“In this commentary, we share some perspectives on how to ensure high-ambition and high-integrity with respect to demand for and supply of credits. Crucially, we argue that companies’ investments in NBS should only qualify for consideration as carbon credits if the company can demonstrate that it is doing all that it should to eliminate carbon emissions from its operations and value chains, aligned with Science-Based Targets. The remainder of this commentary describes why, and how this would work.“
April 5, 2021 By Andrew Steer and Craig Hanson
More than 1,500 companies have committed to net-zero emissions by mid-century, as have 11,000 cities and at least $9 trillion in private assets under management. This raises crucial questions as to how much offsetting of carbon can take place in mid-century and, more importantly, how much can take place on the path to get there. The January 2021 report of the Taskforce on Scaling the Voluntary Carbon Market suggested a market of 1-5 Gigatons of CO2e by 2030, with perhaps two-thirds directed at Nature Based Solutions (NBS), meaning that tens of billions of dollars of investment in NBS are potentially at stake.
Done right, these investments could accelerate the solution to climate change and hugely improve the protection and enhancement of nature. Done wrong, they could seriously undermine the current momentum towards climate action and harm nature. This note suggests how to make sure it is the former.
The idea of large-scale credits for NBS1 (especially in forests) is not new. At COP13 in Bali in 2007, great hope was held for rapid expansion under REDD+.2 Since then, a lot has happened to build the foundation for REDD+. Forest monitoring systems, governance reforms, strategies for reducing deforestation and more have emerged. But climate ambition overall, and thus demand for REDD+ credits, has yet to materialize at scale. We now stand on the threshold of ramping up that ambition. Ensuring a positive outcome requires observing two overarching principles concerning the demand and supply of credits.
- Demand for Credits: Carbon credits must not provide a corporation with an incentive or excuse to delay emission reductions within its own operations and value chain. Offsets must enhance, not dilute, the pace of emissions reduction.
- Supply of Credits: Investments must be ecologically and socially sustainable and must meet a set of standards ensuring integrity — in terms of Paris-aligned levels of ambition, additionality, permanence, and avoidance of leakage and double counting.
In this commentary, we share some perspectives on how to ensure high-ambition and high-integrity with respect to demand for and supply of credits. Crucially, we argue that companies’ investments in NBS should only qualify for consideration as carbon credits if the company can demonstrate that it is doing all that it should to eliminate carbon emissions from its operations and value chains, aligned with Science-Based Targets. The remainder of this commentary describes why, and how this would work.
Our intended audience includes leaders and managers from business, government agencies, and non-governmental organizations active in the world of “getting to zero” by mid-century when it comes to greenhouse gas emissions. We hope our insights are helpful in advancing the conversation during this critical year on climate action, with November’s UNFCCC Climate conference in Glasgow on the horizon.
But first, we share a word on some evolving thinking on carbon markets.
A Shifting Context for Carbon Markets
For at least 30 years, almost all economists have encouraged carbon markets on the grounds that they reduce the costs of solving climate change and thus make it more likely that the problem will be solved. These markets were premised on the idea that emitters should be free to choose whether to lower their own emissions or pay for reductions elsewhere.
But as the world now recognizes that we need to limit warming to 1.5°C rather than 2°C, views on offset markets must be revisited. It is no longer appropriate for emitters to be given the choice to delay action within their own operations by buying offsets elsewhere. This is illustrated in the marginal abatement curve in Figure 1. To stay within 2°C, it was perhaps rational a decade ago to delay higher-cost abatement, while purchasing lower-cost interventions towards the bottom left-hand side of the figure. But now, having lost another decade, if we are to remain within 1.5°C, it is necessary for all emitters, including those in hard-to-abate sectors, to drive down their own emissions by investing in new technologies as aggressively as possible, right away. Any delay — or offsetting against emissions due to less aggressive abatement — would jeopardize ambition.
