The Benefits of Using Carbon Credits for Companies

Carbon Credits for Companies

The carbon credit market can play a key role in companies’ efforts to mitigate climate change. It is a tool that allows companies to purchase and “retire” carbon credits, which represent reductions in greenhouse gas (GHG) emissions sourced outside of the company’s own supply chain. These credits can then be sold to other companies that are seeking to offset their own GHG emissions. While it is desirable for all businesses to substantially reduce their own GHG emissions, not all can do so. A number of businesses have started to look at purchasing and retiring carbon credits to address those areas of their operations where they are unable to make meaningful reductions.

While the voluntary carbon market has been instrumental in enabling companies to offset their emissions, it remains limited in scale and lacks transparency and accountability. In addition, a range of concerns about the integrity of the market impede its growth. These include the high cost of carbon credits and the difficulty in locating reliable sources. These issues can be addressed with improved standards and a clear process for verifying the quality of carbon credits. A large, effective voluntary market can help increase the flow of capital to projects that are needed to achieve net-zero and negative emissions goals.

A robust and effective carbon.credit could also make it easier for buyers to locate trustworthy suppliers and complete transactions. This is important, because the primary value of carbon credits lies in the climate action that underlies them. It is essential to ensure that the actions underlying carbon credits are verified and that the emissions reductions they represent are real, quantified, and permanent. To do so, there needs to be a common taxonomy that can describe the features of carbon credits and make them more comparable.

The Benefits of Using Carbon Credits for Companies

The development of these new standards and processes would enable the voluntary carbon market to grow. It would lower issuance costs, shorten payment terms, and accelerate credit issuance and cash flow for project developers. It would also allow carbon-credit buyers to send strong demand signals, which could encourage sellers to increase their supplies. This in turn can drive liquidity and market stability and help companies meet their climate goals. It can also strengthen the credibility of corporate claims based on the use of carbon credits.

This could include core carbon principles that set quality criteria and additional attributes, such as project location, type of reduction, and co-benefits, that should be standardized.

The nascent literature on this issue offers a helpful categorization of corporate climate-claims based on three dimensions: the intended use of carbon credits, the framing and meaning of the headline terms used, and the status of the claim. Ultimately, the voluntary carbon market can help companies demonstrate their climate commitment by providing a way for them to publicly declare their intent to move toward net zero and thereby support other businesses that are doing the same. To do so, however, the market must develop more effectively and rapidly.