Webinar Q&A: How to set your climate targets

Wednesday, June 15, 2022

The Compensate webinar, How to set your climate targets, was arranged in May 2022. We received lots of questions from the participants during the webinar and have answered these questions in this Q&A. If you missed the webinar you can download the webinar recording

Is the goal to work on both pathways (Net Zero and Carbon Neutral) simultaneously?

Yes, that is a preferred goal. Carbon neutrality can be achieved today by aligning emission reductions with a science-based net zero target and then compensating appropriately for emissions that occur today or in the near future. 

Why net zero by 2040 for the electricity sector and not others? Shouldn't all companies be aiming for net zero by 2040 or asap to compensate for the heavy carbon industries and countries that may not - or may never - reach net zero by 2050?

According to climate science, to stay within the 1,5-degree target set in the Paris Agreement, we need an economy-wide emissions reduction of at least 90% by 2050. However, representing 40% of annual emissions, the global electricity sector is responsible for more emissions than any other sector, with many sectors dependent on the decarbonization of electricity for their own net zero plans. With electricity demand predicted to grow over 166% globally by 2050, urgent action is needed now to decarbonize the sector and limit the global temperature rise to 1.5oC. Is this 90-95% looking at 1990 or looking at today?

Companies need to establish a base year to track emissions performance consistently and meaningfully over the target period. According to SBTi, the following considerations are important for selecting a base year:

  • Scope 1, 2, and 3 emissions data should be accurate and verifiable.

  • Base year emissions should be representative of a company’s typical GHG profile

  • The base year should be chosen such that targets have sufficient forward-looking ambition.

  • The base year must be no earlier than 2015.

Does counting of Scope 3 emissions result in double counting of emissions? Is that intended to combat double counting of offsets?

Double counting can occur under the present GHG Protocol when multiple different companies are within the same supply chain. It is however very important to identify all emission sources and streams in the company’s value chain to be able to mitigate those emissions despite the same emissions being partly also in other companies’ inventories.

When compensating, the communication must be honest and open about what has been counted in and what has been compensated for. If part of the value chain has already been offset by another supplier, then you do not have to do the same again, but as long as you do not know, then the conservative assumption and possible double compensation are preferred.

Can you give an example of long-life storage? Long-lived storage refers to methods of storing carbon that have a low risk of reversal over centuries to millennia, such as storing CO2 in geological reservoirs or mineralizing carbon into stable forms. This usually implies storing carbon in some type of underground geological formation. Other technologies include storing CO2 into construction materials or biochar. 

For carbon neutrality claims, how do you suggest one defines emission reduction trajectories for fast-growing companies/start-ups? This is a tricky question, as start-ups aim at quick scaling of their operations and that usually means growth in absolute emissions. One solution could be, instead of looking at absolute emissions, to focus on relative emissions, i.e. emission intensity. For example emissions intensity per employee. Or emission intensity per revenue.

What is your opinion on Corresponding Adjustments for the voluntary carbon market?

Double counting, or claiming, is highly problematic, as two parties cannot claim credit for the same climate action. If a company claims to be carbon neutral through offsetting that is also counted into the project’s host country goals, as far as the climate is concerned, the company hasn’t actually done anything extra. On the other hand, double counting can also disincentivize countries from implementing much needed climate action. 

Either the so-called carbon inventories and reporting done by the host countries must be able to adjust to offsetters’ claims, or the offsetting claims must be adjusted. 

Corresponding adjustments would mean that the amount of CO₂ reductions or removals claimed by the offsetter through the purchase of carbon credits are deducted from the project host country’s national greenhouse gas inventory. This means that these CO₂  reductions or removals will not contribute to the host country’s national climate targets. This way, emission reductions or removals will only be claimed once: For instance, in the case of corporate offsetting, only by the company making the compensation claim. 

Corresponding adjustments would also mean that private climate action would go beyond what is already set in national policies. To be truly impactful, offsetting should always be additional to national climate targets for an increase in overall climate ambitions. 

Another solution to the double counting issue would be differentiating claims into offset claims and “contribution claims”. Under the contribution model, companies finance climate action and help countries meet their NDCs without making a compensation claim. 

