Carbon credits have become an essential tool in the Chief Sustainability Officers’ arsenal to support decarbonization ambitions; however, many organizations cannot extract real value from carbon credit purchases. Instead, they more often view them as compliance instruments than strategic investments. It is within this perspective that the company employs a whole guide on carbon credit strategy for CSOs – because this is a roadmap on how carbon credits can be connected to long-term sustainability goals, thus being ensured that companies are the ones which succeed in meaningful climate action hence forth maximizing their investments.
Why Carbon Credits Matter
Carbon credits-the case in point, in the voluntary carbon market (VCM)-allow companies to purchase offsets of their emissions through projects that reduce or remove carbon from the atmospheric cycle. As **Patch’s 2023 Guide** has pointed out, the VCM mobilizes private capital far quicker than most government-led climate initiatives-meaning a much quicker response to the rising climate crisis.
In truth, without a proper strategy, carbon credits could actually be an exercise in futility, box-ticking attempts to comply rather than genuinely contributing toward sustainability and CSR. It’s here that CSOs must step up and develop a defined strategy for carbon credits that is directly aligned with a company’s overall goals in sustainability and CSR. The path to achieving this lies in three critical areas: strategic alignment, portfolio diversification, and longer-term pricing strategies.
Strategic Alignment
First, the carbon purchases of an organization would need to be aligned with long-term sustainability goals. Minimizing a company’s carbon footprint, complying with regulations, or simply enhancing the CSR profile of the organization are examples of how these explicit objectives would be critical in maximizing the value of carbon credits.
Lastly, the CSOs have to ask themselves crucial questions: Are we buying credits for compliance, or are we contributing to meaningful, long-term climate change solutions? Are we investing in projects that demonstrate high environmental integrity, or are we worried about the cost? The resolution of these strategic concerns brings CSOs’s organizations to a carbon credit strategy that brings not only compliance but also the right, tangible impact.
Building a Diversified Carbon Credit Portfolio: The Best Way to Manage Risk and Climb the Impact Ladder
Diversification offers the best way to manage risk while maximising available climate impact. Any company should invest in different kinds of projects. If a diversified carbon credit portfolio is put into place, a corporation can diversify risks against diverse sets of projects; from traditional reforestation undertakings to more innovative technologies like direct air capture.
Carbon projects vary in permanence, cost, and environmental benefit. For instance, enhanced rock weathering credits are high-permanence credits but may be more expensive and result in sequestration for much longer time scales. Other options, like biochar, may have low costs but can only provide short-term benefits and low permanence. Combining multiple project types ensures organizations hedge against both price volatility and support a broader array of climate solutions.
According to the EY Net Zero Center, carbon credit prices are about to skyrocket dramatically and, in particular with high-integrity credits in short supply. This brings two imperatives: diversification and locking in prices today toward future stability.
Pricing Long-Term: Securing Future Supply and Costs
Over the next few years, the carbon credit market is said to experience massive price hikes. It is projected that by 2035, prices might hit more than $150 per tonne; thanks to increased demand and concomitant dwindling supply. This warrants critical consideration by CSOs of long-term pricing strategies as a hedge against future shortages and price hikes.
One strategy is offtake agreements, long-term commitments to purchase at current, often lower prices, locking in future carbon credits. The offtake agreements lock in the required amount of carbon credits but also provide price stability and limit the financial risks of fluctuating market prices to some degree.
Locking in prices now may be a strategic advantage,” the EY Net Zero Center notes, as the increasing demand for high-integrity carbon credits suggests that these “carbon credit prices are forecasted to surge, especially for high-integrity credits.” The urgency of acting sooner rather than later applies, according to this report.
Strategic Alignment and a Portfolio Approach
A portfolio-like approach combined with a long-term pricing mechanism is incorporated in a carbon credit strategy that offers a host of advantages beyond those of risk reduction. Organizations will be able to support an extensive range of climate initiatives by combining high-impact, high-permanence projects with less-costly options, thus optimizing their investments.
For example, by funding “ready for market now” forms of enhanced rock weathering while financing cheaper options like biochar, a portfolio supports not just market volatility but also variety in climate solutions by organizations. That is how one gets the broad approach today in carbon markets where, between price, impact, and long-term viability, that balance may be what separates real climate action from bogus compliance.
Conclusion
Carbon markets are likely to play a critical role in helping global decarbonization, but for CSOs, the important issue that arose was: wherein strategy is concerned, carbon credits should not only be bought with a long-term focus towards sustainability goals but also in a diversified manner and price-locked for stability over the future.
The comprehensive guide gives a detailed playbook for CSOs looking to fine-tune their carbon credit strategies and make them a tool for real climate action. Download the playbook to begin maximizing the impact of your carbon credit investments today.