Shaken Not Burned

Highlighting changemakers and solutions

Glossary - Carbon avoidance, reduction and removal

The carbon markets are somewhat notorious for their complexity. Particularly challenging to understand is the difference between carbon avoidance, reduction and removal credits. Simply put these are different forms of credit distinguished by the type of project or intervention from which they are generated:

• Carbon avoidance projects are those that prevent new emissions from being released, perhaps by building a solar plant or wind farm instead of a coal or gas fired plant.

• Carbon reduction, often seen as a subset of carbon avoidance generally refers to projects that reduce the emissions of projects or processes already in operation.

• Carbon removal, on the other hand, includes projects that remove CO2 that is already within the atmosphere and lock it away for decades or even centuries. There is a nascent but growing market for mechanical removal technologies, but the majority today is done through nature-based removal, and sequestration in soil, land and forests.

Busting a myth

“Carbon offsets allow companies to emit without action”

Terms like carbon neutral and net zero are often used but rarely explained. What they often mean is that a company has cut its emissions where it can, and offset its remaining emissions through the purchase of carbon credits. This process got an ugly reputation in the early days of the carbon markets, the process considered controversial because it doesn’t address the root of emissions – their growth in alignment with operational action – so they don’t deliver the action needed.

There’s no doubt that’s true in isolation, but that’s the point of the requirement of ‘additionality’ which means that any carbon credit needs to come from a project or intervention that wouldn’t have happened without the additional carbon finance.

While there are definitely hierarchies of impact, from simple tree planting to wholesale forestry preservation and even carbon removal, carbon offsetting as a process does provide overall benefits. What we need to keep an eye on is implementation – how the projects are defined, managed, monitored and carbon reductions or removals delivered. Best practice for companies, supported by the SBTi, is that offsets shouldn’t be used for more than 5-10% of a corporate’s emissions. That’s out of an overall net zero target and something to watch for if you’re looking at corporate behaviour. But in the early days of trying to cut operational emissions, companies should be encourage to look beyond their immediate emissions as well, and contribute to decarbonisation.

What we’ve been reading this week

• In the US, the anti-ESG agenda is ramping up. Following the Republican state case against the SEC mentioned in a previous newsletter, the Fifth Circuit Court has granted a stay of the SEC’s new climate disclosure rules. Meanwhile, activist investor Bluebell Capital Partner looks like it’s planning to take global asset management giant Blackrock to task for its stance on ESG. There is a growing concern that politics is getting in the way of much-needed action, to the detriment of investors. A Wharton study concluded that anti-ESG policies adopted in Texas drove up the cost of bond issuances to taxpayers by up to $500 million in less than a year. CNN has done some deep-dive reporting  about the behind-the-scenes strategies driving anti-ESG legislation at the state level.

• Earlier this week, the World Meteorological Organization published its Climate Report 2023 warning that the cost of inaction on climate change was likely to be around $1,266 trillion at the minimum. That’s the estimated difference in losses under a business-as-usual scenario and those incurred by taking at 1.5 C pathway. The report confirmed 2023 to have been the hottest year on record by a clear margin, adding that records were broken for ocean heat, sea level risk, Antarctic ice loss and glacial retreat. Unsurprising, but worrying, was the confirmation that extreme weather undermines socio-economic development. The silver lining is that renewable energy deployment grew 50% year on year from 2022 to 2023. If politicians and industry can be made to take a longer term view, and understand that overall inaction will be more expensive than action, we might see greater success in addressing climate change. Given recent statements from the fossil fuel industry, this is going to prove a major task.  

• The Environmental Defense Fund has co-authored a paper in Nature Climate Change which explores the scientific basis underpinning different approaches to nature-based solutions. It highlights tropical forest conservation; temperate forest conservation; tropical forest reforestation; and temperate forest reforestation as having the greatest certainty in carbon mitigation potential. In fact, tropical and temperate forest conservation and restoration reached near consensus among the expert group as being based on solid scientific foundations. Specifically, the experts said that these types of projects could deliver impact at scale while being carefully managed and rigorously accounted. That should give companies comfort in deciding which credits to buy.

• Recognising the need to provide security for those investing in the carbon markets, specialist insurance provider CFC has launched Carbon Delivery Insurance. This is apparently the first insurance product to cover both the physical and political risks faced by businesses purchasing voluntary carbon credits on a forward basis. Carbon Delivery Insurance covers 100% of the purchaser’s investment for the non-delivery of carbon credits. With the carbon markets are expected to hit $1 trillion by 2050, such insurance is becoming increasingly important. CRC did a survey of companies to better understand their concerns, revealing that 75% of existing buyers are ‘very concerned’ about delivery shortfalls while 65% have already having experienced losses from non-delivery. Around 80% said that they are ‘very likely’ to consider purchasing insurance for under-delivery insurance, and 50% of non-buyers said they would be more inclined to purchase voluntary carbon credits if they could be insured against these risks.

• In an interesting turn of events, steel producer Nucor has announced plans to collaborate with Microsoft and Google to aggregate their electricity demand and invest in a range of clean energy projects (including nuclear). In doing so, they plan to explore how large-scale demand can address the barriers to early-stage commercial projects and potentially develop new business models. Google said that, given its goal of running on low-carbon energy 24/7, it needs there to be plentiful sources all over the world. If this is to become reality, it needs more than just wind and solar.  It needs next-generation geothermal, advanced nuclear, clean hydrogen and long-duration energy storage. While both Microsoft and Google have high power requirements for their data centres, Nucor’s position as the largest US company in one of the most hard-to-abate industrial sectors makes this a fascinating indicator of things to come – especially in terms of cross industry collaboration.