From offsetting to contribution: A credible way of using carbon credits

25 years. That’s how long the much celebrated carbon offset schemes have been around.

Officially introduced in 1997 as part of the Clean Development Mechanism under the Kyoto Protocol, they were seen as the most promising symbol for a greener, fairer world.

There have certainly been changes, but they haven’t been particularly clean. With the exception of the Covid crisis and its 5.8% reduction in global emissions in 2020, emissions have increased by more than 70% in 30 years, with levels rising from 38 GtCO2e to 65 GtCO2e.

In 2021, the voluntary carbon finance market reached a record value of nearly $2 billion, with 500 million carbon credits sold. This previously limited market, with its controversial reputation, seems to be finally taking off. In the wake of 2,500 companies committing to Net Zero and in the face of miraculous forecasts of market growth, the players are getting organized. On the supply side, the Integrity Council for the Voluntary Carbon Market (IC-VCM) is looking to address the credibility of carbon credit projects. Demand-side, meanwhile, the Voluntary Carbon Markets Integrity Initiative (VCMI), is striving to bring more coherence to the claims made as a result of buying carbon credits.

For 25 years, the carbon finance market, which has the potential to play a key role in achieving global carbon neutrality, has failed to generate strong stakeholder support – and make a real difference. Whether voluntary or regulated, the use of carbon credits has always been met with suspicion, criticism, and controversy. That’s because it’s resulted in the cancellation of emissions.

The contribution approach doesn’t question carbon credits as such, but it defines a new method to use this indispensable tool. One that breaks with the idea of offsetting emissions and opens up the field of actions contributing to global climate targets.

This white paper introduces a simple method that conveys a collaborative and supportive vision of climate action. And brings back the integrity and moral use of carbon credits.

The historical practice of voluntary carbon offsetting is out of touch with climate economists’ recommendations for carbon price-setting.

Carbon credits were initially created to enable organizations to offset any emissions that remained once they had implemented emission reduction actions. In this system, emissions budgets are set within the framework of a carbon market, like the ETS (Emissions Trading Scheme), that limits the use of carbon credits.

In contrast, the voluntary use of carbon credits – free of regulatory constraints – developed without any strict framework,  allows companies the unlimited use of carbon offsets and disconnects them from the process of transitioning towards a low-carbon model. Instead of reducing their carbon emissions, they simply buy the equivalent carbon credits to offset their emissions, thus ‘buying’ themselves carbon neutrality. 

As a result, a company decides to ‘offset their emissions,’ they do so based on two variables: the scope of emissions to be offset and the financial budget available. The latter is usually defined by the scale and health of their finances. Meanwhile, it’s either the company’s net-zero pledges or marketing trends that dictate the scope of the emissions to be offset.

This process generates three different types of risks

1. Strategic risks: A model that stifles real impact

The price of a carbon credit is based on the business model of the project the credit supports. To obtain this price, all the direct and indirect costs of reducing or removing a ton of CO₂ are added together and then divided by the quantity of carbon credits generated. This means a carbon credit  is not a price signal because it reflects the cost of reducing a ton of CO₂ , not the value of the damage caused by the emission of a ton of carbon.

The problem with this voluntary system is that companies set the price of carbon credits based on their own requirements. If you do this, you’re distancing yourself from the real needs of the project, failing to support its growth and limiting its impact. It also means that you’re less likely to focus on reducing your emissions at the source.

2. Financial risks: At the mercy of carbon markets

It’s rare for companies to retract the carbon neutrality claim once they’ve announced it loud and clear. But, once you’ve made such a claim, you’re vulnerable to market fluctuations in carbon credit prices and their availability. You’ve effectively committed to buying a set amount of carbon credits for the entire lifespan of your company, regardless of how their price changes. As the price of carbon credits is set to more than double between now and 2030, you’ll see your budget rising too – turning carbon neutrality into a threat to your financial health.

3. Reputational risks: Trapped by carbon neutrality claims

This leaves companies with little freedom to choose the projects they place in their contribution portfolios. The content of these portfolios is instead dictated by the volume of emissions you need to offset and the price of carbon credits. Choices become even more limited if you’ve committed to a target of complete carbon neutrality.

As a knock-on effect, you’re forced to pick whatever projects fit into your budget and the amount of CO₂ to offset, regardless of the actual needs of the countries in which the projects are based. On the other side, project developers are forced to sell carbon credits at a lower price – reducing their capacity to develop long-term sustainable projects that are sustainable in the long-term.

Finding themselves locked into carbon neutrality claims, a company might end up supporting low-cost projects that have limited co-benefits and no links to the company’s core activity. Worse still, the process can spark frustration and misunderstanding among internal teams as the company invests significant money into offsetting without any discernible concrete benefits.

Put simply, buying carbon credits to offset emissions does nothing to control costs, create true stakeholder engagement, or reduce emissions at their source.

But we shouldn’t give up just yet. Carbon credits are a means to an end, not an end in themselves. As per the latest IPCC report, they have a role to play in climate justice by supporting the $100 billion funding initiative set up by the Paris Agreement (article 15).

Rather than simply offsetting their emissions, organizations have the opportunity to make meaningful contributions – helping their countries decarbonize and advance climate justice. This is where the shift from offset practices to contributions is key.

At Sweep, we’ve developed a methodology inspired by the Boston Consulting Group (BCG) and the World Wide Fund for Nature (WWF) Blueprint for Corporate Action on Climate and Nature, so you can make smarter use of the mechanisms that are available.

Read on to learn how to turn your contribution portfolio of carbon credits into a competitive asset and show your genuine commitment to tackling climate change.

This methodology offers a new way of buying carbon credits that can benefit your finances, brand reputation, and the planet. It also frees your company from the claim of carbon neutrality.

