#215 The Latest Trends On the Buy Side of the Voluntary Carbon Market

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There has been a global shift towards the sustainability effort in recent years, highlighted by various regulations and schemes aimed at businesses to help encourage a more sustainable way of operating.

This has led to more focus on the voluntary use of carbon markets, in which companies help to fund decarbonisation projects by buying carbon credits.

In this episode Mel is joined by Tiffany Cheung, the Corporate Engagement Lead at carbon markets data company AlliedOffsets, as they discuss the landscape of the market, including current trends, decarbonisation challenges in different sectors, and top tips for navigating the space.

You’ll learn

·       What impact will corporate disclosures have on the carbon markets?

·       What are the rates of decarbonisation across different sectors?

·       What are the emerging buyer trends within the voluntary carbon market?

·       What is an internal carbon price?

·       How can companies use a carbon price to ensure that their sustainability goals are financially viable?

·       How can AlliedOffsets’ data help companies when entering the carbon market?

·       What are the critical steps businesses should take to mitigate price volatility and ensure that they're investing in high quality, impactful carbon offsetting projects?

 

Resources

·       AlliedOffsets

·       AlliedOffsets LinkedIn

·       AlliedOffsets Corporate Emissions Data and Findings

·       Carbonology

 

In this episode, we talk about:

[00:30] Episode Summary – Tiffany Cheung joins Mel to discuss buyer trends in the voluntary carbon market (VCM), including insights on the use of internal carbon prices and top tips for businesses looking to enter the market.

Don’t forget to catch-up on the previous episode where Tiffany explains what the voluntary carbon market is and gives an insight into the lifecycle of carbon credits.

[01:30] What impact will increased corporate disclosures have on the carbon markets? There are 2 main points:

1.      Already on the Agenda: Increased corporate sustainability disclosure may already fit into the changes that are taking place within the thinking of a company.  If a company is spending time on creating and publishing reports on their sustainability initiatives, it is likely that they will  be exploring their options for how they can take action more broadly.This is likely to be associated with increased engagement with the voluntary carbon markets, both through offsetting of carbon footprints and investing in carbon credits or project developers.

2.      Project Developer benefits: Project developers will likely benefit from increased insight to the kinds of projects that buyers are purchasing credits from. As a by-product, there may be more focused projects created based off what certain sectors are willing to offset or invest in.

[02:55] What are the rates of decarbonisation across different sectors? To give a macro view from the public data available in corporate sustainability reports over the last few years, the biggest total polluters by sector continue to be energy, maritime, transportation and materials and mining.

Looking at the positives, the energy sector, which has historically been the biggest polluter, has decreased its emissions in both scopes 1 and 2 since 2019. However, there’s still a very long way to go, and with major emitters recently rolling back their climate commitments, one shouldn’t assume that that trend will continue linearly.

Another sector facing an interesting decarbonization journey is aviation, whose emissions have been increasing in recent years, although not quite to pre-COVID pandemic levels. This sector will have to grapple with its emissions whilst contending with forecasted growth in both consumer and business travel over the next decade. Many aviation companies are both committed to Science Based Targets initiatives (SBTi) and fall under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), applying pressure on the sector to decarbonize as a whole.

On a positive note, 18 sectors assessed by AlliedOffsets have decreased their average carbon emissions in scope 2 over the past few years, due in large part to increased renewable energy sourcing and improved energy efficiency.

[07:10] What are the emerging buyer trends within the VCM?: AlliedOffsets are in a particularly good position to provide insight to this due to their comprehensive view of both historic buyer activity and new market entrants across the world.

Chinese and German manufacturers have become a steady presence in the market, distinguished by their especially detailed credit retirement information. They’ll go as far as to specify the products and operating periods that are being offset, showing really high levels of engagement with their environmental impact and giving clear insight on their targeted offsetting approach.

Another buyer trend to highlight is occurring within the Australian market, where AlliedOffsets is seeing lots of credit retirement associated with the carbon neutrality certification scheme Climate Active. This is driving most voluntary retirements from the region, particularly from real estate and pension funds.

