Author: Shashank Pandey

In a paper published in Nature, Stolz and Probst examine 89 large multinationals in high-emission sectors (oil & gas, autos, airlines) using over 400 reports and self-disclosed data to assess how voluntary carbon offset purchases relate to actual decarbonisation efforts. They find no significant difference in emission reductions or ambition between companies that buy carbon credits and those that don’t. Most firms allocate only a tiny fraction of their capital expenditure to offsets, and often pass the cost onto customers, so offsets rarely displace internal decarbonisation investment. However, in a few extreme cases (especially airlines), large offset budgets may compete with internal mitigation efforts. The authors argue that voluntary carbon offsetting tends to play a marginal role, and is often overemphasised in corporate climate strategies.

PwC released its “Navigating India’s Transition to Sustainability” report on Business Responsibility and Sustainability Reporting (BRSR) compliance for FY23 of the top 100 Indian listed companies. It highlighted that 31% of these companies have revealed their net-zero targets aligning with the government’s 2070 net-zero commitments. Additionally, 51% of such companies have revealed their Scope 3 emission, a voluntary declaration under BRSR. Scope 3 emissions occur in upstream and downstream activities of a business, such as supply chain, waste disposal, etc. This includes emissions in activities of stakeholders, such as suppliers, vendors, and even customers, who are not under the direct control of the reporting company. Scope 1 emissions are direct emissions by a company, whereas Scope 2 includes indirect emissions caused by electricity used by the company. It is estimated that Scope 3 emissions can constitute upward of 90% of total emissions by a company in some industries like automobiles, food and fashion.

The commitment of Indian firms to disclose their carbon emissions is commendable and surpasses the global average. For example, according to the International Emission Trading Association (IETA), 81% of the world’s largest companies have yet to establish a Net Zero goal. This demonstrates that Indian companies are more transparent about their sustainability efforts, particularly regarding Scope 3 emissions. Nonetheless, with the evolving landscape of sustainability compliance, there is a growing debate over whether the use of offset mechanisms like carbon credits to meet Net Zero targets is ethically sound, especially in the wake of the Science Based Targets initiative’s (SBTi) latest stance on Scope 3 emissions.

The SBTi debacle

The Science Based Targets initiative (SBTi), known for setting corporate climate standards, recently sparked debates by permitting the use of carbon credits, formally known as Environmental Attribute Certificates, to counterbalance Scope 3 emissions. This decision has implications for over 4,000 corporations worldwide, including major and minor businesses, that have aligned their emission reduction goals with SBTi’s guidelines, a benchmark for corporate climate action globally. Notably, Indian firms like Tata and Adani, which have committed to SBTi’s Corporate Net-Zero Target, will see an impact on their BRSR due to this change.

Recently, the Financial Times reported that continuous lobbying by the US climate envoy with SBTi may have contributed to making carbon offsets as an alternative to reducing Scope 3 emissions. The new relaxation differs from SBTi’s established mandate for companies to eradicate 90% of emissions by 2050. It’s anticipated that this will result in the revenue diversion towards the carbon credit market, thus causing a demand side signal for carbon offset instead of actual investment in the decarbonisation efforts. This is evidenced by the increased promotion and demand for carbon credit in the African continent vide the African Carbon Markets Initiative (ACMI).

The SBTi relaxation will be antithetical to desired Net-Zero commitments wherein large corporate houses and companies can buy carbon offsets to depict their carbon neutrality or net negative carbon emission. The SBTi’s assurance of providing specific guardrails and thresholds to operationalise this mechanism in the upcoming months is a timely intervention that can check this greenwashing tendency. However, it is undeniable that the usage of carbon credit will gain more prominence in corporate climate commitments. As reported in research from Intercontinental Exchange and the environmental group We Mean Business Coalition, the carbon credit also encourages companies to take more ambitious climate actions. Therefore, maintaining the quality and integrity of these carbon credits is essential to ensure they contribute positively to climate action efforts.

Ethical usage of carbon credits

The IETA recently launched its guidelines for High Integrity Use of Carbon Credits. The guidelines are aimed at allowing companies to make informed decisions while incorporating carbon credits into the company’s climate targets. Although there are technical differences in climate modelling that are relied upon by SBTi and IETA, the substantive parts of these guidelines can be universally adopted.

First, there should be alignment with the Paris Agreement commitments to achieve decarbonisation. Second, quantification of Scope 1,2 and 3 emissions based on international standards and verification of the company’s climate profile by a third party. Third, establishing net zero decarbonisation pathways and setting up near-term targets should account for scientific evidence related to climate change. Fourth, the usage of carbon credits must be in line with the mitigation strategy – suggests a three-step process wherein the first is the reduction of emissions through internal decarbonisation; the second is the switch to less intensive activities; and finally, the usage of carbon credits as an offset mechanism.  Fifth, use high-quality carbon credits validated by third parties after due diligence. Lastly, there should be a transparent disclosure of the usage of carbon credits that covers essential parameters and includes the social and environmental benefits and risks of their carbon credits.

A heads up for Indian companies

As the conversation around carbon credits and corporate climate action evolves, it’s clear that integrity, transparency, and ambition must be at the core of every company’s strategy. The developments in India’s corporate sector, as highlighted in the PwC report, present a promising shift towards greater sustainability. To further enhance their climate action efforts, it’s crucial for these companies to focus on improving transparency regarding their Scope 3 emissions and to integrate the IETA’s mitigation hierarchy structure to effectively reduce these emissions.

Currently, the lack of a comprehensive domestic legislative framework for Net-Zero compliance means that corporate climate commitments and targets are not subject to stringent oversight. Although organizations like SBTi and the MSCI Net-Zero Tracker play a role in validating corporate carbon pledges, there is a growing concern about companies potentially prioritising the purchase of carbon offsets over making direct investments in decarbonisation. This practice can lead to accusations of greenwashing, underscoring the need for more robust verification and accountability mechanisms in corporate climate action.

The article was originally published in LIve Mint here.