Speak the words ‘carbon credits’ today and you’re bound to get raised eyebrows – the global carbon marketplace has undergone intense scrutiny in the past couple of years. Recent controversies range from dubious projects that overstate its impact to phantom credits and the lack of verification.
The result is that businesses have overwhelmingly taken a “wait-and-see” approach to offsetting or being engaged in carbon markets, thus exacerbating the doldrum.
Such a situation is unfortunate and does little to contribute to global climate action, even as headlines around the world tell us everyday we are entering unprecedented territory for how the climate is changing and how it will impact us.
Quality climate and conservation initiatives remain underfunded, while businesses are missing their decarbonisation targets. In Asia, we run the real risk of missing out on massive forest biodiversity and climate benefits, along with private-sector funding for sustainable development.
United Nations officials recently issued a stark warning that no Asian country is on track to meet the 2030 Global Goals. At a time when we need bold political and business leadership, we are instead delaying and stalling on taking action.
While moving too recklessly into carbon markets can be detrimental, we believe that there is a clear path forward. With reflexivity and maturity, businesses can play a part in driving the growth of high integrity carbon markets around the world that will benefit both people and the planet.
Fixing our half of the problem
The general perception now is that carbon offsets are an “easy way out” for corporates who want a free pass to continue business as usual.
A case in point: In April this year, shareholders and investors of oil and gas firm Woodside Energy rejected the company’s climate strategy as it was deemed to be heavily reliant on offsets for its decarbonisation strategy. Woodside had aimed for a 30 per cent cut to its own emissions by 2030, and wants to do it through operational upgrades and carbon credits – while still expanding gas development. There are many other oil and gas companies which are doing the same.
Most companies today face the challenge of convincing their stakeholders that their own sustainability roadmaps are sufficiently ambitious to justify the use of credits for residual emissions. This entails a hard look at the company’s strategy, options available to them in the markets where they operate, and level of commitment from the management on the pace of investment and execution.
The good news is that there are references out there. The Science-Based Targets initiative (SBTi) handholds companies on how to properly set and report on climate targets. This usually involves exhausting all efforts to reduce Scope 1 to 3 emissions through energy efficiency measures, the adoption of clean fuels, transitioning to renewable energy and the engagement of the small-sized and medium-sized enterprise (SME) supply chain. The Voluntary Carbon Markets Integrity (VCMI) also provides guidance on how firms should use offsetting for meeting interim targets.
The bad news is that there remains uncertainty and debate over the stringency of these schemes, especially around flexibility for offsetting “Scope 3” value chain emissions. The frameworks provide only top-line guidance – it cannot spell out specific internal decarbonisation strategies one can take. SBTi and VCMI are global efforts, which may not capture the unique circumstances in which individual companies operate – nor what their stakeholders value.
All these increase the onus on firms to properly explain their need for offsetting. Decarbonisation in Asia is understandably challenging. Is it the lack of access to clean energy or supply chain limitations – and what is being done to tackle each issue? Perhaps firms could disclose how much capital they are spending on their own decarbonisation initiatives, to justify any financial constraints that necessitates offsets?
Addressing such complexities helps build trust, and raises the integrity of the carbon market. A “wait-and-see” approach achieves neither.
Asia’s nature-based opportunity
Beyond using offsets as a last resort, Asian businesses can also prioritise patronising carbon projects that offer co-benefits for nature and the communities it supports, to make a greater case for carbon credits.
Asia is home to the world’s most biodiverse forests, many of which face destruction. Southeast Asia loses 1 per cent of its woodlands a year. In many cases, local communities are turning to ecologically destructive farming practices because greener alternatives do not generate sufficient returns.
Carbon financing – through proper nature-based efforts – could address both challenges. It channels more private-sector money into conservation, lightening the burden on governments. The global biodiversity financing gap stands at some US$700 billion, and a large fraction needs to go to Asia.