In the Paris Agreement era, vocabulary from the Kyoto Protocol needs to be left behind; we need a new vocabulary for a new age of aggressive climate action. Among other things, this means that corporations should be permitted to purchase carbon credits only as a supplement to aggressive action within their own operations and value chain — and consistent with science-based targets — investing in NBS credits to “counterbalance” their residual emissions as they decarbonize towards zero.3
Demand Side Guardrails: Ensuring No Substitution for In-House Action
How much internal effort across value-chain (Scope 1, 2 and 3) emissions4 should be required before investments in NBS can be legitimately regarded as part of the solution, rather than delaying the solution?
We suggest that companies that want to invest in NBS to counterbalance their emissions should first be compliant with the Science Based Targets Initiative (SBTi). The Initiative was established in 2015 to set standards for companies which want to demonstrate that they were not only “doing better” but were “doing enough.”5 As of today, more than 1,200 companies have made SBTi commitments, of which nearly half are committed to 1.5°C, with the remainder to “well below 2°C.” Nearly 400 new companies signed up in 2020, most with 1.5°C goals, including companies such as Ford, Amazon and Facebook.
SBTi is developing a standard and other resources for companies to set longer-term net-zero targets to achieve 1.5°C. It requires companies to set 5-15 year targets in a transparent, accountable manner. The current goal of SBTi is to ensure that at least 20% of major companies in key high-emitting sectors have such commitments — creating, it is hoped, unstoppable momentum for other companies to follow suit. In 2020, this threshold was reached in six new sectors, including hard-to-abate sectors such as cement.
Over the past four years, the typical SBTi company reduced its emissions by 6.4% per year, which exceeds the average requirement for a 1.5°C trajectory of 4.2% per year. This is in sharp contrast to the overall increase in emissions from energy and industrial processes of 3.6% over the same period.
Under SBTi, companies can have their proposed trajectories validated by either signing on to sector-specific decarbonization pathways or by delivering “sector agnostic” emissions reductions (4.2% p.a. for 1.5°, 2.5% p.a. for well-below 2°C). The former is based upon the fact that different sectors are at different stages in technology development and have varied access to low-cost solutions. International Energy Agency (IEA) deep decarbonization paths have been used to inform these trajectories. New estimates are expected in May 2021 and will provide the basis for a new generation of highly ambitious pathways within each sector. These sector-specific paths will internalize a shift to the right in the marginal abatement cost curve that companies will be expected to shoulder prior to counterbalancing remaining emissions with the purchase of credits.
For carbon markets to work, demand-side guardrails must be clear and effective; that is, parties buying carbon credits must demonstrate that they are doing everything they should to reduce their own emissions. For example, companies must be on a transparent path to reduce Scope 1, 2 and 3 emissions, aligned to 1.5°C, ideally through SBTi.
Of course, companies not on such paths also might decide to invest in NBS. Such investments should not be discouraged — after all, they provide capital to strengthen natural systems and reduce emissions. However, the reduced emissions associated with these investments should not be credited against the company’s total emissions, since doing so would undermine incentives for the necessary reduction in total global emissions.
Figures 2 and 3 summarize the required switch. Figure 2 shows the traditional view. The polluting firm decides that it is cheaper not to adhere to a science-based trajectory, and instead follows the dotted line, buying offsets. As a result, investments in driving down technology costs are delayed and the 1.5°C path is jeopardized. Figure 3 shows our proposed “honorable” approach to offsets/counterbalancing. The firm adheres to the SBT path, AND purchases carbon credits to counterbalance remaining emissions, which shrink year after year until mid-century.
This raises the question as to how companies that have been disciplined in adhering to the 1.5°C SBT pathway can best be motivated to purchase NBS credits to counterbalance their remaining emissions. We tackle this question later on.
Supply Side Guardrails: Ensuring Good Results on the Ground
Nature must play a big role in tackling climate change.6 Recent research shows that NBS could yield around one-third of the cost-effective avoided emissions and removals needed by 2030 to limit global warming under 1.5°C according to some studies (Griscom et al. 2017; Roe et al. 2019).
