Building a decarbonised global economy means big risks, but bigger rewards

Carbon credits have a role to play in the energy transition – and with the right tools and products, corporates can trust their effectiveness

Estimates of the amount of investment required to build a decarbonised global economy run into the trillions of dollars. If we are to see this amount of capital put to work in the short time period required, market mechanisms must be in place to enable the private sector to take any risks and seize any rewards.

The carbon market has huge potential to fund some of the main activities, interventions and technologies required to decarbonise the global economy. Despite this, many corporates still find themselves on the sidelines, unable to commit because of uncertainty and risk.

The recent announcement that the Science Based Targets initiative will begin to align with the Voluntary Carbon Markets Integrity Initiative on the use of carbon credits to tackle parts of Scope 3 emissions is welcome progress towards creating an environment that stimulates climate action.

Currently, many corporates remain uncertain whether action is better than inaction when it comes to carbon credits. While a few companies, such as Apple or Microsoft, are staking their claims as climate leaders and setting their own standards regarding carbon credits, most companies have been waiting for clear guidance on the market’s integrity.

A recent report by BloombergNEF, informed by BeZero Carbon’s rating database, emphasised the potential benefits of resolving the integrity issues that are keeping many from participating in the carbon markets.

In BNEF’s “high-quality” scenario, optimal regulations and market structure resolve integrity issues, in turn creating consistent demand for credits, which are seen as one of many credible means of decarbonising. This scenario would see prices reach $238 a credit by 2050, with more than five billion credits being retired a year. BNEF values the annual carbon credit market by mid-century at over $1trn.

Demand and supply-side solutions

Many are looking to demand and supply-side initiatives to help resolve integrity issues. The Integrity Council for the Voluntary Carbon Market announced earlier this year that it had begun assessing more than 100 active carbon credit methodologies for alignment with the core carbon principles, with the first tranche of assessments originally due by the end of March.

Successful demand-side initiatives should remove the uncertainty that is deterring corporates from acting, and incentivise them to invest in decarbonising internally and beyond their own value chains. Ensuring carbon credits are considered a credible solution for tackling parts of Scope 3 emissions is a positive step towards building this confidence and opens up the full range of options to corporates to decarbonise.

Meanwhile, successful initiatives on the supply side should see developers, investors and intermediaries bringing to market carbon credits that buyers have the confidence to purchase and use in their decarbonisation strategies.

Not risk free

However, the success of initiatives on either side of the market should not be framed as making decarbonisation risk free for corporates. Every business decision involves risk, and all businesses take on and manage risk of some type.

Building a decarbonised economy will involve huge amounts of risk as businesses change their activities, behaviour and investment in new technologies; carbon projects and the credits they yield will not be immune. Carbon credits have the advantage, however, that much of their risk can be managed by someone other than the buyer.

As a corporate, if you invest in decarbonising your internal operations – through a new low carbon location, for example – there will be risks involved and most of the time you will have to bear those risks.

Conversely, while every carbon project has risks, the carbon market is continually innovating to offer buyers tools and products to understand and manage these risks. Ratings enable market participants to track risk in close to real time, while insurance enables buyers to offload parts of this risk elsewhere. Intermediaries offer diversified portfolios where risk is spread across multiple different project types in different locations.

Decarbonising the global economy is one of the biggest challenges and opportunities we have faced in our history on the planet. It comes with risks; projects will default, technologies will fail.

Markets have historically been the best conduit to provide the right rewards to incentivise risk taking through investment. Creating the conditions for them to do this for environmental outcomes is crucial for us to seize the narrowing window of opportunity.

Sebastien Cross is co-founder and chief innovation officer at BeZero Carbon