Our approach is simple:

Build your contribution portfolio based on a set budget – rather than the volume of emissions to offset.

This budget is based on an internal carbon price – or tax – and the funds raised in this way are allocated based on your company’s climate goals. That means your contribution portfolio becomes aligned with your corporate values and the needs of local ecosystems where you operate.

2. Allocate funds strategically to support projects that reduce or store carbon emissions

Use your budget in a strategic way to grab the attention of the people sitting in the boardroom.

By setting an internal carbon price, you can take back control over how much you actually spend, instead of having to buy carbon credits according to carbon market pricing. By building the budget and allocating it collaboratively, your contribution strategy will engage everyone within your company. It’s a great way to create a sense of unity around the  improvement of your company’s environmental impact and give individuals a sense of responsibility over their own individual impacts. 

Your allocated budget doesn’t just have to go towards purchasing carbon credits, either. You can use it to fund your company’s direct (reducing absolute emissions) or indirect decarbonization (avoiding emissions related to products and services sold) or invest in projects that are eligible for climate dividends. For example, you could choose to invest in innovative materials for manufacturing low-carbon products.

3. Build a relevant and impactful portfolio of carbon credits

Now that you have control over your climate action budget, it’s time to turn your attention to the type of projects you want to support. Purchasing carbon credits is most effective when you fully engage in picking climate projects that are relevant to your business and also have a genuine local impact.

Here are three criteria to think about when selecting climate projects for your contribution portfolio:

• Align your selection of projects with your company’s values and location. If you have offices in France and Canada, and suppliers in Vietnam and Japan, you could consider supporting climate projects in any or all of these countries.

• Look at your country’s decarbonization plan. These roadmaps, also called National Determined Contributions (NDCs), highlight key issues and priorities to meet national climate goals. They may include industrial emission reductions, forest protection, or agricultural transition.

• Projects should be high-quality and address local social and ecological issues. In a spirit of international solidarity, choose verified projects carried out in regions where local populations are in great need of support. Most developing countries don’t need more trees, but instead, require support to ensure food security or access to energy.

Other criteria to consider could be picking projects in your business sector, those with an educational goal, or prioritizing short-term impact by funding methane reduction projects. Your choice could also be guided by your company’s contribution to the Sustainable Development Goals as well as your Corporate Social Responsibility strategy. Finally, you may want to invest most heavily in the territories or countries where your company’s emissions are the highest, or allocate funds proportionally to match your share of turnover in each country.

Key takeaways:

• Avoid the pitfalls of traditional offsetting by establishing a tailored contribution strategy based on an internal carbon price

• Allocate these funds strategically for greater impact, coherence, and to increase employee engagement

• Make your contribution portfolio more relevant and impactful by providing support to the right climate projects in the right places

Now that you know how to build a credible contribution strategy, let’s talk about how it can reduce the risk exposure previously mentioned, fit into your corporate climate strategy, and even become an asset for the future of your organization.

1. Budget control: Free yourself from market volatility

The cost of carbon credits is set to increase sharply. If your company is committed to offsetting a predefined, inflexible volume of emissions (your remaining emissions), you’re highly vulnerable to market fluctuations. Setting an internal carbon tax protects you from this. And by agreeing to pay the price set by project developers, rather than demanding a discounted price, you put yourself in a strong position to secure more credits in the future, which is crucial as they will become harder to obtain.

1. Align your portfolio of carbon credits with your climate strategy

When you thoughtfully choose the projects you want to support, rather than focusing on the amount of carbon credits you need to purchase, your spending will become a tool used to contribute to positive impact. Your company’s climate strategy, corporate values, and the needs of countries you’re operating in will drive your choices. This method is also compatible with recurrent and longer-term support for project developers. Setting up partnerships that last three years or more means you can track the impact of your financial contribution, create welcome visibility for partners, and potentially see new project opportunities emerging.

3. Futureproof the carbon market and your reputation

By paying the price demanded by developers, projects get the funding they need, and developers can go on to set up new ones. The result is growth in the carbon credit market as a whole, resulting in a larger supply of credits. You’ll improve your company’s impact in real terms as well as boosting employee buy-in. Plus, it’ll make it easier to communicate an authentic, credible, and consistent message.

This doesn’t mean you have to forgo crucial transparency, though, both in terms of how the price is set and how much of the project’s budget is supported by carbon finance.

What’s the price you have to pay to stand out from the crowd? Start with freeing yourself from the concept of carbon neutrality. Keep this term to refer to the collective, global target of carbon neutrality.

Key takeaways:

• Protect yourself from the risk of carbon pricing fluctuations with a fixed budget and build long-term relationships with project developers

• Choose the projects your team wants to invest in thoughtfully, and be sure they are aligned with your values and your climate strategy

• Your impact will become meaningful, strategic, and credible – and you’ll reap the reputational rewards

No one expected carbon offset schemes to be the climate change silver bullet, let alone solve complex and long-standing problems such as world hunger or access to energy, once and for all. Instead, these schemes intended to help developing countries adopt low-carbon technologies, limit the costs of decarbonizing industrialized countries, encourage public sector involvement and, if possible, improve the living conditions of vulnerable populations. Were they successful?

It’s time to acknowledge that our use of offsetting has become an excuse to bury our heads in the sand and avoid changing our high-emitting behaviors, business models, and use of resources. They can’t give us a clean carbon slate, nor can they replace the urgent need to reduce  emissions.

This is why, with a clearly defined methodology and implementation, the switch to contributions can make a lasting difference.

This transparent, traceable, and comparable approach is mutually beneficial and secures stronger stakeholder buy-in.

As a new generation of companies making climate contributions emerges, they’ll lead the way in taking positive, collaborative, and transparent climate action. Will you be one of them?

Get in touch to join the contribution movement.