Should carbon credits play a role in emission reduction targets?

The climate crisis has necessitated a comprehensive approach to reducing greenhouse gas (GHG) emissions, compelling companies to focus not only on their direct emissions (Scopes 1 and 2) but also on their indirect emissions, known as Scope 3 emissions. Scope 3 emissions are particularly challenging as they encompass all other indirect emissions that occur in a company’s value chain. This category includes everything from purchased goods and services to waste disposal and employee commuting.

Given the complexity and extensive reach of Scope 3 emissions, many companies struggle to address them effectively. As a result, there is an ongoing debate about the role of carbon credits in achieving Scope 3 targets. This article examines why compensating residual emissions from Scope 3 with carbon credits can be beneficial along with beyond value chain mitigation efforts using 'money for tonne' approach, particularly after significant abatement, and argues that the Science Based Targets initiative (SBTi) should mandate 100% responsibility for Scope 3 emissions.

Understanding Scope 3 emissions

According to the Greenhouse Gas Protocol, Scope 3 emissions encompass 15 categories, including purchased goods and services, business travel, employee commuting, and the use of sold products. These emissions often constitute the largest portion of a company's carbon footprint, sometimes accounting for more than 70% of their total emissions [1].

The challenge of Scope 3 abatement

Reducing Scope 3 emissions presents unique challenges for companies:

1. Limited control: Companies have little direct control over the actions of suppliers, customers, and other value chain partners.
2. Data complexity: Gathering accurate data across a complex global supply chain is often difficult and resource-intensive.
3. Technological barriers: Some industries lack readily available low-carbon alternatives for certain processes or materials.
4. Economic considerations: Implementing significant changes in the supply chain can be costly and may affect competitiveness.
5. Geographical variations: Different regions may have varying levels of access to renewable energy or sustainable practices.

These challenges explain why many companies find it difficult to make substantial progress on Scope 3 emissions reduction. A 2021 study by CDP found that only 20% of companies engage with their suppliers on climate change, highlighting the gap in addressing these indirect emissions [2].

The current landscape: Science Based Targets Initiative (SBTi) and Scope 3

The Science Based Targets initiative (SBTi) has been instrumental in guiding companies to set emission reduction targets aligned with climate science. However, their current approach to Scope 3 emissions has limitations:

1. Partial coverage: SBTi currently requires companies to set Scope 3 targets only if these emissions account for more than 40% of their total emissions from Scope 1 and 2.
2. Limited responsibility: When setting Scope 3 targets, companies are only required to cover 67% of their Scope 3 emissions [3].

This approach, while pragmatic, may not be sufficient to drive the level of change needed to meet global climate goals. There's a strong argument for mandating 100% coverage of Scope 3 emissions in target-setting to ensure comprehensive action across the entire value chain.

The role of carbon credits in Scope 3 abatement

Given the challenges of Scope 3 abatement, the use of carbon credits has emerged as a potential tool to support emission reduction efforts. Carbon credits represent a quantified amount of greenhouse gas emissions that have been avoided or removed from the atmosphere through projects such as reforestation, renewable energy, or methane capture.

The case for using carbon credits against Scope 3 targets:

1. Immediate action: Carbon credits allow companies to take immediate action on emissions that are currently difficult to abate directly.
2. Financial support for climate projects: Purchasing credits can channel funds into crucial climate mitigation projects.
3. Flexibility: Credits provide a flexible mechanism for companies to address emissions across complex global supply chains.
4. Incentive for innovation: The carbon credit market can drive innovation in emission reduction technologies and practices.

However, the use of carbon credits is not without controversy. Critics argue that it may disincentivize companies from making the necessary structural changes to their operations and supply chains. There's a risk that credits could be seen as a "get out of jail free" card, allowing businesses to continue business-as-usual practices while claiming carbon neutrality.

The Science Based Targets initiative (SBTi) is embarking on a major revision of its Corporate Net-Zero Standard v1.2 . This update aims to align with the latest scientific insights, address challenges in scope 3 target setting, integrate continuous improvement, and enhance interoperability with other frameworks. The revision process will include extensive stakeholder consultation , ensuring comprehensive input and transparency. Key updates include an assessment of Environmental Attribute Certificates (EACs) and their role in corporate climate targets. The first phase involves gathering evidence and feedback, with a discussion paper on Scope 3 target setting expected in July 2024.

