Crafting a Best-in-Class Carbon Credits Strategy

Article | Read Time 8 MIN
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James Ramsay Director, Sustainability Solutions - EMEA
Tyler Marcus Senior Manager, Strategy & Implementation - Americas
Voluntary Carbon Markets
Carbon Credits
Decarbonization Strategy

ENGIE Impact and the Consumer Goods Forum (CGF) joined forces to provide companies with the tools to address key sustainability challenges and enhance long-term competitiveness. Together we developed a series of masterclasses offering insights into key decarbonization measures for the journey to Net Zero. The first session delved into the fundamentals of the voluntary carbon market (VCM) and the importance of distinguishing between carbon projects, credits, and offsetting when building an effective offsetting strategy.

The aim here is to guide companies committed to leveraging carbon credits through the intricacies of the VCM landscape, while also aligning with commercial and decarbonization strategies. For companies cautious about venturing into the VCM realm, we emphasize the strategic value of using credits and the urgency of action.

Designing A Carbon Approach

Carbon credits, while distinct from a company’s emission reduction efforts, play a vital role in compensating for emissions that cannot be feasibly reduced, known as residual emissions.

Carbon Reduction and Carbon Credits Pathway

In today’s landscape, any organization with a credible carbon commitment must demonstrate reductions in line with a science-based pathway. The SBTi (Science Based Targets Initiative) Net Zero Standard, for instance, requires a trajectory that reduces 90-95% of emissions by the chosen target date. At that point, a company can start utilizing high-quality removal credits for its residual emissions. While SBTi compliance is widely considered the gold standard, we believe that aligning with scientific decarbonization targets should rather be seen as the bare minimum, or a license to operate.

The question then arises: how can organizations strategically go the extra mile, ensuring that carbon credits become a meaningful and effective climate lever that adds value? Companies should consider three phases when designing an integrated and effective carbon credit strategy: purpose, projects, and procurement.

1. Establish the Purpose

Begin with a clear purpose that will underpin the carbon program. The narrative should explain the why and what of the program, so it resonates within the organization and its stakeholders. Align it with the strategy for decarbonization, potentially including commercial goals, business practices, or even social missions. The selected projects will align with these factors. Then consider your positioning in the VCM, based on your risk appetite. Three general approaches include:

  • Pioneer – taking a leadership position and supporting innovative, cutting-edge projects
  • Participant – supporting existing projects and remaining open to newer types
  • Compliance – optimizing costs while remaining indifferent to project types

2. Identify Project Types

Identifying project types that best fit the purpose, positioning, and narrative is paramount. Narrow down potential projects by considering various project features, including technology, co-benefits, and location. Then ensure they align with commercial and social goals. This approach ensures the creation of a coherent portfolio that can be communicated in a way that fits within your commercial and climate narrative.

3. Determine Procurement Approach

Once the project types have been selected, assess the optimal market route. There are three approaches:

  1. Spot market – Purchasing carbon credits through exchanges or over-the-counter
  2. Long-term offtakes – Contracting to offtake a pre-agreed volume for several years at set prices. The aim is to gain price and supply certainty, but it brings exposure to policy changes or shifts in public perception
  3. Direct investment (prepayment) – Providing upfront capital or equity to secure long-term access to agreed volumes, mitigating price as well as quality risks. Investing early has great advantages but is complex, and exposes one to policy changes and the potential that a project may fail to deliver the anticipated stream of credits. It is a high-risk, high-reward approach.

From Design to Execution

After identifying a specific project or set of projects, begin an evaluation to determine alignment with the pre-defined strategy and priorities. The evaluation of carbon projects must take key due diligence criteria into account, such as additionality, permanence and leakage, among many other important factors.

It is also important to stay updated on any ongoing quality initiatives. For example, the latest and largest example is the ICVCM (Integrity Council for the Voluntary Carbon Market), a multi-stakeholder initiative that aims to encourage exacting standards of ethics, sustainability, and transparency for carbon credits. The group has created the “Core Carbon Principles” to define a threshold to ensure integrity for voluntary carbon markets.

The Core Carbon Principles

After selecting projects, ensure that the contracts are adjusted for the procurement type. For example, for a spot purchase, even though it is likely to be retired quickly, it is important to receive frequent updates. For an offtake, include price protection by agreeing on escalators and maximums, as well as delivery guarantees. With investment deals, mitigate capital risks by creating equity protection and risk clauses, and also exploring insurance solutions.

Long-Term Success

A successful carbon credit program should engage and align key corporate department stakeholders beyond the sustainability functions:

Investment committee

Finance

Role: Conducts ongoing budget analysis to ensure optimal price and volume mix for credit procurement

  • Aligns decarbonization ambition and procurement strategy with current and projected company finances
  • Implements financial controls which mitigate funding risks
Experts data 1

Communications

Role: Supports with external communications about the purchase and respective claims

  • Integrates claims into other corporate materials
  • Ensures rapid responses to any questions regarding the purchases
Report

Legal

Role: Ensures credit claims are met and retirement certificates are collected and documented

  • Mitigates issuance risks with contractual clauses
  • Advises on any legal considerations when sourcing projects in certain geographies

Communications play an increasingly important role as carbon reduction claims are subjected to increasing scrutiny, with some facing legal action for making misleading marketing claims (greenwashing).

Buyers must remain aware of the progress of their purchased chosen projects while staying ahead of carbon market developments and the overall industry trends.

Follow up on your carbon projects and monitor their outcomes. It is especially important to stay abreast of the evolving best practices regarding carbon project types and sustainability claims, ensuring that your strategy evolves in line with both. And finally, to ensure that you remain current and navigate the complexities in this rapidly changing market, share the complexity burden by collaborating with other companies or joining buyer coalitions to better manage your carbon project strategy.


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