INSIDER: 3 Tips for Companies Navigating the Use of Carbon Credits from Nature

Mariners setting sail under stormy skies and equipped with incomplete maps risk being blown off course or running aground on hidden shoals. Companies considering the use of carbon credits from nature as offsets in their climate mitigation strategies face similar risks, as standards and norms for such use remain unsettled. 

A new WRI paper¹ provides guidance to help companies navigate the shifting winds and swirling currents in ways that provide safe passage toward ambitious corporate and climate goals. Below, we highlight three considerations:

1. Before using credits from so-called nature-based solutions (NBS), companies should build confidence that they are doing all that they can to abate their own emissions now and in the future.

The science is clear that we’ve run out of time and atmospheric space to trade off one source of emissions against another.  The Intergovernmental Panel on Climate Change (IPCC) Special Report on Global Warming of 1.5 °C established that in order to avert catastrophic climate change, we need to dramatically reduce emissions from fossil fuels and halt and reverse emissions from forests and other land-use change within the next decade. Further, by no later than 2050, all residual emissions must be counterbalanced by activities that remove carbon from the atmosphere.

The implication for companies is that the purchase of forest carbon and other NBS credits to offset their own value chain emissions poses both reputational and climate risks unless they are clearly additional to an aggressive decarbonization strategy. The Science Based Targets initiative provides guidance on what those abatement strategies need to look like in the near-term and is currently formulating guidance for companies on setting longer-term net-zero targets. The degree to which such guidance will provide incentives to companies to use NBS credits to counterbalance remaining unabated emissions in the near-term — as they make adequate progress toward net-zero targets — is the subject of active debate.

2. Companies should prioritize high-quality NBS credits, which for forest-based emissions reductions and removals is increasingly defined as crediting at jurisdictional scale.²

While all sources of carbon credits face concerns about issues such as additionality, leakage, impermanence and harm to local communities, forest carbon credits have perhaps been unfairly singled out as especially risky. However, for more than a decade, principles and approaches for managing those risks have been incorporated into standards and refined in light of experience with REDD+. REDD+ is the framework for financing reduced emissions from deforestation and forest degradation negotiated under the UNFCCC and is included in the Paris Agreement.

To date, the voluntary market in REDD+ credits has been exclusively focused on emissions reductions and removals at the scale of individual projects, such as protection of a national park or a tree-planting scheme involving a cluster of villages. While many such projects have achieved worthy goals at the local level, they have not proven effective in addressing the drivers of deforestation at scale. Crediting REDD+ programs at the scale of entire countries or large subnational jurisdictions has the potential to marshal government authority to regulate land use, enforce the law, implement fiscal incentives and other functions necessary to control deforestation that only governments can perform. Under publicly supported REDD+ initiatives, dozens of countries and states and provinces have invested in building the monitoring systems and strategies necessary to offer high-quality forest carbon credits. While only a few are “market ready,” a strong demand signal could provide incentives for others to accelerate the difficult policy reforms needed to achieve that status.

A consensus is emerging that projects must be aligned within government programs and carbon accounting systems, and that jurisdictional-scale credits represent a higher standard of quality than project-based credits. For example, the Taskforce on Scaling Voluntary Carbon Markets  concluded that “as many governments have begun to account for deforestation and forest degradation at the jurisdictional level, there is a need to ensure national accounting adds up, and thus for individual project-based REDD+ projects to ‘nest’ into the jurisdictional program, if possible.” Furthermore, the first international compliance regime to accept forest carbon credits — the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (ICAO CORSIA) — has approved only jurisdictional-scale REDD+ crediting programs.

3. In composing a portfolio of investments in NBS credits, companies should include both emissions reductions from protecting ecosystems and carbon removals from restoring them, with priority to the former in the near-term.

The recent cascade of companies making commitments to net-zero emissions targets has drawn attention to the need to offset any residual emissions with carbon sequestration no later than 2050. Unfortunately, this has led many companies to focus exclusively on tree-planting activities in the short run, even while the world continues to destroy existing high-carbon ecosystems such as tropical forests and wetlands at a high and even increasing rate.

Carbon released into the atmosphere through such destruction is essentially irrecoverable through restoration in the relevant timeframe, not to mention the loss of valuable biodiversity and ecosystem services. While we need to both protect and restore nature for climate stability and other reasons, a focus on planting trees — which annually sequester only a tiny fraction of the carbon released in a single pulse from deforestation of a similar area — is less valuable to society’s efforts to reach net-zero emissions.

Charting the Course, Pending Clearer Skies and Calmer Seas

These course corrections and other navigational tools are explored in greater detail in the working paper, including specific strategies for managing risks to the environmental and social integrity of NBS credits on the part of demand-side purchasers and supply-side sellers.

The paper also highlights issues that remain unresolved, such as how carbon emissions traded in voluntary international transactions will be reflected in national accounting systems under the Paris Agreement, and the various forums in which these issues are being debated. It asserts that companies should promote carbon market rules that ensure a high level of integrity, lest their credibility and legitimacy be undermined.

We hope that the urgency of putting the planet on a pathway to net-zero, combined with the imperative of mobilizing finance to protect and restore nature, will lead to rapid consensus in the run-up to the UN’s COP26 climate summit in Glasgow in November 2021. Companies are eager for a clearing of skies that remain cloudy with respect to society’s expectations for their roles in meeting both of these challenges, and a calming of rough seas of debate over what standards and norms should apply to the use of NBS credits in corporate climate mitigation strategies.

In the meantime, being clear that such credits are not a substitute for a company’s own abatement, choosing high-quality jurisdictional-scale credits, and financing both emissions reductions and removals from nature represent channel markers to ensure a safer journey toward corporate and climate goals.