WIKI

The Carbon Market

Sustainable business practices are becoming more and more necessary in day-to-day business as the environment and climate change become pressing issues that all industries, from fashion to e-commerce to tech to finance, simply cannot ignore. The Carbon Market has become an important transitional aspect for businesses looking for ways to reduce their carbon footprint on the path to ensuring business practices are in line with the Paris Agreement, ultimately aiming to reach net-zero. Net-zero is the idea that businesses should reduce their footprint as much as possible and neutralize the residual emissions. 

The voluntary carbon market gives businesses the opportunity to reduce emissions by choice, something that is increasingly a key part of corporate social responsibility and further shapes business practices accordingly. However, what is the carbon market and why do we need it? How will decarbonization help make businesses more sustainable and what is the environmental impact of business operations? What are the different types of carbon offset programs?  In this article, we will deep dive into the carbon market and answer all of these questions.

Voluntary vs. Compliance

There are currently two aspects to the carbon market, the voluntary and the compliance market. The voluntary carbon market is exactly what it says on the tin, it is a market that companies choose to engage with and be a part of if they want to offset their businesses emissions. It gives companies the opportunity to strengthen and develop their corporate social responsibility and climate agenda by investing their time in supporting CO2 removal or CO2 avoidance initiatives. The Fair Climate Fund states that “The voluntary carbon markets function outside, but in parallel with, the compliance market. This market offers businesses, NGOs and individuals the possibility to offset their own emissions on a voluntary basis by purchasing carbon credits.” Alternatively, companies can also invest in new projects with positive climate impact. 

The compliance market is slightly different. It is used for governments and companies who by law are required to meet emission reduction targets. An example is the EU Emission Trading Scheme (EU-ETS) who regulates the supply of emission rights that companies need and are constantly reducing that quota. For example, power companies in the EU produce electricity for society, but not every part of that electricity production can be fossil fuel free, so the governments regulate these power companies on the non-green part of their business, by requiring them to secure an equal amount of permits matching their carbon emissions. As the government gradually reduces the supply of these permits, companies are forced into action to cut their emissions over time.

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Why do we need the Carbon Market?

We need the carbon market as we invest in new technologies and start shifting the environmental impact of business. This cannot be done overnight, and while we figure out how to move forwards, we need to mitigate the unavoidable impact for now. This is what is commonly referred to as offsetting (buying/retiring credits) or neutralization (investing in carbon-removing projects).

Take CO2 removal as an example – it can be done through nature-based solutions like reforestation, or through engineered solutions like carbon capture and storage (CCS). The voluntary carbon market gives businesses the opportunity to gain access to high-quality projects that match businesses’ corporate sustainability priorities and be front runners in sustainable business practices. By working with companies working in nature-based solutions, such as Land Life Company, decarbonization and corporate social responsibility can be put into action through the carbon sequestration that takes place when trees are planted. As companies invest in such projects, they gain credits/certification of their verified CO2 removal and their positive impact on biodiversity. Through this investment, they can offset their business emissions over time and through their own corporate social responsibility, work towards becoming a net-zero company. 

To recap, the carbon market is what facilitates these project-based climate mitigations, but companies must work hard on reducing their carbon emissions simultaneously to maintain long-term sustainable business practices.

The Environmental Impact of Business Operations

Decarbonization is the process of eliminating carbon from business practices and the value chain. The carbon market is incredibly important to bridge the gap between now and the net-zero future we are aiming towards. However, companies simply offsetting and continuing with business as usual is not enough to achieve the targets set out by the Intergovernmental Panel for Climate Change (IPCC) and Science-Based Target initiatives (SBTi) for a 1.5 degrees pathway, which means we must not allow global temperatures to rise any more than 1.5°C above pre-industrial levels. Therefore, ensuring that businesses are firstly aware of the environmental impact of business operations and secondly actively reducing their carbon footprint through sustainable business practices is incredibly important. Offsets are not a free pass to emit more, but a transitional mode to reduce carbon emissions while new technology and sustainable business practices are being developed. They are to sequester the emissions that are currently impossible to reduce. This should be conscious and part of a company’s corporate social responsibility. A really important aspect of the carbon market is that it has made companies and consumers much more aware of the environmental impact and cost of business operations. This is another motivation to ensure that corporate social responsibility is at the forefront of the environmental agenda within businesses. The voluntary carbon market is a tool for forward-thinking companies to genuinely improve business practices for a more sustainable future.

Types of Offset Programs

So as previously mentioned, every tonne of emissions reduced/removed through these climate mitigation projects can be made into a carbon credit after undergoing a thorough verification process that is certified by an industry standard. Companies have the option to either invest in these projects directly or to buy the carbon credits from existing projects. Both of which they can do as part of their corporate sustainability initiatives for CO2 removal.

Carbon credits are tradeable on the market and can be controversial in how easy they are to attain. However, the concept is the same: a company is either investing in or generating revenue for a green project in order to mitigate its own emissions. Reforestation is one way of carbon removal and arguably the most popular and multi-beneficial. Credits are created by measuring the carbon captured by trees that are planted. This type of carbon removal usually has a myriad of benefits as well as the carbon removal itself. Rebuilding ecosystems, wildlife restoration/prevention, climate change adaptation and benefiting local communities are amongst them, which is significant for companies offsetting or neutralizing their carbon emissions as part of their corporate social responsibility as they can also claim and talk about the other positive effects these kinds of programs have. 

Besides carbon removal via reforestation, there are other types of offset programs.  Conservation is a good example as it ensures no more CO2 is released into the atmosphere and is something that should be considered the norm in the long term. Waste to energy projects is another option. These usually involve methane capture and convert methane into electricity. If these are put into effect by capturing landfill gas or human and agricultural waste, projects can have a very positive impact on communities. Again, this can be a part of corporate social responsibility programs as an effective way towards decarbonization. Soil storage through better agricultural practices is another way to store CO2 and is something that is being researched further. Finally, renewable energy is another way to reduce emissions. Investing in projects working with solar, wind, or hydro can decrease reliance on fossil fuels, another excellent way to improve a business’s carbon footprint and improve the overall environmental impact of business operations.