Carbonomics 101: Top 3 Factors you Should Consider when Buying Voluntary Carbon Credits

Published: September 13, 2022

As companies look to introduce net-zero targets, the use of carbon credits to offset emissions has seen a strong resurgence. But fast-moving markets can be tricky to navigate and getting started can feel overwhelming. In this article, we take a closer look at the key factors that companies should consider when buying carbon credits.

Many corporate decision-makers realise they require carbon offset credits for a remainder of their carbon emissions they can’t reduce to zero.

While the purpose of carbon offset credits is straightforward – to help companies lower their carbon dioxide emissions by investing in projects that reduce or remove carbon dioxide from the atmosphere – choosing a suitable carbon credit can quickly become an overwhelming task. Typical questions that potential buyers ask include: How can we access carbon credit markets? How can we determine the quality of the credits on offer? Which criteria do we use to make the final selection of our ‘short list’?

We’ve created this short guide to help answer these questions.

Accessing carbon credit markets

The universe of projects that produce carbon credits is growing. Typical projects include protecting or growing new forests, enhancing biodiversity, improving soils, and supplying renewable energy through off-grid energy production. Experts estimate that 90% of carbon credit projects come from emerging and developing economies – and up to 90% of the demand for these credits will come from companies in developed economies. ^[1]

While anyone looking to purchase carbon credits could approach suppliers directly, organisations that act as intermediaries arguably make it much easier to match supply and demand.

Finding the right carbon credit: how to separate the wheat from the chaff

While there are many factors that can determine the choice of carbon credit, we focus on the three most important ones for corporate decision-makers.

1. Quality of the credit

Needless to say, carbon credit quality is critical. The integrity of the carbon offsetting concept relies wholly on the environmental additionality of the credit, which all standards (outlined later in this article) define in the same way: a carbon credit is considered additional if the emissions reduction/removal that underpins the credit would not have occurred without the project that generates the credit.

While this might sound obvious, there have been issues with poor-quality, legacy credits, where projects offering credits would have happened anyway without the additional funding from the credits. In these cases, buying the credits didn’t result in additional reduction/removal of carbon from the atmosphere, meaning the carbon credits of these projects generated no environmental benefit.

Standards are key and have been developed to ensure that credits offered on global carbon credit markets are genuinely additional, auditable, and verifiable. While very similar in their approach, these standards differ depending on the type of carbon credit – of which there are two:

Certified carbon allowances are traded in compliance carbon markets. These are applied to the power, heat generation, oil refineries, and commercial aviation industries, representing the regulated ‘stick’ that puts a price on greenhouse gas (GHG) emissions. In the UK, it’s commonly known as the Emissions Trading Scheme (ETS), where companies buy emissions ‘allowances’ at auction. These don’t actually remove any GHGs from the atmosphere, whereas carbon credits do.

Voluntary carbon credits are traded on voluntary carbon markets, which function outside but in parallel to the compliance market. Voluntary markets operate not because of government obligations but to give companies and others the opportunity to offset their own emissions on a voluntary basis. Carbon credits can be created under voluntary market standards, the most notable of which are:

Standards are becoming higher and increasingly multilayered as more organisations get involved in their development. A good example of this is the Core Carbon Principles (CCP), a new internationally recognised standard for global voluntary carbon markets developed by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM). The CCP sits alongside a range of other frameworks, legal principles, and contracts developed by the TSVCM providing better governance, transparency, and scalability in global voluntary carbon markets.

2. Strategic alignment with the wider business

Choosing carbon credits with strong links to an underlying business model and corporate activities can help make emitting activities more aligned with emissions removal, which is desirable from the standpoint of a wide range of external stakeholders: lenders, investors, and regulators included. After assessing the quality of available carbon credits, applying a strategic and geographical/supply chain lens to gauge alignment between credits and business activities will help produce a ‘carbon credit short list’.

In doing so, companies and organisations should ask themselves the following questions:

Intermediaries can also support in finding projects that fit strategically with the credit buyer’s business.

3. Costs of carbon credits

Finally, comparing the costs of carbon credits of equal quality and equal fit with the business is the natural next step to conclude the choice of suitable carbon credits. However, the pricing of carbon credits remains very elusive, mostly because of the wide variety of credits in the market and the number of factors influencing the price. Credits can currently cost anything from as low as $3 to $200 per tonne depending on a range of factors, with many estimates forecasting price increases over the next few years.

One of the main factors affecting the price of carbon credits is the nature of their underlying project. Projects are grouped into two large categories or baskets:

Removal credits tend to trade at a premium to avoidance credits, not just because of the higher level of investment required by the underlying project, but because of the high demand for this type of credits. They are also believed to be a more powerful tool in the fight against climate change because no carbon would have been removed without the project. With avoidance (or reduction) credits, it is less clear what would happen without a particular project.

Beyond the type of the underlying project, the price of a carbon credit is also influenced by a number of other factors which we outlined in a previous article of our Carbonomics 101 series.

No time to wait for market to mature

While the rapid development of carbon markets has kept some on the sidelines waiting for the dust to settle, the urgency of the climate crisis means now is the time to seriously consider how to offset emissions that can’t be eliminated or reduced through other activities. The velocity of current initiatives – such as the Taskforce on Scaling Voluntary Carbon Markets – to increase the transparency and robustness of the carbon markets should help reinforce the role carbon credits play within the wider toolkit that companies can draw from to achieve their climate ambitions. And with careful planning and preparation, accessing carbon markets doesn’t have to be daunting.

Follow NatWest’s Carbonomics 101 series to stay informed on the development of the carbon markets and learn about the role they could play in your sustainability strategy. Access forthcoming articles in this series the moment they’re published by following NatWest on social media, and visit the bank’s ESG Hub for essential tools and insights to help you on your sustainability journey.