We must ensure ethical use of carbon credits

PwC released its Navigating India’s Transition to Sustainability report on Business Responsibility and Sustainability Reporting (BRSR) compliance for 2022-23 of the top 100 Indian listed companies. It highlighted that 31% of these companies have their net-zero targets aligning with the government’s 2070 net-zero commitments. Additionally, 51% of such companies have laid out their Scope 3 emission, a voluntary declaration under BRSR of emissions occurring in upstream and downstream activities.

These include 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 include indirect emissions caused by its electricity usage. It is estimated that Scope 3 emissions can constitute more than 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, the International Emission Trading Association (IETA) states that 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 using 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: SBTi, known for setting corporate climate standards, recently sparked a debate 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. Notably, Indian firms like Tata and Adani, which have committed to SBTi’s Corporate Net-Zero Target, will also see an impact on their BRSR.

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 revenue diversion towards the carbon credit market, resulting in a demand side signal for carbon offsets instead of actual investment in decarbonization 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 Net-Zero commitments as large corporates will be able to buy carbon offsets to show carbon neutrality or even net negative carbon emissions. The SBTi’s assurance of providing specific guardrails and thresholds to operationalize this mechanism is timely to check this greenwashing possibility.

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 availability of carbon credit encourages companies to take more ambitious climate actions. Therefore, maintaining the quality and integrity of these carbon credits is essential to ensure that 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. These are aimed at allowing companies make informed decisions while incorporating carbon credits into their climate targets. While there are technical differences in the climate models relied on 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 decarbonization. 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 decarbonization pathways and setting up near-term targets should be based on scientific evidence.

Fourth, the usage of carbon credits must align with the mitigation strategy, which suggests a three-step process wherein the first is the reduction of emissions through internal decarbonization; 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 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, 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 climate action efforts, it's crucial for these companies to focus on improving transparency on their Scope 3 emissions and to integrate the IETA’s mitigation hierarchy structure to reduce these emissions effectively.

A comprehensive domestic legislative framework for Net-Zero compliance is necessary. Although organisations like SBTi and the MSCI Net-Zero Tracker play a role in validating corporate carbon pledges, there is growing concern about companies potentially prioritising the purchase of carbon offsets over making direct investments in decarbonization. This practice can lead to accusations of greenwashing, underscoring the need for more robust verification and accountability mechanisms in corporate climate action.