Navigating Climate Claims: From Greenwashing to Credible Climate Action

Introduction

Delta Air Lines is currently facing a $1 billion lawsuit challenging its carbon neutrality claim, as plaintiffs argue that the airline’s reliance on offsets offers little in mitigating global heating. However, Delta is not the only company grappling with such issues.

The concept of carbon credits originally emerged as a market-based approach to combat climate change and reduce greenhouse gas emissions, introduced under the Kyoto Protocol with collaboration from policymakers, environmental experts, and economists. This approach incentivized emission reduction projects and sustainable development by enabling countries and organizations to offset their emissions through investments in projects that reduce or remove emissions elsewhere.

Over time, the concept has evolved with significant contributions from various organizations, governments, and international bodies, leading to the establishment of a voluntary carbon market. As of 2022, this market has seen the issuance of billions of carbon credits through numerous offset programs and initiatives across the globe, with the primary market value estimated to exceed 1 billion USD (Trove).

Concurrently, more than 5500 companies, representing over one third of the global economy, have made climate-related pledges. The use of carbon credits by companies has emerged as an effective tool to contribute to our ambitious 1.5° target. Companies that are material buyers of carbon credits are decarbonizing twice as fast as companies that do not use carbon credits (Trove). By investing into carbon credits, companies put a price on their emissions which incentivizes them to decarbonize faster. However, all companies must adhere to specific rules and regulation when making climate claims to ensure integrity for the voluntary carbon market and refute the allegations that companies are “buying their way out” of decarbonizing when investing into carbon credits.

The Challenges with Climate Claims

The rapid und unregulated growth of the voluntary carbon market has brought challenges, including vague and unsubstantiated climate claims that consequently lead to greenwashing accusations.

Many companies around the world want to understand how carbon credits can be leveraged in the context of their climate strategies in a way that is accepted and valued by investors, civil society, government regulators, and policymakers. Providing this understanding is the goal of this article.

Companies are facing difficulties in upholding the integrity of their climate strategy and the claims they make. These challenges arise from three primary factors:

1. Lacking Standards for Climate Claims

The lack of a universal definition for climate claims, such as “climate neutral” or “net zero,” has led to confusion and inconsistency among companies. While the Science-based Target Initiative (SBTi) provides a recognized standard for corporate net-zero targets, companies can also claim net zero without adhering to the SBTi criteria. Net zero implies that companies first reduce their emissions and then neutralize any remaining emissions with carbon removals.

Furthermore, a widely accepted definition for climate neutral or carbon neutral claims is currently lacking, resulting in a lack of transparency and clear approaches to emissions compensation. Historically, companies have often depended on purchasing carbon credits, both removal and avoidance, to offset their emissions and assert climate neutrality. However, a significant number of companies have self-declared as climate neutral, even when they only offset their Scope 1 and 2 emissions, which typically represent less than 10% of their overall emissions.

2. Differing Carbon Credit Characteristics

The lack of standardization for climate claims brings about a corresponding lack of commonly accepted regulation regarding the eligibility of carbon credits for specific claims. Although most carbon credits use one metric tonne of CO2e as their base unit, they are not universally equivalent. Carbon credits can have different characteristics which distinguish them and also make them eligible for different claims. There is a difference between the type of climate change mitigation impact, avoidance vs. removal, or carbon credits with so-called corresponding adjustments and ones without. The market is missing a commonly accepted regulation on the claims that can be made based on these different characteristics.

3. Insufficient Quality Standards for Carbon Credits

It has become increasingly evident that relying solely on private standards such as Verra is inadequate to guarantee the quality of carbon credits. This primarily relates to the climate mitigation impact of the credits. The crucial question is whether one tonne of CO2 has genuinely been avoided or removed for each carbon credit issued. Regrettably, in many projects, this is not the case, raising concerns about the credibility of the carbon credits.

Moreover, the potential effects on biodiversity and local communities are frequently overlooked, making companies susceptible to accusations of greenwashing when they base their claims on low-quality credits. To ensure greater accuracy and authenticity in climate claims, a more rigorous and comprehensive approach to assessing carbon credit quality is essential.

