protocol [Accessed on 05/09/2020]

[7] Cadez, S. & Czerny, A. (2016). Climate change mitigation strategies in carbon-intensive firms. Journal of Cleaner Production. 114 (5), 4132-4143. Available from: https://doi.org/10.1016/j.jclepro.2015.07.099

[8] Kolk, A., & Pinkse, J. (2004). Market strategies for climate change. European Management Journal. 22 (3), 304-314. Available from: https://doi.org/10.1016/j.emj.2004.04.011

[9] UNFCCC, United Nations Framework Convention on Climate Change. (n.d.). What is Paris Agreement? UNFCCC. Available from: https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement [Accessed on 05/09/2020]

[10] Hale, T. (2018). The Role of Sub-state and Nonstate Actors in International Climate Processes. Energy, Environment and Resources Department – Chatham House. 1-16. Available from: https://apo.org.au/node/209981

[11] TCFD, Task Force on Climate-related Financial Disclosures. (2019). 2019 Status Report. TCFD. Available from: https://www.fsb-tcfd.org/publications/tcfd-2019-status-report/

[12] IPCC, International Panel on Climate Change. (2018). Annex I: Glossary [Matthews, J.B.R. (ed.)]. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, and T. Waterfield (eds.)]. In Press. Available from: https://www.ipcc.ch/sr15/chapter/glossary/

[13] Backman, C.A. Verbeke, A. & Schluz, R.A. (2017). The Drivers of Corporate Climate Change Strategies and Public Policy: A New Resource-Based View Perspective. Business and Society. 56 (4), 545-575. Available from: https://journals.sagepub.com/doi/pdf/10.1177/0007650315578450

[14] Weinhofer, G. & Busch, T. (2013). Corporate Strategies for Managing Climate Risks. Business Strategy and the Environment. 22, 121-144. Available from: https://doi.org/10.1002/bse.1744

[15] EasyJet. (2020). Leading the industry on sustainable travel. EasyJet. Available from: https://www.easyjet.com/en/sustainability [Accessed on 05/09/2020]

[16] Amazon. (2019). Amazon Co-founds The Climate Pledge, Setting Goal to Meet the Paris Agreement 10 Years Early. Available from: https://www.businesswire.com/news/home/20190919005609/en/ [Accessed on 05/09/2020]

[17] Hamrick, K. & Gallant, M. (2017a). Unlocking Potential: State of the Voluntary Carbon Markets 2017. Forest Trends. Available from: https://www.forest-trends.org/publications/unlocking-potential/

[18] Hamrick, K. & Gallant, M. (2017b). Unlocking Potential: State of the Voluntary Carbon Markets 2017: Buyer Analysis. Forest Trends. Available from: https://www.forest-trends.org/wp-content/uploads/2017/07/doc_5677.pdf

[19] Vidal, J. (2019). Offsetting carbon emissions: ‘It has proved a minefield’. The Guardian. Available from: https://www.theguardian.com/travel/2019/aug/02/offsetting-carbon-emissions-how-to-travel-options [Accessed on 05/09/2020]

[20] British Standards Institute. (2020). PAS 2060 Carbon Neutrality. Available from: https://www.bsigroup.com/en-GB/PAS-2060-Carbon-Neutrality/ [Accessed on 15/08/2020]

[21] Stephens, A. (2019). Net zero: an ambition in need of a definition. Available from: https://www.carbontrust.com/news-and-events/insights/net-zero-an-ambition-in-need-of-a-definition [Accessed on 12/08/2020]