Carbon markets connect the growing demand from companies and consumers committing to net zero, with the small but growing supply of removal and avoidance solutions. Carbon credits make the most of tangible solutions that are possible and available now.
2020 was a year that will be remembered most for the challenges and losses it brought to so many of us. However, the COVID-19 pandemic put a spotlight on climate action and created momentum that may well set 2021 up to be the real tipping point we’ve been expecting.
In particular, voluntary action by companies to reduce and offset emissions continued despite the economic downturn and is poised to continue growing at a significant pace in 2021. Concurrently, new solutions for carbon mitigation are emerging that need support in order to scale. The uptick in corporate activity to reduce carbon through credits can help finance the growth and implementation of these new efforts.
While there is no substitute for companies taking direct action to reduce their emissions and remove carbon from the atmosphere by evolving their own products and processes, the market is recognition of the fact that solutions for all business use cases may not yet exist — or may not be mature enough to accomplish all of the reductions a company needs to complete in order to achieve carbon neutral/net zero. In the meantime, carbon credits foster new solutions and make a valuable impact on emissions.
Here, we take a look at some of the major trends driving that action, as well as new ways of solving the impact of carbon emissions.
Big climate trends shaping corporate action
How to define and build a regenerative business
How can we start building truly regenerative systems? Download our new report, The Road to Regeneration, to understand the principles of regenerative business and learn how to put regeneration into practice.
Awareness and support for sustainability among both companies and consumers is increasingly becoming mainstream. In terms of government action, recent polling shows that 2 out of 3 Americans want the government to “do more” about the environment. The new administration has taken note: President Biden has already taken steps to rejoin the Paris Agreement, and has pledged to invest $2 trillion over the next 10 years in a long list of climate-related projects (Download South Pole’s briefing on the topic here). Even during the past administration, with little government leadership on climate, many companies doubled down on their own commitments — and shifting in their business practices and product portfolios, and demonstrating their own leadership in the process.
In recognition of shared challenges, companies are also becoming more open to collaborating, both with NGOs and with each other. Partnerships, such as the Marine Stewardship Council, Renewable Energy Buyers Alliance, The Climate Collaborative and many others, have demonstrated successful outcomes. Swiss retail chain COOP’s collaboration with WWF is a good example. Such collaboration is proving highly effective in addressing urgent problems by combining the expertise, awareness and presence of NGOs in problem areas with the resources and support of corporations who are feeling stakeholder pressure to find ways to meet some of their environmental and social justice commitments.
The energy transition is also well underway. Renewable energy has grown at the “blistering” pace of 13.7 percent annually over the past decade. Renewables are now the least expensive way to produce electricity nearly everywhere. While this is a critical development, it’s not nearly enough to keep up with the growth of global emissions linked to millions of people moving out of poverty and becoming energy consumers, many switching on electric lights and driving cars for the first time.
Businesses will play a role in driving the use of renewable energy across their supply chains and adopting energy-saving measures —such as encouraging greener forms of transport, more energy-efficient appliances; and growing consumer awareness of how they contribute to climate change, and how they can change their diets and habits to lower emissions.
Net-zero targets and emerging climate solutions
The biggest trend among companies setting specific climate action targets is the emergence of net zero emissions. When it comes to climate leadership, there is no substitute for companies actively reducing their emissions across their entire supply chain. But businesses also recognize that reaching net zero can take time — for example, switching contracts to renewable energy suppliers, or collecting methane emissions from landfills. Both require infrastructure changes — and so they recognize that they must simultaneously make the most of robust climate finance solutions at their disposal today, while proactively planning to adopt new low-carbon technologies.
The term “net zero” has been around since 2013, when it was coined at a meeting of women, including former UNFCCC Executive Secretary Christiana Figueres, who were making plans for the 2015 Paris Climate Summit. The term grew out of the recognition that there was no longer time to rein in climate change by simply cutting emissions, as the concentration in the atmosphere was already too high while the rate of decline was hardly budging — especially in sectors where carbon-free options did not yet exist.
A careful analysis of the situation recognized that there were not one, but two, controls that could be applied to reduce atmospheric carbon levels. The first was to directly reduce the amount of carbon emissions. The second would be to increase the rate at which carbon is withdrawn from the atmosphere. By working the problem from both ends, we greatly increase our chances to reach the point where the amount of carbon we emit is not more than the amount being absorbed. According to the IPCC, if we can achieve net zero globally by 2050, we have a decent chance of limiting warming to 1.5°C.
Over the past 15 months, a sizable number of organizations — ranging from Mastercard, Ford and Microsoft to the Church of England — have committed to achieving net-zero emissions anywhere between 2030 and 2050. According to Ricard Mattison, CEO of S&P Global Trucost, some 1,400 new companies have committed to net zero during the past year. Most recently, the Biden administration has affirmed its commitment to achieving net zero on the national level by 2050.
When the 2015 Paris Agreement featured the idea of net zero as one of its key elements, a challenge was that preserving and regenerating forests — one of the most effective and cost-efficient ways to remove CO2 from the atmosphere — was still not happening on a large scale around the world. Even today, deforestation continues as a result of unsustainable industry and farming practices, and wildfires.
