This article is sponsored by BeZero Carbon.
Carbon markets have faced a challenging few years of intense media scrutiny. But in this time, the market has shown an immense capacity for self-reflection and improvement in how it has responded to concerns around integrity and incentives. This feedback loop means carbon markets today are almost unrecognizable compared to the landscape a few years ago.
However, persistent media attention has spooked some businesses away from offsetting due to the prospect of reputational risk, despite the strides the market has made to resolve crucial issues around the effectiveness of carbon credits as climate action.
Attempting to do what they think is the “right thing” with their climate investments, and in part to keep their head down to avoid the scrutiny that the voluntary market has faced, some firms are turning their attention to carbon insetting.
The nascent state of the carbon insetting market
With carbon insetting, a company compensates for its emissions by funding emissions-reducing activities directly within its supply chains. This well-intentioned approach of businesses taking matters into their own hands is laudable. Indeed, the opportunity for corporate climate action when it comes to insetting is immense. But the lack of standardization and oversight in this market poses undue risk.
The insetting market is in its very nascent stages of development. It hasn’t yet faced the challenges or the scrutiny that the voluntary carbon market has. As such, it has not matured or raised the bar for integrity to the degree that the voluntary carbon market has.
Any business seeking to invest in carbon insetting must therefore learn lessons that the debates around the voluntary carbon market can teach, and carefully assess the risk and quality of climate instruments. This should be done before embarking on investment within its own supply chains.
The evolution of carbon markets
The voluntary carbon market has evolved by mirroring effective mechanisms from other markets and raising the bar for carbon credit quality to encourage greater investment. The keys to that process are better standards as well as independent risk assessments through ratings, as are customary in public debt markets.
Carbon ratings are becoming critical for identifying and mitigating risks while boosting quality and transparency. They leverage scientific expertise to make understanding a credit’s effectiveness easier than ever before for buyers. Carbon accounting grows more robust by the day, to stave off the threat that a lack of reliable information poses to corporate decarbonization. Safeguards, developed by both standards bodies and some ratings agencies, such as BeZero Carbon, have emerged to guard against the potential negative socioeconomic impact of carbon projects.
It’s through this type of evolution that the voluntary carbon market has survived its battles and attracted the attention of policymakers at an international level. Recently, the Commodity Futures Trading Commission in the United States finalized guidance on voluntary carbon credit derivatives, with Treasury Secretary Janet Yellen recognizing that the guidelines will boost the “integrity of carbon credits and enable greater liquidity and price transparency.” The market is maturing, and corporations and governments alike are taking notice.
Reframing the debate about effective decarbonization
Ratings provide the risk-based framework that encapsulates the spectrum of quality in carbon projects by measuring the likelihood that a credit actually reduces a metric ton of CO2. This is the key measure that businesses need to invest in the carbon market with confidence and trade their carbon credits effectively, ensuring that they are accurately delivering climate results.
As is happening for offsetting, insetting could massively benefit from this risk-based approach to quality, where carbon impact is measured on a scale of likelihood and not in binary terms.
The use of risk-based assessments, such as project-level carbon ratings, reframes the debate away from the focus on “insetting vs. offsetting” or “regulatory vs. voluntary corporate action.” Instead, a committed focus on quality means that the only differentiator among carbon projects is how effective they are, not how they are used and by whom. Ratings, and project due-diligence-based risk assessments conducted ex ante (before projects even get off the ground), provide an effective way for companies seeking to invest in their own supply chains to accurately measure their intended climate impact.
The biggest risk is lack of action
Ultimately, the biggest risk to climate action is corporations taking no action at all. The pace and scale required to reach net zero means the methods for companies to compensate for their emissions can’t be mutually exclusive. We need an all-of-the-above approach, which means climate effectiveness must take center stage as the metric for any carbon project, whether it’s offsetting or insetting.
We should learn from carbon markets that risk-based market infrastructure is critical to understanding effectiveness, and that businesses require it to act confidently in favor of our planet.
