The low cost of carbon credits undermines the objective of carbon pricing: to reduce emissions at the source. This partly explains why the use of carbon credits is so controversial. We need to reconnect carbon pricing with carbon contributions so companies can effectively decarbonize while making a real impact on the planet.
What’s the problem?
It starts with the way companies define their carbon strategies. CSR teams pick – sometimes arbitrarily – which business activities to offset and then negotiate a budget that’s divided by the number of CO2 tons needed to meet climate targets. That’s how companies price and buy carbon credits today.
This approach is flawed. An arbitrary budget will inevitably decrease and won’t keep up with the increasing price of carbon credits1. More importantly, the price signal isn’t set by the market, it’s set by companies’ willingness to finance decarbonization.
Project developers are left out of the pricing discussion, even though their work makes the existence of carbon credits possible. What’s worse is this creates unfounded competition between projects.
Take two similar climate projects: one only relies on carbon credits to fund activities; the other has other sources of funding. When they enter the carbon market, the first project asks for a higher price per ton of CO2 to cover its costs, while the second project can sustain a lower carbon pricing. In the end, these two projects generate carbon credits at different values even though they have the same impact on the planet.
In this system, the carbon credit isn’t a price signal. It’s a consumable unit.
How to bring more coherence in carbon credit pricing?
Companies need to move past the sheer number of CO2 removed and see their financial contributions to carbon neutrality as a key indicator of their climate performance. By creating a carbon contribution budget based on an internal carbon price, companies can invest in decarbonizing their products or services and in carbon credits."
With this system, companies would no longer depend on the evolution of the voluntary carbon market. The climate projects you support drive investment decisions – not the number of carbon credits that fit into a budget.
