Just before the start of this year’s round of international climate talks at COP23 in Germany, the UN’s Environment Programme published the 2017 edition of the Emissions Gap report. It delivers a stark message – that there is a “catastrophic climate gap” between where the existing Paris Agreement commitments will get us, and where science says we need to be to limit global warming to less than 2°C.

But with every challenge comes opportunity, and economic analysis such as the Stern Review shows that the benefits of avoiding the consequences of climate change far outweigh the costs of reducing greenhouse gas (GHG) emissions. As a result, it is in all our interests to close the emissions gap and constrain global warming to less than 2°C.

What can the private sector do?

Climate change is a truly global issue; the atmosphere does not differentiate between where GHGs are emitted or where they are reduced. This means we can focus emission reduction activities into low-cost options and be highly efficient with the finance we choose to dedicate to the challenge. These are the underlying scientific and economic principles of carbon offsetting and the voluntary carbon market.

But the benefits for business in using the carbon market go much further than just cost-efficient emission reductions. Carbon finance through offsetting delivers low-carbon sustainable development to operational areas, growth markets and supply chains.

It provides a mechanism to direct finance into emissions reductions activities, such as renewable energy, reforestation or energy efficiency. These reductions are independently validated and verified according to agreed methodologies, before being certified by standards organizations. This is the point at which carbon credits are issued and can be bought by companies and organizations wanting to take voluntary action. To use these carbon credits to offset emissions, they are then permanently cancelled on independently run registries, which provide a platform to track the flow of credits and deliver transparency to the market.

Consequently, the market represents a tool to put a price on carbon that reflects the cost of abatement. This has two benefits for organizations wanting to take voluntary action:

  • By being cost-efficient, it allows companies to maximise their ambition and bridge the gap between their internal reductions and more challenging targets such as carbon neutrality.
  • It delivers a price on carbon that can be used to drive transformation both within companies and in their supply chains. For companies operating outside compliance systems, the voluntary carbon market is the only mechanism to deliver a price that is linked to the cost of abatement.

But the market is not just a tool to help mitigate the causes of climate change. Many emissions reduction projects deliver non-carbon benefits such as health improvements, alternative livelihoods, water stewardship and biodiversity conservation. An Imperial College study, commissioned by ICROA, estimated that for every 1 tonne of CO2 reduced through an offset project, additional benefits totalling US$664 were also delivered. Through the simple process of buying carbon credits, organizations are directing finance to critically challenged economies and ecosystems. This means their funding is not only helping to mitigate climate change, but also helping communities adapt to its impacts and deliver sustainable development outcomes.

Image: ICROA

Why should the private sector take action?

In many cases, taking action aligns naturally with business risk management. In 2017, nearly 500 companies disclosed to CDP that they are affected or expect to be affected by carbon pricing regulation. Measuring, reducing and offsetting emissions is just good business practice. Not only does it indicate the source and scale of future regulatory risk, but it also helps companies prepare for that regulation by implementing a carbon price, which can drive down emissions before regulated costs are imposed.

Climate leadership is also an opportunity for many organizations, and this was the most popular reason for purchasing carbon credits in Ecosystem Marketplace’s 2016 survey of buyers. Companies are looking to differentiate from their competitors, and build their brand, by taking a leadership role on climate. Offsetting plays an integral role in delivering this climate leadership status, alongside direct emissions reductions. The survey indicated that companies that included offsetting in their carbon management strategy typically spend about 10 times more on emissions reductions activities than the typical company that doesn’t offset.

Beyond these direct commercial reasons for companies to take voluntary action, there are many broader, societal motivations at play. Climate change is a global, multidecade challenge that needs solutions and input from all stakeholders. It transcends the short-term nature of politics, which will inevitably experience changes in priorities, personnel and knowledge. Because of this, climate change cannot be solved by governments alone. Instead, it needs significant and long-term investment from the private sector. Companies that take a longer-term outlook recognise this and want to contribute to the solution to help secure the viability of their businesses.

How far can we go?

The role of voluntary action under the Paris Agreement is the key area of focus for ICROA. We believe that the private sector can and must make a material contribution to closing the emissions gap. We are working to ensure the mechanisms are in place to deliver the required outcomes.

But if voluntary action is to be scaled to the levels necessary, the rewards to those taking action need to be explicit and meaningful. Consequently, we are encouraged to see the growing wave of momentum for voluntary action through initiatives such as:

These initiatives are helping companies understand their climate impacts and are encouraging them to take action. Once that decision has been made, the voluntary carbon market provides the tools to deliver climate change mitigation and adaptation rapidly and in the most cost-efficient manner.

It is ICROA’s belief that if we can match up explicit and meaningful rewards for voluntary action, with robust mechanisms that deliver verifiable climate outcomes, the private sector will make a material contribution to closing the emissions gap. And if that happens, it will help us get closer to the Paris Agreement’s end goal of global carbon neutrality by the second half of this century.