You can’t beat Mother Nature for simplicity and grace. No human endeavor to date has yet to embody the comprehensive, extravagantly integrated approach that underscores literally every natural system.
Trees and plants absorb CO2 from the air and incorporate it into their structure as wood — while providing habitat for thousands of organisms, preventing erosion, and enhancing soil health, just to name a few of the multiple functions. At a time when rampant deforestation is destroying ecosystems at a breathtaking rate, a number of organizations are working to protect, restore and expand forests, prairies, peatlands, mangroves and other natural carbon sinks, with many of these activities funded through carbon credits.
Because of the highly integrative character of natural systems, many of these efforts, like the natural systems they are striving to protect, have numerous co-benefits — such as biodiversity, social justice, and sustainable development. Nature-based carbon-removal solutions also tend to be less expensive than man-made ones. Some examples of nature-based solutions we’re pursuing at South Pole — ranging from forest protection to fire prevention, wildlife conservation, soil regeneration and many more — can be found here.
At the other end of the spectrum are technological solutions — basically machines or processes that literally suck carbon out of the air. Several companies, including Carbon Engineering, Global Thermostat, and Climeworks have developed machines that draw air through various types of filters that can extract CO2 so that it can either be sequestered or utilized in products such as concrete, carbon-negative ethanol and high-tech polymers. Solutions such as these are getting a boost from Elon Musk, who recently announced a $100 million prize “for the best carbon-capture technology.”
The challenge with engineered solutions is that they are still new, unproven and very expensive. However, in time, they could potentially remove carbon more quickly than natural processes (as much as 1,000 times faster, according to Arizona State University professor Klaus Lackner) and take up less space than forests; and since the machines are man-made, we could, theoretically, produce as many of them as the economics would allow. New York-based Global Thermostat, led by Nobel Prize winner Graciela Chichilnisky, has now partnered with Exxon-Mobil, which certainly has plenty of financial muscle to lend to the effort.
However, the biggest bang for the buck is still in forest protection; and with limited budgets for climate action, it still seems reasonable to spend the money on protecting and planting trees vs building new machines.
Then, there are a variety of solutions that combine natural processes with human intervention. These range from biochar (slow-burning biomass, then burying it to improve the soil), to combining biofuel with carbon capture (BECCS), to enhanced weathering — in which certain minerals that absorb CO2 are exposed to the air (such as the Stripe-funded olivine beach), or turning captured CO2 into durable materials. Other hybrid solutions include encouraging the use of more wood in construction in place of more carbon-intensive materials such as steel or concrete.
Perhaps the most important hybrid solution right now lies in agriculture. Today, scientists have recognized the enormous potential for large-scale carbon removal that can be achieved by simply restoring soil health. Improved understanding of soil biology has led to the awareness that certain traditional agricultural practices – such as tilling — release large amounts of carbon. Climate-smart agriculture helps to reverse that and leave the carbon in the soil, while also improving the quality of the soil itself, resulting in higher yields. We now know that globally, soil contains four times as much carbon as the atmosphere or the entirety of terrestrial vegetation. Much of that carbon has been released by conventional agriculture but can be restored using alternative methods. That awareness has led to a renaissance of "regenerative agriculture."
Debbie Reed, Executive Director of the Ecosystem Services Market Consortium, has been working on greenhouse gas remediation in agriculture since long before it became fashionable. Indeed, it wasn't that long ago that large-scale agriculture was viewed as nothing but trouble for the environment.
Our job, Reed says, "is to figure out what are the new outcomes that society wants from agriculture. That could be greenhouse gas mitigation, improved water quality, etc. What we are quantifying in our program is impact on soil carbon; net greenhouse gas emissions — including nitrous oxide, carbon dioxide and methane; water quality, water use/conservation, and biodiversity.” Reed estimates conservatively that promoting soil health on farms and ranches can sequester on average roughly a half ton per acre per year of greenhouse gas emissions.
The role of voluntary corporate climate action
The hope is that many of these solutions will become a part of mainstream industry and as such, will eventually attract investment. However, right now they require funding, which is where the voluntary carbon markets come in. The financing challenge here is substantial. Not only do we need to transform our entire economy, we need to do so urgently.
A key enabler for many companies is the growth of the voluntary carbon market and formalization of principles under which the market will operate. The Taskforce on Scaling Voluntary Carbon Markets wrote in its recent report, "every company, every bank, every insurer and investor will have to adjust their business models, develop credible plans for the transition and implement them." In the report, the Task Force lays out carbon market principles and taxonomy, reference contracts, and a blueprint for managing trades, financing and data; and perhaps most importantly, maintaining the integrity of the market.
The integrity issue is crucial and all programs must be carefully validated and certified. The evolution of standards and consolidation of third-party verification agencies — such as Gold Standard, Verra's Verified Carbon Standard, Social Carbon and Climate, Community and Biodiversity Standards, or standards verified by the UNFCCC — highlights the fact that as the market matured, it has become increasingly rigorous.
The carbon market provides a mechanism to direct funding expediently to these early-stage ventures, by connecting the growing demand on the part of companies and consumers committing to net zero, with the small but growing supply of removal and avoidance solutions.
Given the urgency of the matter, carbon credits make the most of what is possible and available now. The fact is, our chances of meeting the Paris targets would be significantly lower without them.