The Business Case for Carbon Credits: The Hidden and Visible Costs of GHG Emissions

This week the Chinese company DeepSeek released a new AI tool, “R1,” which requires roughly 90% less energy than the AI models developed by Silicon Valley. This development sent immediate shock waves through the investment world. Alphabet, Microsoft, Oracle and others in the space saw large drops in the value of their stock. NVIDIA shares dropped 17% in a single day, representing a $600 billion loss, the largest such loss any company has ever experienced. All of this because a startup showed it can produce a service more efficiently, with less energy, than the established players.  And boy, investors were paying close attention, and their action was swift.   

Before this news, you could perhaps make a plausible argument that investors didn’t really care about all this concern over energy and emissions, and that those issues weren’t material. After this week, it’s hard to argue that. DeepSeek is one of many examples that show that 1) companies face great risk if they have an energy-intensive (and high emitting) business model; and 2) investors are aware of and reactive to that risk. 

What does that have to do with the Voluntary Carbon Market (VCM), if anything?   

Well, in the first half of 2025, AFF is going to outline the business case for companies to decarbonize and purchase and retire high-integrity carbon credits to address their unabated emissions. We introduced this topic in a blog post in December, where we previewed our argument.   

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.

Register for the AFF Auction series to learn more and get the Business Case series directly in your inbox.

We will kick it off by talking about the financial benefits of decarbonization more broadly. The events this week are a powerful illustration of how a company’s projected energy use (which is intimately connected to its emissions profile) can cause massive ripples in markets. We believe it’s important to talk about how companies which are successful at decarbonizing (by, for example, innovating processes that require less energy) will be rewarded by their financial stakeholders.  

Now, this issue of decarbonization may not seem directly related to a company’s participation in the voluntary carbon market (VCM), but it’s necessary to start here. That’s because the business value of participation of the VCM is one a company can only realize within the context of a broader decarbonization strategy. Think of the VCM as a lubricant that helps the machine of decarbonization work more efficiently. If decarbonization generally doesn’t make business sense, neither will participation in the VCM.    

Before we jump into today’s topic, it’s worth spending a moment defining “business case.” as “a justification for a proposed project or undertaking on the basis of its expected commercial benefit.” The key part of this definition is the last bit about commercial benefit. We will propose that active and appropriate participation in the VCM will, over time, return strictly financial benefits to a company and its stakeholders.   

That, of course, is a high bar to clear. How could voluntarily spending money (in some cases, a lot of money) that a company is under no legal or practical requirement to spend possibly be financially beneficial for that company?   

Well, let’s find out. 

So, what are the financial benefits of decarbonizing across a company’s Scope 1, 2 and 3 emissions? There are too many to detail extensively here, but we will talk through what, in our opinion, are the “Big Four,” each of which could have a material impact on the profitability of the business. 

Let’s start with two that have absolutely nothing to do with climate change (meaning, these would be equally impactful even without taking CO2 emissions into account). 

The cost of fossil fuels 

First, operations that rely on fossil fuels for energy inputs are typically more expensive than operations that use renewable energy. That is because the Levelized Cost of Electricity (LCOE) from renewables is, at this point, generally lower than the LCOE from fossil fuel sources. Of course, renewable sources of energy are not yet accessible in every geography or for every application – that’s what makes decarbonization challenging. But, where they are readily available, simply put switching from fossil fuel sources of energy to renewable sources of energy will result in lower energy costs, and a business that is successful in innovating around how to switch from fossil sources of energy to renewable sources across more of its activities will see a commensurate drop in energy expenditures.   

Second, reliance on fossil fuels can create operational unpredictability. Oil prices are volatile and are highly sensitive to geopolitical developments, as the war in Ukraine has demonstrated. Oil and gas as an energy source, relying as it often does on large, centralized points of extraction, refinement and distribution – many of them along the worlds’ coasts - is also potentially more vulnerable to disruption from climate or geopolitical impacts. And while renewable sources of energy have their own reliability issues, improvements and innovation in battery storage and grid technology are quickly changing the game. A recent study revealed that in California, for example, battery storage capacity in the state doubled in just one year, and renewables provided 100% of electricity needs for ten hours daily on 98 out of 116 days.  

The cost of climate change 

The third financial benefit to decarbonization – and the one that is explicitly linked with the issue of climate change – is that businesses which decarbonize avoid paying the regulatory costs associated with CO2 emissions. Now, in many jurisdictions in the U.S. this idea might seem confusing, because the cost of emissions in those jurisdictions is technically zero. But remember, companies today source the materials they use to make products from all over the globe, and sell those products to markets throughout the world. That means even a business in the reddest of red states, where there is no regulation on emissions, will still be exposed to a growing carbon price when they do business elsewhere. The estimate of what that price is today is $23.20 / tonne of CO2. Now, individual businesses will pay much more or much less than that, depending on where they are operating and what pricing mechanisms they are exposed to. But every business everywhere is already paying something for the “right” to put CO2 into the atmosphere. And, more importantly, that cost is only going to go up. The percentage of CO2 emissions that were subject to some regulatory pricing mechanism doubled from 2009 to 2016 and doubled again from 2016 to 2023. Today about 23% of global emissions are covered by a carbon price of some form. If that trend continues, we’ll hit 100% of global emissions covered by carbon pricing by the mid-2030s, and if political leaders are forced to take climate issues more seriously and begin to listen to the scientists, we will hit 100% far sooner (the IPCC suggests 2030 as a target date). So, the price a company pays to emit CO2 will go up, and the percentage of their emissions subject to a price will also go up. The bottom line is, reducing emissions is a way for a business to reduce its exposure to carbon pricing, thereby reducing expenses over time. 

Competitive advantage 

The fourth and final benefit for businesses that decarbonize is one that ties the other three together, and it relates to competitive advantage. Up until now, we’ve been thinking of a company’s business model as static over time. Within this frame, reducing CO2 emissions creates financial value because it reduces costs while revenues remain constant. A company sells the same good or service for the same price but is able to pocket more money because it has reduced costs related to energy, operational instability and regulatory compliance. But of course, business models are not static over time. A competitor which decarbonizes faster will be able to reduces the prices it charges for its good and services while maintaining its profitability, thereby capturing more market share and driving others, dependent on a high-carbon business model, out of business. So, decarbonizing can: 

1. Reduce energy costs 

2. Improve operational reliability 

3. Reduce costs of regulatory compliance 

4. Create competitive advantage in the marketplace 

It’s no wonder that investors are persistently interested in the decarbonization strategies of the companies they invest in. Put simply, a company that can more quickly reduce emissions throughout its value chain is a company that will be more profitable and resilient in the coming decades. By not decarbonizing, businesses open themselves to extreme disruption from firms that have innovated away from such models. And it’s for that reason that investors are demanding and will continue to demand information from companies about their decarbonization plans. Because a company that can demonstrate its ability to decarbonize and lessen its reliance on fossil fuels is a company much more likely to produce substantial and sustainable profits. Next month, we will turn to the question of how decarbonization doesn’t only reduce costs and reduce risk but can also help generate new revenue opportunities. After these first two installments, the decarbonization imperative will be clear. Then we can turn to the role of the VCM in allowing companies to realize the maximum benefits from their decarbonization efforts.

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. 

Register for the AFF Auction series to learn more and get the Business Case series directly in your inbox.