Shouldn't the voluntary carbon market lead to a unique and worldwide registry to avoid double counting? This would be the ideal solution to the double counting issue. However, in reality many actors in the market, or the countries that host carbon projects, do not recognize the problem with double counting. COP26 in Glasgow delivered rules that avoid double counting in compliance markets, so it would be perfectly feasible to come up with a similar solution for the voluntary market. Several countries have signed the San Jose Principles where they commit to ensuring that double counting is avoided and that all use of markets toward international climate goals is subject to corresponding adjustments.

Are you also considering the permanency of the carbon removal of the nature base projects when doing your screening? Could overcompensating address this? Yes. Compensate’s project criteria address the issue of permanence and the related risks in nature-based projects. Permanence is one of the climate integrity topics where projects are scored. The same score is used to determine the necessary overcompensation factor. Overcompensation can mitigate risks related to permanence, but it does not remove those risks. A portfolio approach is another good tool to mitigate the permanence risk. 

Is it so that e.g. in Finland the state has counted all existing forests and the carbon storage in them already? Yes. Finland has set climate targets as part of the EU for the land-use sector. This means that activities that take place within the forest sector are accounted for in Finland’s national carbon inventory. Thus, Finnish forest projects cannot currently be used for offset claims. 

9/10 credits failing is really surprising..... what are the reasons for the failures?

Problems in projects vary. Some projects cannot be considered additional, others have serious permanence risks. Some have unreliable baselines because assumed deforestation is largely inflated. Worryingly, many projects also cause serious human rights violations. Compensate’s 2021 white paper Reforming the Voluntary Carbon Market , describes the issues in more detail. Eventually vintages post 2020 will need to be used. What is your recommendation and how do you think the VCM should adapt to the compliance market? We need to work towards ensuring corresponding adjustments before these vintages enter the market. There have recently been some encouraging signs that project developers have been able to secure corresponding adjustments with host country governments. It's also encouraging that several governments have pledged to avoid double counting by committing to the San Jose Principles . If for some reason corresponding adjustments cannot be secured, companies will have to resort to making contribution claims and not offset claims. 

How do you evaluate and score social impact? We have both pass and fail criteria and scoring criteria for social impact. A more detailed description can be found here

How does Article 6 come into play and the claims that companies will be able to make depending on whether they have bought credits with or without corresponding adjustments?

Article 6 concerns the compliance markets, but it will definitely have a spillover effect also on the Voluntary Carbon Market. Many countries have already pledged to apply the same accounting rules also for the voluntary market. To truly contribute to global ambition-raising beyond national targets, voluntary compensation needs to be based on real, additional, and verified mitigation outcomes that are not double-counted. If credits have a corresponding adjustment, or if they are from a sector that is outside the scope of the host country NDC, using them will help to reduce global net emissions above and beyond the host countries’ targets, thus contributing to global ambition-raising. However, if the credits are double-counted, using them will only help the host country in meeting its existing targets. Using non-double-counted adjusted credits will result in a compensation claim that can be credibly used for carbon neutrality and/or net zero targets. Non-adjusted credits will result in a “contribution claim” that cannot be used for reaching carbon neutrality or net zero. 

What’s your reflections on the market pricing now and in the future of VCM vs Compliance market? How will the two evolve? And how do you see one market competing with the other market? The market has recently seen a sharp increase in prices. Good quality credits are up to two or three times more expensive than what they were a year ago. The imbalance in high demand and limited supply of good quality credits is driving prices up. It is foreseeable that prices will continue to go up in the coming years, but a similar sudden price hike that we saw in late 2021 is probably not to be expected. 

The prices on the VCM have recently followed the same patterns that we see in compliance markets like the ETS, even though they are very distinct markets. It will be interesting to see how these voluntary and compliance markets potentially converge in terms of pricing in the future. 

Double accounting. Seems that it's not an issue to many potential offsetting firms anyway. Like comparing apples to oranges. What is your opinion about this nationalization of private property by the government?

