Insights / The pros and cons of carbon credits

The pros and cons of carbon credits and choosing your portfolio

In 2023, the global value of the Voluntary Carbon Market (VCM) reached almost $2 billion dollars – an increase of nearly four times on 2020.

As the VCM grows and supports even more projects globally, the range of available credits also expands – although most relate to carbon emissions reduction activities. While this growth gives you more options, it also raises questions.

How do you assess the advantages and disadvantages of each credit? And how can you feel confident you’re making the right choices? This article intends to help you find the answers.

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Supporting a broad portfolio of projects as early as possible on your decarbonisation journey, and acquiring the associated credits, is a sound approach to achieving your sustainability goals.

But to buy the right kind of carbon credits, you need to assess the projects and technologies they relate to while also matching them to your strategy and budget. Here’s an overview:

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Guidance from the Voluntary Carbon Markets Initiative (VCMI) suggests that organisations transition from reduction credits to carbon removal credits over time. In doing so, it’s important to consider these factors.

1) The risk of reversal (stored CO2 being re-released into the atmosphere)

Carbon projects that involve tree planting put the associated carbon credits at a higher risk than others. Since these habitats are vulnerable to wildfires, the CO2 that’s stored in the trees can be re-released into the atmosphere.

2) Additionality (would the project have happened without the revenue from the VCM?)

If the project would have gone ahead anyway, any credits relating to it are invalidated. As the cost of the technologies underpinning such projects comes down, the risk of them being able to claim additionality rises.

3) The complexity of calculating reductions in emissions

Certain projects – particularly those concerning emissions reduction – will rely more upon projections and modelling than others to calculate their impact versus not having the project in place. As a result, these projects are more vulnerable to inaccuracies or miscalculations. This brings into question the validity of the claims and results of the project and, ultimately, the viability and value of its credits.

4) The voluntary aspects of the market

The carbon credits market is voluntary and not regulated by any centralised body. Organisations wanting to buy credits should consider which ones comply with the standard(s) prevailing – and most widely agreed upon – at the time of purchase. Currently, the Integrity Council for the Voluntary Carbon Market (ICVCM) is the leading credit integrity initiative.

5) The availability (and price) of the credits

Currently, the supply of credits exceeds the demand for them and this is keeping prices low for reductions and low-permanence removals. However, the constraints on the supply of high integrity credits and CDRs in the mid- to long-term mean there’ll be a shortfall. In short, the market won’t be able to meet the expected increase in demand that’s due over the next few years and this will drive up prices.

So, purchasing earlier – before that happens – will save you money and allow you to account for a larger proportion of your emissions than less agile competitors can achieve.

After reviewing projects and their associated credits, it could be that you remain uncertain about the need to spread your investment across both reduction and removal credits. The key reasons relate to gaining a commercial and competitive advantage:

- Beat the rush and ‘buy low’ – a supply versus demand squeeze in the market for credits associated with carbon dioxide removals (CDRs) is expected over the next decade. This is likely to drive prices even higher than today’s levels, so purchasing CDRs now will save you money in the mid- to long-term.

- Get ahead of your competitors – organisations within your sector will probably be buying credits as part of their net zero drive, just like you. If you secure CDRs earlier than them, you’ll not only get a better price but also cover a larger proportion of your emissions before they do, which delivers other benefits.

- Keep stakeholders happy – purchasing CDRs will get you closer, faster, to achieving your sustainability targets. This will help satisfy your employees, customers, investors and other stakeholders, generate positive PR, and close in on attaining your environmental, social and governance goals.

To discuss buying a range of carbon credits – including CDRs – from Drax, get in touch now.

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