But not all NBS are created equal. While the planet’s atmosphere does not care from where emission reductions and removals come, the impact of NBS on climate and other goals is unique. Compared to industrial emission reductions and removals, NBS can provide additional benefits in terms of biodiversity conservation, rural livelihoods, adaptation and non-carbon-based climate stability. Many of these benefits unique to NBS are “public goods” and thus currently lack proper market valuation. Moreover, within the suite of NBS options, some are “more impactful” or more in need of urgent support than others:
- Avoiding conversion of natural ecosystems — especially high-carbon ecosystems such as forests, wetlands and peatlands — has a bigger near-term climate impact than restoration or afforestation. Avoiding deforestation prevents a large and immediate “pulse” of GHGs into the atmosphere while growing new trees results in the gradual absorption of carbon over time.
- Avoided emissions from tropical deforestation have more knock-on positive climate benefits than other emissions reductions. Forthcoming research shows that the conservation of tropical forests provides significant additional cooling via evapotranspiration and other non-GHG pathways.
- Tropical forests are home to numerous indigenous peoples and the most biodiversity on the planet. Avoiding emissions from the loss or degradation of such forests thus benefits human rights and biodiversity.
- Nonetheless, in many parts of the planet, natural ecosystems have long been degraded and the only NBS option available is restoration.
In short, the world should conserve tropical forests first and foremost, complemented by pursuing opportunities to restore forests that have already been degraded.
Ensuring NBS supply-side integrity. This requires managing risks such as leakage (unintended increases in emissions outside the targeted jurisdiction due to emitting activities shifting elsewhere), impermanence (emissions reductions reversed at a later date), and lack of additionality (emissions reductions that would have occurred anyway). Supply-side integrity also requires ensuring that the funded NBS does not negatively impact vulnerable or indigenous people. Table 1 outlines each concern and approaches to risk management. These “guardrails” are increasingly being embedded into REDD+ standards, with the ART/TREES standard arguably the most advanced.
|Table 1 | Approaches to Managing Supply-Side Risk|
|Concern||Approaches to Risk Management|
|Leakage||Ensure that activities that generate emissions are not simply shifted elsewhere:Discount credits to reflect the assessed risk of direct and indirect leakageCredit at the scale of national or large subnational jurisdictions|
|Permanence||Ensure that emissions reductions and removals are not reversed, or if reversed, are compensated:Require risk mitigation measuresRequire long-term monitoring and reportingRequire mechanisms to compensate for reversals (e.g., withholding credits in buffer pools)|
|Additionality||Ensure that emissions reductions and removals are “real” and would not have happened anyway:Require crediting reference levels to be established in ways that avoid “cherry-picking” reference periods and inflated baselinesUse jurisdictional-scale historical emissions, conservatively adjusted in the case of high forest, low deforestation countries|
|Accuracy of measurement||Ensure that reporting on emissions reductions and removals is accurate:Utilize data and methods consistent with Intergovernmental Panel on Climate Change guidanceTake advantage of new monitoring technologies and use conservative approaches|
|Uncertainty||Ensure that the risk of measurement errors is reduced:Discount crediting to reflect the assessed uncertainty in the monitoring data and calculation methods|
|Social safeguards||Ensure that programs do not harm affected communities and that benefits are equitably shared:Independently verify implementation of a national safeguard system|
|Double counting||Ensure that each credit for emissions reductions is claimed only once:Certified emissions reductions are unique and maintained on a registryInternationally transferred post-2020 credits are reflected in corresponding adjustments to the nationally determined contributions in countries reporting to the United Nations Framework Convention on Climate Change|
Source: Seymour and Langer (2021)
The “jurisdictional approach” is gaining traction. To date, NBS credits in the voluntary market have only been generated at the project scale — a defined area of intervention ranging from hundreds to up to hundreds of thousands of hectares. But momentum is growing toward the “jurisdictional approach,” which refers to a “government-led, comprehensive approach to forest and land use across one or more legally defined territories” (e.g., state, country) (Boyd et al., 2018). There are four reasons for this momentum (Seymour 2020):
- Governments have the authority to control land use and land-use change. Avoiding conversion or degradation of forests and other ecosystems, as well as stimulating large-scale restoration, typically requires steps that only governments have the power or authority to perform, such as enforcing the law, recognizing and securing land rights, suspending land licenses/concessions, and reforming agricultural subsidies. In contrast, project-based efforts often cannot handle constraints caused by insecure tenure (Sunderlin et al., 2014).