To make credible offsetting claims, we need to fix the double counting issue and that requires governments to set up a corresponding adjustment mechanism. I don’t necessarily see a problem in private organizations supporting countries reaching their national targets by using non-adjusted credits, but these companies need to be careful in communicating understandably that this is not offsetting. Is there a universally agreed baseline date from which the decarbonization path of net zero transition plans should be set? This is particularly relevant for having comparable % decarbonization targets by 2030 etc. According to the SBTi, the following considerations are important for selecting a base year:

  • Scope 1, 2, and 3 emissions data should be accurate and verifiable.

  • Base year emissions should be representative of a company’s typical GHG profile

  • The base year should be chosen such that targets have sufficient forward-looking ambition.

  • The base year must be no earlier than 2015.

Have you come across this paper ? Here is an attempt to define carbon neutrality claim from Carbon 4.

I have not come across it before, but thank you for sharing. Very interesting document. I think our white paper addresses many of the same issues the Carbon 4 paper highlights. Shifting to contribution claims and not trying to counterbalance emissions with offset claims would be a welcome development. But this would require that there is a demand for these “alternative” claims. We need more pioneering companies shifting to using contribution claims. It is important to note that even if the claims were to change, the climate integrity of the credits used, should not be compromised. 

How would you characterize the different assurance models out there in the market? What is working in terms of assurance, where are gaps, and do we need regulation to have robust assurance of climate claims?

Based on Compensate’s experience, current leading market standards do not provide sufficient assurance. This is why we have built additional tools on top of them to mitigate risks. These include strict evaluation criteria for projects, a portfolio approach to maximize impact and minimize risks, as well as an in-built overcompensation mechanism.

Who is responsible of double-counting issues? Who should be taken accountable? Providers, consumers, regulator?

Double counting has to be solved by national governments by implementing corresponding adjustments to credits sold to the voluntary market. Responsible market actors, sellers, buyers, and intermediaries can obviously put pressure on the governments to solve this issue. 

I really doubt that companies are philanthropic. I think that the main reason behind company claims is marketing. It is interesting for a company to sell "climate neutral" products. It's the new 'bio' product branch.

This might be the case for many companies. All the more reason to get the claims right, so that we avoid greenwashing.

Totally agree. Taking supply&demand into account, if all companies start buying their way out by only offsetting instead of reducing their emissions, the offsetting prices will skyrocket.

We have already seen prices skyrocket. Prices for good quality credits are up to two or three times higher than what they were a year ago.

We are setting an internal carbon price - are there any standards or white papers to guide businesses in how best to start this process?

The CDP has a good report on the topic.

Should we align to the carbon price from Sweden, as an internal price of carbon (114€/t CO₂e in 2021)? Is it reflecting the right level of responsibility?

There are several ways to put a price on carbon, and it is tricky to set the same one for all sectors, as the marginal abatement costs vary. The World Bank has stated that to be in line with the Paris Agreement goals, the price of carbon should be about $50-100 per tonne by 2030. The European Investment Bank has estimated that the price should be around €250 by 2030 to be in line with the Paris targets. The IPCC has suggested that a carbon price from $135 to $5,500/tCO2 in 2030, and from $245 to $13,000 in 2050, would be needed to drive carbon emissions to stay below the 1.5 °C target set in the Paris Agreement.

Another way to look at the price of carbon is to calculate the social cost of emitting. The social cost of carbon is the cost of the damages created by one extra ton of carbon dioxide emissions. Estimates about the social cost of carbon are as high as $417/tCO2 or as low as $54/tCO2.

Has Gold Standard also had problems with the quality of their carbon credits? Only around 10% of Gold Standard certified projects that Compensate has evaluated have passed our evaluation criteria. 

I know a startup company that provides data center services to their customers by using only green energy sources, e.g. water generated electricity. They then capture the heat from the servers and sell it to customers who need heat, i.e. water-heated. Could carbon credits be available because of the zero energy requirements for the captured heat that is reused?

It seems like this is already a profitable business to sell the heated water. Thus from an offsetting perspective, it is not additional. Buying carbon credits from such a project would not result in any additional emission reductions that wouldn’t already take place in the absence of selling credits. 

