How the voluntary carbon market can help address climate change

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December 17, 2020 | ArticleOpen interactive popupHow the voluntary carbon market can help address climate changeOpen interactive popupThe voluntary carbon market is gaining momentum and plays an increasingly important role in limiting global warming. Here’s how.

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As business leaders set increasingly ambitious commitments to reduce global greenhouse-gas (GHG) emissions, a market is developing that can help to achieve them by supplementing companies’ efforts to reduce their own emissions. This is the rapidly growing market for voluntary carbon credits.Sidebar

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Carbon credits (often referred to as “offsets”) have an important dual role to play in the battle against climate change. They enable companies to support decarbonization beyond their own carbon footprint, thus accelerating the broader transition to a lower-carbon future. They also help finance projects for removal of carbon dioxide from the atmosphere—delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. However, while the voluntary carbon credit market is currently experiencing significant momentum, it is still relatively small. The recently launched report by the Taskforce on Scaling Voluntary Carbon Markets aims to create a blueprint for solutions that could help overcome obstacles to its further growth. (For more about the Taskforce, which McKinsey supports as a knowledge partner, please read our article “Scaling voluntary carbon markets to help meet climate goals.”) This article will explain how carbon credits work and how they can help in the global effort to address climate change.

The dual role of voluntary carbon credits in addressing climate change

Criteria for carbon credits

A carbon credit is a certificate representing one metric ton of carbon dioxide equivalent that is either prevented from being emitted into the atmosphere (emissions avoidance/reduction) or removed from the atmosphere as the result of a carbon-reduction project. For a carbon-reduction project to generate carbon credits, it needs to demonstrate that the achieved emission reductions or carbon dioxide removals are real, measurable, permanent, additional, independently verified, and unique (see sidebar, “Criteria for carbon credits”). If a project meets these criteria—as specified by independent standards such as Gold Standard and Verified Carbon Standard (VCS)—credits can be issued. The impact of a carbon credit can only be claimed—that is, counted toward a climate commitment—once the credit has been retired (canceled in a registry), after which it can no longer be sold. A carbon credit is considered a “voluntary carbon credit” when it is bought and retired on a voluntary basis rather than as part of a process of compliance with legal obligations.

The proceeds from the sale of voluntary carbon credits enable the development of carbon-reduction projects across a wide array of project types. These include renewable energy; avoiding emissions from fossil-fuel based alternatives; natural climate solutions, such as reforestation, avoided deforestation, or agroforestry; energy efficiency; and resource recovery, such as avoiding methane emissions from landfills or wastewater facilities; among others.

While most of these project types including renewable energy, avoided deforestation, and resource recovery focus on avoiding carbon emissions, others, such as reforestation, focus on removing carbon dioxide from the atmosphere. This is a meaningful difference, illustrating the dual role voluntary carbon credits can play in addressing climate change:

• In the short term, voluntary carbon credits from projects focused on emissions avoidance/reduction can help accelerate the transition to a decarbonized global economy, for example by driving investment into renewable energy, energy efficiency, and natural capital. Avoiding emissions is typically the most cost-efficient way to address atmospheric greenhouse gas concentrations.
• In the medium to long term, voluntary carbon credits could play an important role in scaling up carbon dioxide removals (or negative emissions) needed to neutralize residual emissions¹ that cannot be further reduced. In a recent analysis, we found that at least 5 gigatons of negative emissions will be needed annually to reach net-zero emissions by 2050. These could be realized through a combination of natural climate solutions such as reforestation (for example, sequestering carbon in trees) and nascent technology-based carbon capture, use, and storage solutions such as direct air capture with carbon storage (DACCS), and bioenergy with carbon capture and storage (BECCS). Voluntary carbon credits can help finance the scale-up of these solutions.

The role of voluntary carbon credits in corporate climate commitments

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A credible corporate climate commitment begins with setting an emissions reduction target that covers both a company’s direct and indirect greenhouse gas emissions: if a company does not already have an emissions baseline from which to set a target, creating one is a necessary first step.

Aligning such a target’s ambition level with the latest climate science is widely seen as best practice. In other words, the target needs to be in line with the level of decarbonization required to limit global warming to well below 2 degrees Celsius above preindustrial levels at a minimum—and ideally be in line with a 1.5-degree pathway, which scientists estimate would reduce the odds of initiating the most dangerous and irreversible effects of climate change. The Science Based Targets initiative has developed methodologies for setting such a target, which have been already adopted by more than 1,000 companies, including many leading multinationals. To achieve the required emissions reductions, companies can pull levers such as improving energy efficiency, transitioning to renewable energy, and addressing value chain emissions.Sidebar

Types of carbon targets

As a next step, a company may commit to a target that involves the use of voluntary carbon credits—either to compensate for emissions that it has not been able to eliminate yet or to neutralize residual emissions that cannot be further reduced due to prohibitive costs or technological limitations. These types of targets come with various designations (for example, carbon neutral, climate neutral, net-zero, carbon negative, climate positive) but they all typically involve a company supplementing reductions achieved within its own carbon footprint by financing reductions elsewhere through the purchase and retirement of voluntary carbon credits (see sidebar, “Types of carbon targets”). By offsetting its remaining emissions in this way, a company can claim it is mitigating its residual impact on the climate. Some, such as Microsoft, have gone further by setting aspirations to make a net-positive impact on the climate.

Scaling voluntary carbon markets to help meet climate goals

Read the report