- Expanding the geographic scale helps increase social and environmental integrity. Having a large geographic area of a jurisdiction, as opposed to a smaller project area, helps mitigate some of the social and environmental integrity concerns listed in Table 1. For instance, leakage is less likely to occur over a large geography and within a political jurisdiction than it is with a smaller project plot. The same is true of reversals and additionality.
- Skepticism of project-based REDD+ persists. Project-based NBS have a poor reputation due to some projects having inflated baselines, leakage, non-additionality, negative social impacts and more. This has fueled resistance to having international NBS credits eligible to programs, such as California’s cap-and-trade system or the EU Emissions Trading Scheme. A case in point is a November 2019 Open Letter to the Green Climate Fund Board which called project-scale crediting “the most controversial form of REDD+.”
- Private sector initiatives are selecting the jurisdictional approach. For example, the Tropical Forest Alliance is engaging progressive jurisdictions to find suppliers that can help the companies meet their commitments. The International Civil Aviation Organization’s “Carbon Offsetting and Reduction Scheme for International Aviation” (ICAO CORSIA), one of the first sector-wide carbon offsetting programs, has approved only jurisdictional-scale REDD+ crediting programs as meeting its offset eligibility criteria and disallows project-level REDD+ crediting.
How countries can “nest” REDD+ projects into jurisdictional programs is an outstanding issue that will be debated, and hopefully resolved, in 2021. Other outstanding issues include how to adjust country emissions accounting when credits are sold beyond the country’s boundary, as well as debates around the science on non-REDD+ credits, particularly in regards to soil carbon sequestration in agricultural systems.
Furthermore, the approaches listed in Table 1 do not fully address risks to environmental integrity. For example, there is still a need to address the problem of deforestation’s cross-border leakage by linking REDD+ efforts to investments in improving agricultural yields, restoring degraded working lands and reducing demand for land-intensive products. In addition, current methods of setting baselines based on recent historical emissions fall short of ensuring additionality in light of confounding and dynamic factors — such as weather, commodity prices and the amount of remaining forest — that affect the rate of forest loss, and changing expectations around national ambition to reduce emissions as the Paris Agreement comes into force. A performance (i.e., benchmarking) approach might strengthen baseline-setting.
Standards differ in their ability to address the supply-side concerns. Quantification, monitoring, reporting and verification standards for NBS are adjusting to reflect advancements over the past decade. Three leading standard accreditation systems are VERRA’s Jurisdictional and Nested REDD+ (JNR), the World Bank’s Forest Carbon Partnership Facility (FCPF) Carbon Fund and the Architecture for REDD+ Transactions’ The REDD+ Environmental Excellence Standard (ART/TREES).
ART/TREES is arguably the most advanced and is gaining traction as a robust standard — it ensures high levels of environmental and social integrity — that would certify high value NBS credits generated at the jurisdictional scale. The Green Gigaton Challenge, which involves UN-REDD, will use ART/TREES as the standard of reference in its efforts to build demand for high-integrity jurisdictional REDD+ emissions reductions. The public consultation on ART/TREES v2.0 was initiated in February 2021, where the standard proposed new features, including a method for crediting removals (e.g., restoration), a method for giving additional rewards to “high-forest, low-deforestation” countries, and a pathway for direct crediting to large indigenous territories.
Summary: Rewarding Best Practice, Preventing Bad Practice
The stakes are high. The failure to fully realize the promise of REDD+ over the past decade has been in part due to the lack of consensus on how environmental integrity could be achieved on both the demand and supply sides of the equation, lack of national and corporate ambition on tackling climate change and, as a consequence, too little private finance. The world is poorer as a result.