Regulators have taken note of the growing concerns and challenges surrounding climate claims. In the European Union (EU), the Commission has issued the Green Claims Directive, aiming to establish clear guidelines for companies to accurately portray their environmental impact and performance when making climate-related claims. The directive prioritizes principles of integrity, transparency, and data verification, aiming to ensure that companies provide reliable information and shield consumers from deceptive or misleading claims. However, it will take time until this Directive finds its way into national laws, leaving companies with some uncertainties in between.

In addition, the Voluntary Carbon Markets Integrity Initiative (“VCMI”) recently released its Claims Code of Practice as a response to integrity issues surrounding climate claims. Companies have the option to choose between three VCMI claims: Platinum, Gold, and Silver. These categories are based on the percentage of carbon credits purchased and retired relative to their scope 1, 2, and 3 emissions. However, in addition to meeting these criteria, companies must also fulfill foundational requirements, such as disclosing their greenhouse gas (GHG) emissions, adopting science-based targets, adhering to carbon credit quality thresholds, and obtaining third-party assurance that all criteria are met. While this marks a positive step towards greater accountability, concerns still linger, especially regarding the quality of the carbon credits used to support the claims.

From Claims to Credibility – A Three-Step Approach

The interest in the climate strategy of companies from stakeholders, such as consumers, investors, talent, suppliers, and regulators, is constantly increasing. As a result, companies are strongly motivated to both “do good” and effectively communicate their efforts regarding climate strategy. To achieve this, a firm commitment to integrity is crucial, and it can be accomplished by following three essential steps:

1. Define science-based emission reduction target and set ambition for net zero timeline

As a primary step, companies must set science-based emission reduction targets and commit to achieving net zero emissions by 2050 or earlier. Companies can align with the net zero standards defined by SBTi, which necessitates reducing over 90% of their scope 1, 2, and 3 emissions before neutralizing the remaining 10% with carbon removal credits to claim net zero status.

2. Set ambition level for beyond value chain mitigation

According to the IPCC, we are not on track to achieve our 1.5° pathway. The current emissions reductions efforts are simply not enough. Therefore, it is crucial for companies to demonstrate responsible leadership and go beyond emission reductions within their own value chain. They should invest in beyond value chain mitigation now.

But what is the business case for companies to make investments and take actions beyond their Science Based Targets (SBTs) to mitigate emissions outside of their value chain now?

We believe that companies can generate a tangible competitive advantage through these investments on three levels:

• Position the Company as a Responsible Leader: Demonstrating commitment to climate action fosters trust among company’s stakeholders and can lead to direct and indirect returns on various fronts: (a) commercial success through positive perception among consumers, (b) improved access to capital by meeting ESG criteria of investors and banks, and (c) enhanced employer branding leading to increased access to talent given the high sensibility of Generation Z for sustainability efforts of employers.
• Broaden the Decarbonization Engagement: Building up engagement with high-impact projects that provide the necessary carbon sequestration potential to achieve net zero targets but which also positively affect additional planetary boundaries which companies will be held liable for e.g. biodiversity impact, freshwater, pollution.
• Respond to Regulatory Pressure: Addressing requirements from CSRD and the EU taxonomy to disclose actions that contribute to the environmental objectives defined, thereby attracting more investments and lowering risks.

To communicate transparently about their engagement, companies need safe grounds for making claims before they reach net zero.

Contribution claim

The simplest claim companies can make are contribution claims. Contribution claims offer flexibility by allowing companies to communicate their support for CO2e reducing or removing initiatives without necessarily netting their emissions and claiming climate neutrality. This way companies can for example invest into carbon credits from projects they could not afford if they would have to buy a certain of amount of credits to claim climate neutrality.

However, the added flexibility could also imply the resurgence of vague climate claims if for example companies with large emissions invest into carbon credits that only represent a fraction of their emissions and then claim a contribution without disclosing the extent of their contribution. It is therefore important that companies are concrete and transparent on the contribution that they are making. For example: instead of making a claim that implies to consumers that by purchasing a product the protection of a rainforest is supported, companies should clearly state that the company has contributed to the avoidance of e.g. 100 tonnes of CO2e through the purchase of carbon or contribution credits.

We anticipate a rise in contribution claims as they enable companies to also take action in protecting and restoring biodiversity.

