With an increased drive to reduce carbon emissions to meet the goals of the Paris Agreement, companies are increasingly making bold claims about their current climate efforts and their future mitigation commitments.

These claims are often supported by carbon credits  —  a tradable certificate or permit that represents the right to emit a set amount of carbon dioxide or the equivalent amount of another greenhouse gas into the atmosphere. The issue with carbon credits is that corporate climate claims are largely unregulated, which means that they are often perceived to be misleading or even deceptive and potentially risk undermining, rather than contributing to, global climate mitigation.

A new review of academic literature surrounding carbon credits published in the journal Global Challenges proposes that a better understanding of corporate climate claims is needed to govern carbon credits in a manner that adequately addresses potential greenwashing risks.

The authors, including Danick Trouwloon of the Copernicus Institute of Sustainable Development at Utrecht University, look at the key question of whether the use of carbon credits by companies is actually in line with global climate mitigation efforts.

Notably, the authors also ask whether the use of carbon credits by companies complements other public and private efforts to mitigate climate change, given the substantial amount of climate action required to reach current global temperature goals, rather than simply acting as a substitute for these efforts. 

Trouwloon discussed the review and its aims with Advanced Science News, explaining why the time is right for such an analysis.

Can you explain what carbon credits are and how they are used?

A carbon credit is a tradable unit that represents one ton of greenhouse gas emission reductions or removals, which means emissions that are mitigated as a result of investments into a carbon project. Carbon credits are typically used by companies to offset their own emissions, either voluntarily  —  to make corporate climate claims like being net zero or carbon neutral  —  or non-voluntarily, to meet a target set by a regulating body. 

Carbon credits can also be bought without being used as offsets. In these cases, the use of carbon credits is intended to reduce global emissions, enabling companies to claim that they have provided social and environmental contributions globally, but without entitling them to make claims about their own climate efforts. One of our main interests in conducting this review was understanding how the kinds of claims that companies make depend on the (intended) use of carbon credits.

How can carbon credits benefit the environment and help countries meet the goal of net zero?

The practice of trading carbon credits to offset greenhouse gas emissions has been around for more than three decades. Over this time, voluntary carbon markets have developed and polished protocols, methodologies, and monitoring frameworks to safeguard the environmental integrity of carbon credits and the emission removals and reductions they represent. Thus, voluntary carbon markets provide public and private sectors valuable and cost-effective opportunities to contribute to their climate goals, while differentiating themselves from competitors, building brand recognition, and marketing “carbon neutral” products and services. 

In this way, voluntary carbon markets and the carbon credits they generate can help mobilize public and private investment into climate change mitigation projects across the globe, especially in those areas and sectors where this finance cannot yet be provided through other means. Engagement in voluntary carbon markets may also lead to positive spill-over effects, by facilitating research and development as well as technology transfer.

Why did you choose to review the defining elements of corporate climate claims?

Voluntary carbon markets have seen a rapid increase in activity over the last five years, with thousands of companies purchasing carbon credits and using them to make claims like being net zero or carbon neutral. As these claims are largely unregulated, there is a clear risk of greenwashing, which may serve as a disincentive to participate in carbon markets, undermining the potential role that voluntary carbon markets can play in mitigating global climate change.

To address this risk, recent years have seen many governance initiatives working to fill this governance gap, frequently consulting and collaborating with both companies and civil society organizations in the process. But, because of how quickly the landscape of corporate climate claims has been developing, there has been relatively little engagement with academic literature on this topic. 

We were therefore interested in understanding how these claims have been discussed in recent academic literature, with the expectation that such a review can helpfully inform and support ongoing governance efforts.

Why is such a review important now?

Corporate climate claims are being made by thousands of companies in sectors as diverse as finance, energy and utility, ICT, retail, and the automotive industry. For example, one of the papers we reviewed found that 417 out of the 2000 largest publicly traded companies globally  —  as included on the Forbes Global 2000 list in 2020 — had made some sort of corporate climate claim by December 2020, representing nearly $14 trillion USD in sales.

There is no consensus, either academically or publicly, on what it means for corporate climate claims to accurately reflect their contribution to global climate mitigation. Most companies and consumers have little understanding of what stands behind the popular “climate neutral” claim, for example. This leaves room for greenwashing, which poses risks for companies and may make it more difficult to achieve global climate targets.

What were your major findings?

Our review enabled us to identify three key dimensions  —  or “defining elements”  —  which we propose characterize the nature of corporate climate claims.

Firstly, how a company intends to use the carbon credits that they acquired and whether this involves offsetting their own emissions or not. 

Secondly, we distinguish between claims based on the framing and meaning of the headline terms used, differentiating between net zero and carbon neutral as the most commonly discussed terms, each holding a distinct meaning. Net zero is typically used to express a commitment by a company to reach an equilibrium of net zero between emissions and removals across their entire operations, using carbon credits only to neutralize (i.e., remove from the atmosphere) those emissions that cannot feasibly be reduced due to a lack of available technologies. In turn, carbon neutral typically communicates that a product, service, or company has a “neutral” impact on global carbon emission levels, a feat that is often achieved through substantial reliance on the use of carbon credits for offsetting purposes. 

The last defining element that we discuss in our paper is the status of a claim, thereby distinguishing between those claims that communicate a future aspirational commitment that has not yet been accomplished, versus those communicating achievements that can readily be demonstrated.

Having identified these three defining elements, we then propose a categorization of claims, which usefully indicates the general differences between what it currently means for a company to claim to already have accomplished a positive climate impact, versus signalling their future climate ambitions. 

More concretely, we observe a general, but importantly, not absolute, distinction between claims that currently signal a long-term commitment to climate mitigation — which are typically net zero claims that tend to be defined over the long term, in line with global decarbonization pathways and without allowing offsets to substitute value-chain emissions — and those claims that have already been achieved — which are often carbon neutralclaims, that tend to rely substantially on carbon offsetting in place of direct corporate emission reductions.

What could be done to tackle issues with carbon credits, what would be needed to implement these changes, and who would be responsible for this?

We wanted to provide clarity around the types of claims that companies can credibly make when they integrate carbon credits into their climate strategies. To do so, we proposed a preliminary categorization of corporate climate claims and discussed the risks and governance implications associated with each category. We believe the proposed categorization is particularly useful because it shows a clear difference between what it currently means to claim a positive climate impact that has already been accomplished, versus signalling a future climate ambition.

Given the legal and governance implications of this distinction, we expect our categorization to serve as a useful reference point for ongoing and emerging efforts to govern the corporate climate claims landscape, leading to increased transparency and more robust climate mitigation action.

Reference: D. Trouwloon., C. Streck., T. Chargas., G. Martinus, Understanding the Use of Carbon Credits by Companies: A Review of the Defining Elements of Corporate Climate Claims, Global Challenges (2023). DOI: DOI: 10.1002/gch2.202200158

Feature image credit: Anne Nygård on Unsplash