Following-up on the responsibility mentioned by Niklas - shouldn't the voluntary market evolve in a way to set a minimum carbon price that would be country-based (i.e. rich countries should pay more)? This could be a justified approach from the climate justice perspective but might be difficult to implement on the voluntary carbon market. 

I heard you can sell carbon credit from reduced own emissions (for example in farming) is this true? Or is this part of the 9/10 that did not pass the test.

Avoided emissions projects are the most common credits on the voluntary carbon market. They are however often very problematic in terms of lack of additionality and faulty baselines. Compensate has decided to phase out avoided emissions projects from its portfolio in line with the Oxford Principles of net zero aligned offsetting. Currently, only 2 out of 10 projects in our portfolio are avoided emissions projects and 8 are carbon removal projects.

What do you think of a spend-based method to calculate your emissions upstream?

When you base your emission calculations of purchased goods and services on supplier-specific data or a combination of supplier-specific and mass-based average data you get more accurate results than using average values based on economic expenditure. As the spend-based method estimates emissions for goods and services by collecting data on the economic value of goods and services purchased and multiplying it by relevant secondary (e.g., industry average) emission factors (e.g., average emissions per monetary value of goods) it doesn’t necessarily capture the changes made in the supplier-chain. 

Nevertheless, using the spend-based method is always better than excluding the emissions from calculations in lack of more accurate data. It is also useful to estimate how significantly the emission source contributes to Scope 3 emissions and is the data available on the physical quantity. If the emission source is not significant and/or data is unavailable, the spend-based method is justified to be used.

With regards to scope 3 I read an article from the Harvard Business review about applying cost accounting principles to the balance sheet - so in essence you would have an emission liability on the balance sheet and emissions would be added to products etc. they had a great example of a car door manufacturer and where the emissions are added from the source straight through the value chain and in essence double counting will not be an issue as it will go on the balance sheet and then off again when sold. What do you think of this? Is this a valid different way to look at the gaps in scope 3 accounting?

The approach to emission calculations depends on what you will do with the inventory results. It is true that the same emissions can appear in many inventories depending on from which point of view the inventory has been made. The emissions anyhow do not magically disappear when the ownership changes. It is good to recognize and include all the emissions linked to activity/product/operation under review and case by case justifiably include or exclude emissions if needed. For example, some parts of the relevant activities of the supply chain could be compensated for by another party. Therefore, these recognized emissions can be excluded from the company’s own emission compensation but should still be recorded in the inventory.

Another question on farming. When is compensation a compensation, for example if carbon capturing plants are grown on one's own field vs carbon capturing plants on somebody else’s fields? Can you both claim the carbon and then also sell the carbon credit? Thank you for a great discussion!

Only one entity can claim the carbon. If it is already being claimed by the farmer in this case, it cannot be sold to another entity. However, if the farmer does not claim the carbon and does not report it in his or her carbon inventory, then it can be sold. 

Would limiting corporations to only make such contribution claims remove the rationale for comprehensive corporate action because it ends up de-linking action from the corporate footprint? Contribution claims may be perceived as mere donations to good causes, and undermine the climate finance that the VCM facilitates.

Not necessarily, but it is certainly a risk. The solution could be to set separate targets for emission reductions and contribution actions. Thus there wouldn’t be an attempt to counterbalance emissions with the use of offsetting, but rather to reach a separate target for carbon removals, for example. 

Could you please share your view on the new REDD+ methodology from VERRA?

Verra's REDD+ methodology updates include a shift from previously used reference areas to set the baseline (the situation without the project e.g. 100% deforestation), to setting a baseline with the help of a risk map. The risk map is supposed to support more accurate estimation of the deforestation risks as it takes into account different risk levels on the area where the project is located, including also the leakage belt. Previously used reference areas allowed for inflating the number of carbon credits issued, if the reference area would experience more deforestation than the project area due to more roads, higher population density, and illegal activities such as mining or illegal logging. How good/accurate the Risk Map is depends on the quality and accuracy of data used e.g. if they over exaggerate deforestation risks, then the project will issue too many credits.

Interested in learning more? Download the webinar recording.

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