Carbon Insetting: An Emerging Approach to Reduce Scope 3 Emissions

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Lorena Moreno Maxinez Sustainability Consultant - EMEA
James Ramsay Director, Sustainability Solutions - EMEA
Joseph Sarvary Manager, Sustainability Solutions - EMEA - ENGIE Impact
Carbon Insetting
Supply Chain Decarbonization

Addressing emissions across Scope 1, Scope 2, and Scope 3 requires a holistic approach, including evaluating current supply chain relationships and considering multiple Value Chain Interventions (VCIs). One such emerging VCI is carbon insetting. This corporate decarbonization approach can reduce costs, improve supply chain and supplier relationships, and aims to facilitate climate finance directly within a company’s value chain (upstream and downstream) in hard-to-abate sectors such as agriculture, mining and logistics.

However, carbon insetting is still in its early days of adoption and implementation. Despite its nascency, it is a relevant lever that could help accelerate climate action to achieve net-zero emissions by 2050.

What is Carbon Insetting?

Carbon insetting is a way for companies to reduce carbon emissions within their own supply chain (Scope 3) by directly investing in supplier or customer carbon reduction interventions (Scope 1 and Scope 2).

For instance, a company — the “Insettor” — looking to address its Scope 3 emissions may begin collaborating with its suppliers — the “Insettee” — to identify and implement carbon reduction opportunities. Frequently, those suppliers may not be in a position to finance their own Scope 1 and Scope 2 decarbonization needs.

Insetting is a financial mechanism that can unblock and scale those carbon reduction solutions within the economic ecosystem of the organization and should typically only be considered after implementing other emission-reduction efforts like energy reduction, procurement changes, and supplier engagement.

When a company moves forward with providing funding for its suppliers' decarbonization projects:

  • The supplier reduces its Scope 1 and Scope 2 emissions
  • The company reduces its own Scope 3 emissions
  • The company has the opportunity to build a more resilient supply chain and influence the adoption of sustainable practices
  • Value chain actors could strengthen their relationships to improve transparency and create value

While a company will typically address its Scope 1 and Scope 2 emissions before beginning to address its Scope 3 emissions, the interconnectedness of these emissions also means a company doesn’t have to wait to have insetting discussions. As part of its Scope 1 and Scope 2 efforts, a company can proactively reach out to its own customers — ideally, those looking to reduce their own Scope 3 emissions — to secure funding and begin building strong decarbonization partnerships.

In this way, insetting doesn’t focus on compensating for existing emissions but works to align the full value chain with science-based targets and tie reduction activities directly into inventory line items. Insetting can be costly, especially in the short term, but can provide long-term savings compared to other options — in addition to increasing supplier resilience and mitigating some of the physical risks of climate change. If the main limitation to implementation is financing, the funds sourced through insetting efforts provide a clear way to overcome that barrier to implementation through these proven technologies.

Varied Insetting Solutions

The full breadth of potential implementations that can be addressed through insetting efforts are still being explored and will vary from sector to sector. While the majority of efforts to understand and implement insetting programs have been done in the agriculture sector, there is a high unexplored potential in other hard-to-abate sectors, such as the mining and cement industry and transportation activities. We’ve found some combination of five proven technologies — on-site solar, heat pumps, and electric, biomethane or biomass boilers — accounts for approximately 75% of decarbonization interventions.

However, other sectors may not have such well-established solutions and the push for decarbonization will vary among players within a sector. For those, insetting discussions will begin the collaboration that will be necessary to identify sector-specific solutions and customize individual implementations. An open dialogue among the various parties will help identify investment opportunities that work for all parties. For instance, a supplier may not be in a position to decarbonize all of their factories, and its customer may only care to finance enough insetting efforts to cover what they purchase. Insetting discussions could identify an opportunity for the customer to provide funding to decarbonize one supplier facility without geographically limiting them to only receive products from that facility — again creating a mutually beneficial agreement with all parties.

Discover a systematic approach to identifying scope 3 emissions. Learn more →

Insetting Certification Challenges

Carbon insetting is not without its challenges, especially around the still-emerging regulatory and reporting framework. Depending on where a facility operates, there may or may not exist standards, auditors, and validation criteria for insetting certification, and existing frameworks vary among regions and sectors. So while not always straightforward, some common factors to be aware of:

  • Not all Scope 3 reductions are automatically considered insetting
  • Current insetting leaders developing their own voluntary reporting may have to change their process in the future
  • Insetting typically requires external financing and financial additionality in order to qualify for certification
  • The carbon rights need to be carefully traced, validated, and not double-counted
  • Organizations receiving the financing can’t decarbonize incrementally

All of these factors should be considered and discussed as carbon insetting options are explored.

Start Insetting Now

As with many decarbonization efforts, carbon insetting takes time — from initial strategy to collaborative discussions, to on-the-ground implementation, and then ongoing carbon data management. In order to see the benefits and meet 2030 goals, organizations need to add insetting to their decarbonization repertoire starting now. It is going to be challenging, especially for regions and sectors with fewer existing proven decarbonization levers, but being an insetting leader will bring with it significant advantages.

Carbon insetting pioneers will be in a position to drive discussions and decisions, they will emerge as centers of collaboration across an industry, and they give credence to what nearly 70% of organizations already believe — that having superior sustainability capabilities will drive their competitive advantage.

Insetting provides an avenue to supply chain visibility, improved industry relationships, and overall reputational benefits for stakeholders, customers and the general public — a currently underutilized tool in a corporate decarbonization toolbox that shouldn’t be ignored.

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