A balanced approach: Beyond Value Chain Mitigation

A more nuanced approach to using carbon credits in Scope 3 emission reduction strategies is gaining traction: Beyond Value Chain Mitigation (BVCM). This concept, endorsed by the SBTi, encourages companies to invest in emission reduction or removal activities outside their value chain, in addition to – not instead of – making reductions within their value chain [4].

BVCM offers several advantages:

1. Complementary action: It allows companies to contribute to global emission reductions while still focusing on internal abatement efforts.
2. Addressing ‘hard-to-abate’ Emissions: BVCM can help compensate for emissions that are currently technologically or economically challenging to eliminate.
3. Accelerating global progress: By supporting projects beyond their value chain, companies can contribute to faster overall emission reductions.
4. Stakeholder engagement: BVCM can enhance a company's reputation and demonstrate commitment to climate action beyond its immediate sphere of influence.

Climate contribution approach

A carbon fee is sometimes referred to as a “money-for-tonne” approach in that the funding is raised in direct proportion to the level of emissions. Under this approach the company sets the price level to incentivise cutting emissions within its own value chain. Alternative approaches include “tonne-for-tonne” accounting (the model adopted by those that use a carbon credit to claim to offset one tonne of carbon dioxide emissions) and “money-for-money”, where companies tie their level of funding to a financial indicator, such as their annual revenue, or profit [5].

Personal view

Based on the latest science and evolving best practices, I propose the following framework for addressing Scope 3 emissions:

1. Mandatory 100% coverage: Companies should be required to account for and set targets for 100% of their Scope 3 emissions, not just 67% as currently mandated by SBTi.
2. Aggressive abatement targets: Companies should aim to directly abate at least 80-90% of their Scope 3 emissions through changes in their value chain operations, technologies, and partnerships along with beyond value chain mitigation (BVCM) efforts.
3. Residual emissions abatement: For the remaining 10-20% of emissions that are 'hard-to-abate' in the short to medium term, companies should be allowed to use high-quality permanent carbon removal credits or invest in BVCM projects.
4. Adopt internal carbon fee: This incentivizes own emission reductions and provides a clear indication of a company’s level of climate ambition.
5. Transparency and reporting: Clear reporting on the breakdown between direct abatement and compensation through credits should be mandatory to ensure accountability.
6. Regular review: As technologies and best practices evolve, the threshold for direct abatement should be periodically reviewed and increased.

Conclusion

The question of whether carbon credits should be used against Scope 3 targets does not have a simple yes or no answer. While direct abatement of Scope 3 emissions should always be the primary focus, a carefully managed approach that includes Beyond Value Chain Mitigation and high-quality permanent carbon removal credits can play a valuable role in comprehensive climate action strategies.

As we navigate the complex landscape of global emission reductions, it's crucial to maintain a balance between ambition and practicality. By mandating comprehensive Scope 3 coverage, setting aggressive direct abatement targets, and allowing for strategic use of carbon credits, we can create a framework that drives meaningful action across global value chains while providing mechanisms to address hard-to-abate emissions.

Ultimately, the goal is not just to meet targets on paper but to effect real, lasting change in our global economic systems. As technologies advance and best practices evolve, our approaches must remain flexible and grounded in the latest scientific understanding. Only through concerted, multi-faceted efforts can we hope to address the urgent challenge of climate change and transition to a sustainable, low-carbon future.

References:

[1] World Resources Institute and World Business Council for Sustainable Development. (2011). Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

[2] CDP. (2021). Transparency to Transformation: A Chain Reaction.

[3] Science Based Targets initiative. (2023). SBTi Criteria and Recommendations v5.3

[4] Science Based Targets initiative. (2024). Above and Beyond: An SBTI report on the design and implementation of the Beyond Value Chain Mitigation (BVCM)

[5] A guide to climate contributions: Taking responsibility for emissions without offsetting, NewClimate Institute, 2023.

[6] Fit for Paris, Replacing Kyoto-style CO2 offsetting: How companies should finance additional climate action, WWF DACH, 2024.