What Every Leader Needs to Know About Carbon Credits
- Media Manager
- Dec 15, 2023
- 2 min read
Harvard Business Review
Written By: Varsha Ramesh Walsh and Michael W. Toffel
Published: December 15th, 2023
In the absence of government regulations requiring dramatic reductions of greenhouse gas (GHG) emissions that are causing climate change, a growing number of companies are adopting “net zero” targets. More than one third of the world’s 2,000 largest publicly held companies have declared net zero targets according to Net Zero Tracker, a database compiled by a collaboration of academics and nonprofits. These targets typically entail public commitments to reduce GHG emissions through measures such as process modification, product reformulation, fuel switching, shifting to renewable power, investing in carbon removal projects — and a pledge to zero-out their remaining emissions by purchasing carbon offsets, also known as carbon credits. Carbon credits are financial instruments where the buyer pays another company to take some action to reduce its greenhouse gas emissions, and the buyer gets credit for the reduction.
As companies creep closer to their net zero target years, many have already begun purchasing carbon credits. The market for carbon credits is projected to grow 50-fold within a decade, from nearly $2 billion in 2022 to nearly $100 billion by 2030, and as much as $250 billion by 2050, according to Morgan Stanley. But navigating the world of carbon credits creates brand risk because the market remains immature and complex, with wide variation in project types, developers, location, and cost, resulting in unclear quality, transparency, and credibility.
Companies routinely choose to purchase rather than produce goods and services that other companies can create more inexpensively, and this decision doesn’t often attract the attention of activists or the media. Not so for carbon mitigation: Activists are vocal about how companies choose to meet their net-zero goals. Corporate carbon mitigation plans viewed as overly reliant on buying carbon credits rather than making carbon reductions to their own operations and supply chains risk being accused of not being sufficiently serious about decarbonization and seeking to “buy their way out” of meaningfully achieving their goals. In part, this is because the carbon credit market is far too small to accommodate the dramatic carbon reductions necessary to meet companies’ net-zero goals or for the world to reduce GHG emissions by 45% by 2030 and reach net zero by 2050 that the UN claims is necessary to avoid the worst effects of climate change by limiting the global average increase to 1.5 degrees Celsius. Questions about credits’ credibility abound, including whether they deliver on their promise to reduce GHGs, whether any such reductions will endure, and whether the project would have occurred even without the sale of carbon credits. From John Oliver’s claim that “offsets are bullshit” to the Guardian calling some carbon credits purchased by Disney, Gucci, and Shell “largely worthless,” some offsets receive charges of “greenwashing” — environmental performance claims that outstrip reality. That’s hardly the reputation boost firms seek.