This note has suggested that the best way to organize corporate investment in NBS is to require that a company aligns its operations to a 1.5°C trajectory; and that investments in forest carbon credits are guided by high supply-side standards, such as ART/TREES. The fact that hundreds of large companies are signed up to SBTi, and some are planning to “counterbalance” for their unabated emissions as they shrink year by year, reveals that this approach may be acceptable to many firms.
There is one challenge and one opportunity to address. First is, the challenge. Ways must be found to ensure that low-quality carbon credits do not drive out good investments by degrading the image of corporate NBS funding. We may not share all of Greenpeace’s assessment of January’s Report of the Task Force on Scaling the Voluntary Carbon Market led by Mark Carney, UN Special Envoy for Climate Action, but Greenpeace is right that the risks are real and could undermine the entire enterprise.
“For as long as these critical issues remain unaddressed, Carney’s scheme will serve as a giant get-out-of-jail-free card for polluting companies. It will undermine tighter controls in international agreements while doing little to actually tackle the climate emergency.” —Greenpeace, January 2021
Carbon credits must support — not undermine — greater climate action ambition. As such, they should align well with and support the eventual Article 6 mechanism under the Paris Agreement of the UNFCCC, which aims to articulate how emission reductions in an official compliance market might be transferred between nations and how these transfers count toward their Nationally Determined Contributions (NDCs). Article 6 should in turn be designed with a robust set of rules that will help drive countries towards stronger national ambition — globally aligned with the Paris Agreement 1.5ºC goal.
Second is, the opportunity. Good behavior should be rewarded. In a traditional credit system, the reward comes in the form of avoided costs. In the approach we have proposed, any credits would be “voluntary” — above and beyond driving down emissions within the company’s value chain. Rewards could come through governments (e.g., tax breaks), financial markets (e.g., preferential financing from net zero asset owners and managers’ alliances), business and government customers (e.g., preferential procurement), NGO recognition programs such as SBTi or similar, customers (e.g., improved brand recognition and reputation), and raised employee morale and recruitment. And for all stakeholders, enhanced social license to operate and positive recognition for company.
All to play for!
A note prepared by Andrew Steer and Craig Hanson. With special thanks to Frances Seymour and Paige Langer for insights from their recent working paper, Consideration of Nature-Based Solutions as Offsets in Corporate Climate Change Mitigation Strategies. Thanks also to Nate Aden, Manish Bapna, Helen Mountford, Fiona McRaith, Janet Ranganathan, Yamide Dagnet, Cynthia Cummis, and other WRI colleagues for their comments.
1 Nature-Based Solutions (NBS) for climate are “actions to protect, sustainably manage, and restore natural or modified ecosystems” to help mitigate climate change (e.g., reduce GHG emissions, remove carbon from the atmosphere) and/or help people and nature adapt to climate change (IUCN 2016).
2 REDD+ = Reducing Emissions from Deforestation and forest Degradation plus conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries.
3 We tentatively propose “counterbalance” as a replacement for the word “offset.” The latter implies a least-cost choice or equivalent reduction on the part of the emitter, while the former is intended to capture the notion of voluntary support to decarbonization outside an emitter’s value chain, to complement aggressive reduction within the emitter’s own Scope 1, 2 and 3 emissions. We are not insisting on this specific term: the terminology is less important than the substance.
4 Scope 1 refers to emissions within a company’s property; Scope 2 to the emissions from energy purchased by the company; and Scope 3 to emissions throughout the company’s value chain, both upstream and downstream.
5 SBTi is managed by a partnership of CDP, WRI, WWF and UN Global Compact.
6 This section reflects ideas and developments more fully elaborated in F. Seymour and P. Langer (2021), Considerations of Nature-Based Solutions as Offsets in Corporate Climate Change Mitigation Strategies. Working Paper. Washington, DC: World Resources Institute.