There is also a growing imperative for companies to address nature risks – such as how they contribute to deforestation, and are in turn harmed by it. The Taskforce on Nature-related Financial Disclosures (TNFD) launched a reporting framework last year, which markets are expected to gradually align to.
Businesses can use the TNFD guidelines to strategise doing good for both climate and biodiversity, including through their offsetting strategy. And they should, as a responsible denizen of nature-rich and nature threatened Asia. Perhaps we can take a leaf from the renewable energy certificates market, and adopt best practices such as localising carbon credit purchases to keep benefits within the region.
This does not justify a bigger use of offsets than needed, rather a more diligent choosing of which carbon projects to adopt for maximum impact. We believe this is another layer of nuance that the public will appreciate.
Don’t bet on wholesale improvements to carbon project quality
Arguably the biggest hiccups to the carbon market have occurred on the supply side – with project developers and their checkers accused of selling credits with little climate benefit, or sidelining local communities. Many integrity initiatives have sprouted in recent years to address these issues. Credit certifiers are tightening their rulebooks. An industry body – Integrity Council for the Voluntary Carbon Market (ICVCM) – is checking on the certifiers themselves.
A parallel effort is underway at the United Nations to set rules for governing a global marketplace – one that could start operating as early as this year – which could influence regulations in the voluntary carbon market across different countries. The negotiations over the operationalisation of Article 6 of the Paris Agreement which is expected to give the carbon offset market a new lease on life, allowing credit holders to compensate for pollution at home by investing in projects elsewhere to cut emissions under a rigorous framework, however, has so far been difficult and disappointing, with no significant progress at the last COP28 climate summit in Dubai.
Ratings agencies meanwhile scrutinise individual projects, filling in the gap left by other high-level initiatives that generally only scrutinise entire project types or specific credit certifiers.
We shouldn’t assume that these initiatives can offer a blanket increase in trust that buyers can just ride on. For one, not everyone is happy with the stringency of the new initiatives. Ratings agencies’ scores for individual projects also have a very high degree of divergence, according to nonprofit Carbon Market Watch, reflecting disagreements on what exactly constitutes “quality”.
It once again means that businesses seeking to buy carbon credits need to do their own homework, to understand what each standard-setter assesses and guards against – or not. Where carbon projects have diverging ratings, buyers need to know the underlying reasons to make an informed decision on purchases.
Bilaterally, governments keen on facilitating high integrity and robust carbon markets are also working with like-minded partners to develop frameworks needed, in the absence of clear global rules. For example, Singapore and the Philippines have said they are keen to tie up on carbon credits trading and are planning to form a working group to take the discussion further. These are strong signals from the political leadership that businesses can heed.
As an aside: given the high risks in the carbon market, buyers should look into hedging strategies, such as insurance schemes that cover unexpected credit invalidations, to avoid huge financial losses from inadvertently engaging black-sheep carbon projects.
Maturity and transparency pays
Our arguments are premised on a few convictions: that the decarbonisation challenges in Asia necessitates some degree of offsetting given the region’s unique circumstances, and that credibly managed offsetting does more good than harm for Asia’s biodiversity and communities. In the current global economic order, carbon is the new commodity and climate finance does not flow unless carbon is priced and traded – this is the foundation of carbon offsetting.
The problem lies in the market having been too lax, accommodating many black sheeps that now taint the entire field.
We believe that given such conditions, it pays for companies to show maturity and transparency in stating – in good faith and after fulfilling internal decarbonisation strategies – why they need carbon credits, and how they are putting in effort to ensure integrity on their end. This is the way to convince sceptics that businesses are not taking the easy way out, and to defend one’s reputation when carbon credits turn sour as a result of unforeseen forces.
There are no easy solutions, and it will take time and effort to come up with proper carbon offsetting strategies. But if Asian businesses act now, they can contribute to creating a trusted carbon market that benefits climate, nature and stakeholders.
This piece was first published in the Singapore Business Carbon Report 2023, in collaboration with UN Global Compact Network Singapore.
