The Business Case for Carbon Credits
Growing Graph with Forest Background
2024 demonstrated that the predicted death of the voluntary carbon market (VCM) was greatly exaggerated. Retirements of carbon credits are on pace to break previous records, having grown 24% over 2023 levels. Today, a number of companies are utilizing the VCM as part of a comprehensive decarbonization strategy. And equally, not nearly enough companies are doing so. The VCM, even in this record year, still only compensates for, at best, one half of one percent of global emissions.
It is of critical importance to the future of our planet that more companies invest in decarbonization and climate solutions. Since the public sector has failed to provide the funding needed to finance our collective transition to a 1.5-degree pathway, committing to provide at best approximately one quarter of the funds needed, it will now fall on the private sector to finance the majority of the work to mitigate climate change.
What’s holding companies back? The answer: a clear and irrefutable business case for the value of carbon credits.
Today, the American Forest Foundation is launching a series designed to provide companies a comprehensive and easily understandable answer to the question, “What is the business case for purchasing and retiring carbon credits on the voluntary carbon market?”
Over the next six months, we will cover the following topics:
January - The hidden and visible costs of GHG emissions
February – How reducing GHG emissions increases revenue
March – How do we know you’re serious? The challenge of assurance
April - The role of high-integrity carbon credits within a climate leadership agenda
May – Building the right credit portfolio
June – How to talk about this work
Our goal is to provide leaders at every company with a simple to understand framework for building your own business case for using carbon credits, and then operationalizing it quickly, at the pace and scale required by the climate crisis (and in a way that provides the best ROI for your company).
Carbon credits for too long have been a tool exclusively designed for huge, technically sophisticated companies. (That’s why AFF is launching our first carbon credit auction to offer all companies an easy way to access carbon credits.) This series will guide any business leader through the value carbon credits offer their bottom line. With the right planning, every private enterprise, from a small, family-owned business to a multinational company with a dedicated team of 50+ sustainability experts, has a profitable role to play in financing the transition.
Today, we’ll provide a whirlwind introduction and preview our basic argument, with much more details to come in the coming months.
Your business is losing money because of its emissions
The first step is to realize that there is a cost any business pays for emitting carbon dioxide. Unfortunately, that cost is difficult to fully understand and therefore tends not to be included in financial or business modeling. It is a “hidden” cost for most companies – and actually, it’s more of a basket of distinct hidden costs. But just because the cost is hard to define and quantify, doesn’t mean it’s not real.
And here is the most important point: regardless of what that cost is, or how precisely you can define it, that cost is going to rise sharply in the coming decades.
This means that those companies that are adept at managing their emissions and therefore reducing those costs will have a competitive advantage relative to their peers. In this, decarbonization is no different from other “megatrends” that shape societies and individuals in ways that are often hard to quantify, but that end up having a huge impact on which businesses thrive and which ones wither on the vine. The companies that are doing well right now are the ones that came to grips early with globalization, technological advancements, urbanization, demographic shifts, and other similar trends. Just like greenhouse gas emissions, the costs and opportunities associated with those trends were initially difficult to conceptualize and quantify. But the companies that saw the trends and did the work to adjust their businesses in spite of the uncertainty are the ones that are around today.
But it’s not just a cost issue! Developing a sound decarbonization strategy can increase your revenue as well.
Your Business Can Make More Money if it Decarbonizes
A well-reasoned and executed decarbonization strategy will improve your revenue at the same time as it decreases your costs. Here are some topline reasons:
B2B customers increasingly expect it. 51% of global businesses have existing sustainable procurement policies, and that number is only going to go up. 45% of public sector clients have similar policies. And Bloomberg projects as much as 90% of procurement contracts will eventually require carbon neutrality for the purchased good or service. If you can deliver your products and services with a minimum of emissions, you are going to win a LOT of business.
Although data on B2C customers’ willingness to pay for climate action is all over the map, it’s clear that consumers have a persistent and powerful interest in products and services that benefit (or at least don’t unduly harm) the climate. How to service that interest responsibly and in a way that builds trust is a challenge – but one that, if solved, can differentiate a business and lead to a sustained market advantage.
But what does all this have to do with the carbon market and carbon credits?
The Importance of Assurance
To understand the vital role carbon credits play in any business fully seizing the opportunities for cost reduction and revenue production described above, we have to understand the nature of the claim that produces those benefits.
Very few businesses are able to claim today that they are a low carbon business. The vast majority of businesses today are extremely reliant on energy that results in carbon dioxide emissions. So the claim a business is making in terms of decarbonization is not a claim about a current state, but rather about an ambition to change. A business is telling its employees, investors, customers and other key stakeholders that it will decarbonize, not that is has decarbonized.
So if you are a company making a claim as to your decarbonization efforts, in order for that claim to return value it must be believed. And this is where the voluntary carbon market has a powerful role to play. Imagine you are an employee deciding where to work, a customer deciding which company to enter into a long-term contract with, or an investor deciding which company to invest in, and tell me which argument is more compelling:
Company A: We aim to reduce our emissions by 50% by 2040 and 90% by 2050. We will report on our progress annually, and have set five year interim targets to make sure we’re on track.
Company B: We aim to reduce our emissions by 50% by 2040 and 90% by 2050. We will report on our progress annually and have set five-year interim targets to make sure we’re on track. Along the way, for every tonne of unabated emissions, we will purchase and retire a high-integrity carbon credit. In this way, our business will incur a cost for falling behind our targets and conversely will benefit from exceeding our targets. This is how we will hold ourselves financially to account for these targets.
Would this inclusion of carbon purchases as an “assurance mechanism” make a difference to you as an employee, customer or investor? I strongly suspect it would, because in the absence of that kind of assurance, the claim a company is making is just empty promises, and you have no way of evaluating the seriousness and integrity of the claim.
It is interesting to note that this idea corresponds quite nicely to the concept of “honest signaling” in biology, in which organisms develop “signal traits” (like plumage) to reliably communicate about an otherwise unobservable factor. In this case, the unobservable factor is the seriousness of the company making the claim, and the use of carbon credits is the signal trait: a way for a company to demonstrate that otherwise unobservable factor. Much more to say on this later next year!
We will be writing much more about this topic in 2025, but you shouldn’t wait for the details. The climate crisis and your businesses bottom line will benefit from you acting NOW, in whatever small way you can. Wherever your company is today, whatever it can do to get started is a worthwhile thing to do.
Ready to buy carbon credits but don’t know where to get started? The American Forest Foundation is here to help. Our Family Forest Carbon Program offers companies verified, high-integrity carbon credits and the first American Forest Foundation Carbon Auction now makes it easy to access the credits you need.