This online workshop organised by Life ETX partner ZERO focused on the synergies between carbon markets and private sector decarbonisation. The goal was to explore the integrity of corporate climate action claims made through use of voluntary and compliance carbon markets. This was followed by a discussion on the role of the EU in setting best practice, and how Article 6 of the Paris Agreement can raise the bar further.
What is climate integrity?
Pedro Barata, from the Environmental Defense Fund, started by mentioning four possible scenarios, starting first and foremost with the integrity of the claim itself – the aspect that is more prominent in the public eye.
Companies often make claims regarding their climate policies, but is what they are saying beneficial to the environment? Barata highlighted that public reaction is sceptical of company claims- to be “climate neutral” or “net-zero” when they offset their emissions in some form. Whilst regulating climate claims can become very complex, particularly the reduction of scope 3 (value chain) emissions, Barata stated that there are some voluntary initiatives that help companies follow through on their claims, such as the Science Based Targets Initiative (SBTI). The SBTI sets out ambitious emissions targets for 2050 that must include scope 1 (emissions that occur from sources that are controlled or owned by an organisation) and scope 2 (indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling) whilst also gradually including scope 3., In addition, the Voluntary Carbon Markets Integrity Initiative (VCMI) establishes a reasonable set of claims on what offsetting might mean. The problem, Barata declares, is that because these initiatives are unaligned it is very difficult for companies to understand what can or cannot be claimed.
The question of integrity can also be asked over credit quality, because if a company has set a target or is making a claim by using carbon credits to what extent is this meaningful? The answer depends on the type of carbon credits being used, and Barata notes that this has been the topic of many heated discussions between NGOs and companies, particularly when credits used pertain to activities that are inherently impermanent. Barata proceeded to ask: “Should a company claim to be carbon neutral by buying credits related to forests, when we know the lifespan of forests is too short to fully compensate for their emissions?” This is a particularly pertinent question in the Portuguese context, given the country’s intent to establish a voluntary carbon market based on afforestation and reforestation despite its vulnerability to forest fires.
A third issue is the integrity of the transactions that are being made, and is related to the transparency around co-benefits of carbon credit projects. Barata explains that in many cases, claims are made around benefits accrued by local communities. However, more often than not, these claims do not stand up to scrutiny. Carbon Market Watch’s report “Secretive intermediaries: Are carbon markets really financing climate action?” has some useful insight into this topic.
Finally, we considered the overall climate action of a company and here the biggest question is: what should we be asking of companies in terms of their climate engagement? Barata again highlights SBTI, which carries the support of several NGOs and other initiatives such as Race to Zero, as setting the standard for good corporate climate integrity. He continued by stating that the companies under the spotlight are probably amongst the most scrutinised companies anyway, so “They are putting themselves in the line of fire.”
Because there is a compliance carbon market in place, there is a very different context and discussion for companies based in the EU. In theory, companies in Europe have less incentive to join a voluntary carbon market. However, there are still many companies, particularly those that are considered energy-intensive, that are claiming carbon neutrality. “Clearly there is a lot more scepticism around the possibility of these claims being backed up”, said Pedro Barata. “So it would be very useful for the EU to develop and take up international guidance, by way of a coherent corporate disclosure framework.”
What role for the EU?
Pedro Barata’s closing remarks left open the answer to the question of whether the EU is a good example to other jurisdictions around the world., In response, Nicolas Kreibich, of the Wuppertal Institut, started by pointing out that there has been a difficult relationship between the EU and other countries and regions when contextualising carbon offsetting. Indeed in the EU, Kreibich stated that it is of paramount importance to continue excluding the use of international carbon credits as offsets as a means to achieve the EU’s own Nationally Determined Contributions (NDC). He also mentioned that the EU should scrutinise the integrity of how other actors make use of carbon credits under the Paris Agreement.
Kreibich explained that under Article 6 of the Paris Agreement, market-based cooperation can move forward in two particular ways: Article 6.2 (framework allowing countries to cooperate internationally) and Article 6.4 (successor to the Clean Development Mechanism), both have provisions that will avoid double counting of credits (corresponding adjustments). There are three areas of action the EU can further explore – starting with supporting partner countries, to regulating offset claims, and moving beyond offsetting.
Firstly, the EU can support partner countries make informed decisions on implementing Article 6. This has potential benefits, but also some challenges. The EU can, for example, support countries in tapping emissions that are beyond their reach and assist mitigation activities that can provide positive impacts. However, corresponding adjustments could adversely affect NDC attainment and there is also an overselling risk (countries may export too many credits at prices that are too low).
Secondly, the EU can regulate offset claims and the use of carbon credits. This is crucial because not only do they carry reputational risks, but there is also a legal uncertainty that can have a negative impact on consumers and investors.
Thirdly, the EU has the option of going beyond offsetting by fostering the contribution claim model, which would allow companies to support mitigation measures outside their value chain without the need for misleading claims based on offsetting or compensation through carbon credits. .
Kreibich asserted that “the EU should maintain the domestic nature of its NDC and continue excluding the use of international offsets for compliance purposes”, highlighting that the recent agreement on the ban of offset claims on products shows the EU’s potential to act as normative power and fight greenwashing. Moreover, Kreibich concluded that to further advance corporate climate action, the EU should promote the contribution claim model and support companies in going beyond offsetting.