Climate neutral claim

Companies can claim climate neutral when compensating their emissions with carbon credits equaling the same tonnes of CO2e. They can achieve climate neutrality in their operations by compensating only scope 1 and 2 emissions or become entirely climate neutral by compensating for scope 1, 2, and 3 emissions.

When making a climate neutral claim, companies should adhere to the requirements outlined in the Green Claims Directive. These include:

• clearly indicating the proportion of GHG emissions reduced through their own operations and the portion compensated through offsets
• specifying whether the compensation projects relate to emission reduction or removal credits
• providing details on the integrity and accounting of the offsets used.

We firmly believe that companies should only make climate neutral claims if they have science-based targets in place and a net zero commitment no later than 2050. Additionally, it is important to define the scope of a climate neutral claim (scope 1, 2 or 3) to avoid misleading claims.

3. Plan out the right portfolio of carbon credits to achieve claims

Once the ambition level for net zero and interim claims is established, companies must secure the appropriate carbon credits to support their claims. However, not all credits are suitable for every claim.

We distinguish between two categories of credits: compensation credits and contribution credits.

Compensation credits are defined as credits which emerge from projects whose carbon sequestration efforts has a) already occurred in the past (also called ex-post credits) and b) has not been accounted for by the country in which the project is situated to achieve their national carbon reduction targets (also called National Determined Contributions or NDCs). Within compensation credits, we differentiate between removal and reduction/avoidance credits. Removal credits are issued by projects which actively eliminate one tonne of CO2e from the atmosphere. Avoidance credits represent the prevented release of one tonne of CO2e into the atmosphere.

Contribution credits in turn are all those which arise from projects whose carbon sequestration effort has already been accounted for in NDCs. An exception are those credits for which a corresponding adjustment has been done on a national level. The concept of corresponding adjustments has been introduced under Article 6 of the Paris Agreement, aiming to provide transparency on double claiming. However, only a few countries have already implemented Article 6 yet. Therefore, it’s necessary to analyze the scope of the host country’s (NDCs to understand whether a project would be subject to double claiming.

Also, contribution credits are issued for ecosystem services which go beyond carbon sequestration e.g. for restoring or protecting biodiversity.

Which credit can be used for which claim?

Based on the guidelines from integrity initiatives and regulation as well as statements from greenwashing accusations, we recommend companies to follow the eligibility guideline of carbon credits for climate claims outlined below.

For net zero claims, only carbon removal credits can be used to neutralize the remaining emissions, achieving the net zero status.

For climate neutral claims, companies have the flexibility to utilize both emission avoidance credits and removal credits.

In both cases, only ex-post credits are eligible.

Contribution claims have even more flexibility. They can use compensation and contribution credits. Additionally, ex-ante credits, which represent future avoidance or removal, can also be communicated as a contribution.

To illustrate, consider a company aiming for a net zero claim. It can purchase and retire carbon removal credits from a regenerative agriculture project in Germany or a reforestation project in Brazil since both are not part of the NDC of either Germany or Brazil. For a climate neutral claim, the company could also retire carbon avoidance credits from a REDD+ project in Brazil. However, it cannot use carbon removal credits from an afforestation project in Germany, as these credits have already been counted towards Germany’s national reduction target and would constitute double claiming.

For any claim, the ultimate key to credibility lies in using high-quality carbon credits. Companies must ensure that the projects generating these credits truly deliver the environmental impact they promise. Otherwise, the claims made by these companies would be vulnerable to criticism and scrutiny.

Conclusion:

More than 5,500 companies have made climate related pledges and stakeholder expectations are that companies provide a continuous progress update. Companies can turn these pledges into a competitive advantage, with a strong commitment to integrity and by respecting the rules of play.

The use of compensation and contribution carbon credits are viable means to deliver on a company’s climate strategy, if applied appropriately. To do so, it is essential to follow the mitigation hierarchy, to substantiate claims sufficiently and to leverage the right carbon credits for the specific claim at hand. What is crucial to any carbon credit, be it contribution or compensation, is the impact and integrity of the underlying project.

goodcarbon provides companies with an access to carbon credits from high-impact Nature-based Solution projects. goodcarbon assess the impact, risk and integrity of such projects using its proprietary quality and transparency framework. It leverages a data model to provide a quantified and transparent assessment to allow companies to make informed investment decisions.