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As carbon accountability becomes increasingly essential to achieving a company’s medium and long-term goals, understanding the sources and levels of emissions within its operations is fundamental. By first identifying and then reducing emissions (insetting), a company can focus on offsetting any remaining, unavoidable emissions. Offsetting often involves purchasing carbon credits in the voluntary carbon market, which directs funds through carbon finance to support environmental projects.
Unlike regulated carbon markets, such as the EU Emissions Trading System (EU ETS) in Europe or the Regional Greenhouse Gas Initiative (RGGI) in the northeastern U.S., Voluntary Carbon Markets (VCM) mostly operate independently of government-mandated caps on emissions. In the VCM, credits are generated on a project-by-project basis without cap allocations, and purchases are made entirely voluntarily, primarily with corporations as final buyers. After assessing their emissions and, where possible, reducing them internally, companies may approach the VCM to offset their remaining emissions by selecting projects that align with their sustainability goals, budget, and project preferences.
Each carbon credit in the VCM represents one metric ton of CO₂ that has either been avoided to be released or removed from the atmosphere as a result of a specific project. For a project to be credible, it must meet the principle of "additionality," meaning that the carbon reductions or removals it achieves would not have occurred without the financial support provided by these credits. This concept is fundamental in the carbon market and is closely tied to carbon finance, which refers to the process of channeling funds directly to these impactful initiatives.
Carbon registries play a key role in accrediting projects, ensuring that emission reductions or removals are real, measurable, and additional. Project developers follow established methodologies that define how their initiatives will achieve and verify these emissions reductions or removals, thereby creating trustworthy credits in the market.
Carbon pricing is closely linked to various factors, including project type, location, vintage, registry, and the relative scarcity or abundance of available credits. While each carbon credit technically represents the avoidance or removal of 1 ton of CO₂, the price of these credits varies based on how this outcome is achieved, as well as additional influencing factors.
Carbon credit projects involve underlying costs for both project development and ongoing maintenance. These expenses cover certification fees through registries, as well as the broader costs of implementing and sustaining the projects themselves. Depending on the project type, these initiatives involve different technologies and approaches, which further contribute to the variation in carbon credit pricing.
For example, REDD+ projects (forest conservation) involve costs related to satellite and forest monitoring, fire prevention systems, community services, capacity building, and training. In contrast, ARR (Afforestation, Reforestation, and Revegetation) projects incur additional expenses, such as cultivating native vegetation in greenhouses and later planting trees. In carbon dioxide removal projects, like biochar or direct air capture, the advanced technology required for high-capacity carbon removal leads to significantly higher costs, which are reflected in the price of the carbon credits.
Beyond project development, the scarcity of certain project types in specific countries can also drive-up prices due to limited availability. Additional certifications, such as the Climate, Community & Biodiversity (CCB) Standard for REDD+ projects, along with third-party ratings and labels like the Carbon Credit Quality Initiative (CCQI) and CORSIA, further influence credit pricing as they enhance credibility and market appeal.
The process of accounting for emissions should be well-established in companies, which are facing increasing pressure from governments and customers to reduce and offset their emissions. For internal emission reductions, different actions can be taken depending on the sector. For example, transportation companies should invest in electric vehicles and trucks, while steel companies should replace coal with renewable options, such as biochar. After these reductions, offsetting through carbon credits occurs and should be integrated into the company’s financial planning and goals. The entire process can ultimately be documented in annual ESG reports.
Publicly reporting on carbon reduction efforts and the use of carbon credits can enhance a company’s reputation. Transparent communication about sustainability initiatives builds trust with stakeholders, including customers, investors, and employees.
The ongoing COP29 in Baku, Azerbaijan, highlights the global commitment to emission reductions and carbon offsetting. The events of 2024 have underscored that climate change is already happening, with episodes like the severe floods in Spain, and New York experiencing its driest October in 150 years. As climate change increasingly impacts economies and ecosystems worldwide, the business sector has a crucial role in mitigating these risks. Supporting emission reduction and removal projects through carbon credits not only contributes directly to climate change mitigation but also provides additional benefits, including support for local communities, biodiversity preservation, and the promotion of sustainable development. Carbon credits also offer an efficient way to channel resources from Global North countries to the Global South, where, in many cases, local funding alone cannot cover the cost of these projects.
The scope of carbon offsetting has expanded beyond traditional carbon credits to encompass innovative solutions. CO2 Removal Certificates (CORCs), for instance, specifically support the growth of carbon removal projects such as Direct Air Capture and Biochar. Similarly, Sustainable Aviation Fuel credits (SAFc) promote the development of Sustainable Aviation Fuel by enabling investments from companies with significant business travel demands, even if they do not directly use the fuel. For Scope 2 emissions (energy-related), Guarantees of Origin (GOs) and International Renewable Energy Certificates (IRECs) offer effective compensation mechanisms at the European and international levels, respectively.
Integrating carbon costs into business operations is a strategic move that offers numerous benefits. It helps companies reduce their environmental impact, enhance their brand reputation, and improve operational efficiency. By investing in carbon offset programs and staying informed about market trends, businesses can make meaningful contributions to the fight against climate change while positioning themselves for long-term success.
OTC Flow plays a crucial role in helping businesses navigate the complexities of carbon offsetting. With our expertise, we guide companies through measuring, reducing, and offsetting their carbon footprints effectively. To learn more about how we can support your sustainability journey and to get in touch with our team, visit our contact page.
In today’s competitive market, sustainability is not just an option but a necessity. Companies that proactively manage their carbon emissions and invest in sustainability will be better positioned to thrive in a low-carbon economy. Integrating carbon costs is a critical step towards building a sustainable future for both businesses and the planet.