[09:15] What is an internal carbon price? An internal carbon price is a specific cost or budget set by a company for the carbon or other greenhouse gas emissions that are associated with their specific business activities.

This is typically based off of something like the World Bank calculations on the cost of climate change to society, or it could be based on the price of carbon set by an compliance emissions trading scheme (ETS) that is local to that business.

[10:20] How can companies use a carbon price to ensure that their sustainability goals are financially viable?: For example, EasyJet has an internal carbon price that's based off of the UK emissions trading scheme. That internal carbon price is factored into the airline’s master financial models and that drives their 5 - 10 year long financial plans. That helps to determine things like the geographical routes that EasyJet operates, which can affect profitability. An internal carbon price makes emissions tangible and material, playing a role in the wider business decisions. An airline operator is considered a big emitter and is likely to already be exposed to some kind of compliance carbon scheme which has a financial impact on the company.

Nonetheless, having an internal carbon price can be useful regardless of how big your business is, as it can be used to budget certain activities and see where emissions might be centralised in a particular department.

An example of this in practice may be that you have an internal carbon price of £50 per tonne, you can take that to an emissions calculator or advisor to work out a budget based on the carbon footprint of different activities or departments in the business. The idea being that if you can identify the cost associated with the emissions created, you know how much to spend to decarbonize. This process may also highlight where you can make further reductions, i.e. reducing air travel and supporting staff on switching to less polluting forms of transport.

[12:55] How can AlliedOffsets data help companies interested in an internal carbon price?: AlliedOffsets has data on the carbon pricing programmes used by companies to set their internal carbon price, as well as the specific price itself for hundreds of different companies.

This dataset also includes companies that haven't chosen to use a particular pricing scheme but have set an internal carbon price based just off of their unique activities. 

This helps to contextualize the current range of internal carbon prices and the logic behind them.

[13:50] The need for regular review: Internal carbon pricing is something that needs to be reviewed on a regular basis as the costs associated with emitting in some business locations is not going to remain the same. This can also be affected by national legislation, which can increase the financial risk of emitting.

Tiffany recommends reviewing your internal carbon pricing at least annually. They’re seeing an emerging trend within the environmental space where sustainability related impacts within a company are being sequestered into their wider financial operations.

The impacts of climate change are going to become more material to businesses in the very near future. As a result of this, it makes sense for businesses to assess their internal carbon price as part of their annual financial reviews. 

[16:30] What are the critical steps businesses should take to mitigate price volatility and ensure that they're investing in high quality, impactful projects? Tiffany recommends the following steps:

1.      Focus on decarbonising your business operations first and engaging with your suppliers to tackle scope 3 emissions as well. It’s more beneficial to both the business and environment for you to reduce emissions as much as possible, so you have a smaller residual footprint to offset.

2.      Decide what kind of projects / carbon credits you want to spend money on, whether it's offsetting or investing. Besides the climatic impact, there are many co-benefits of carbon projects to choose from, such as improved biodiversity, water supply, or workplace gender equality. Knowing what is valuable to you and your business will help in the selection of these projects.

3.      Build strong relationships with developers directly where possible and buy credits directly, in advance. This also has the benefit of ensuring a supply of carbon credits into the future without the worry about how the market might change or become more volatile within the next couple of years.

4.      If your business is operating at quite a significant scale, it would be wise to work with another company that's focused on the voluntary carbon market, like AlliedOffsets. They can provide guidance and forecasting for the specific projects or sectors you’d like to buy from, reducing uncertainty on the future of the market.

 

[20:00] Have faith in the impact of the voluntary carbon market  – The voluntary carbon market has been through a turbulent period of time, and it’s alright to feel cautious about entering a space which has been unstable in the past.

The concerns about reputational risk associated with offsetting have greatly reduced in the last few years, and it’s set to reduce further as the voluntary and compliance markets merge and integrity improves.

However, if you decide that offsetting isn’t right for your business, there are still other tools that you can take from the voluntary carbon markets to help drive decarbonisation, such as internal carbon pricing.

If you’d like to learn more about AlliedOffsets, visit their website!

If you’d like any assistance with carbon standards, get in touch with Carbonology, they’d be happy to help!

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