Carbon Credits Explained

Scientists at the IPCC have shown that increased levels of GHG in the atmosphere are warming the planet. This creates extreme weather changes around the world. Currently, burning fossil fuels - coal, oil and gas – is the main driver of increased GHG levels.

Under the banner of the UN and Paris Agreement, the world's countries have come together to declare that urgent action must be taken to lower emissions if we are to maintain a habitable planet that can support the world's population.

The latest research emphasises that urgent action must be taken by everyone in order to safeguard some of the most vulnerable ecosystems and communities on the planet.

The current pledges and actions are falling short and the window to keep climate change in check is shrinking.

Companies have an important role to play in increasing ambition and mobilising significant amounts of climate finance before 2030 to dramatically lower greenhouse gas emissions and contribute to reaching internationally ratified targets such as the Paris Agreement and the UN's Sustainable Development Goals (SDGs).

By financing climate action, companies can set an internal price on carbon, so that it incentivises them to decarbonise faster. Further, a recent study conducted by Trove revealed that companies using significant amounts of carbon credits are decarbonising at twice the rate of those that do not.

Beyond decarbonising their business towards global net zero, it is becoming imperative for companies to address today's emissions while further decarbonising their own operations and value chain. The SBTi encourages companies to engage in beyond value chain mitigation (BVCM). In consequence, BVCM becomes a natural part of every climate strategy.

And not only BVCM, but also reaching net zero eventually is a use case for funding climate actions with carbon credits. No company in any industry is expected to decarbonise their business completely to zero emissions. Acknowledging that fact, the SBTi pledges for using removal carbon credits to neutralise the remainder of emissions at net zero target year (depending on the industry, between 10 to 30%).

Carbon credits are measurable, verifiable emission reductions from certified climate action projects. These projects reduce, avoid or remove greenhouse gas (GHG) emissions. Moreover, they also bring a whole host of other positive benefits, for example, they empower communities, protect ecosystems, restore forests, or reduce reliance on fossil fuels.

Projects must adhere to a rigorous set of criteria to pass verification by third-party agencies and a review by a panel of experts at leading carbon certification standards like Verra's Verified Carbon Standard or the Gold Standard.

After an organisation or an individual buys a carbon credit, the credit is permanently retired so it can't be reused.

The key is in the detail.

High-quality carbon credits adhere to a strict set of standards. These standards are previously approved by organisations like The International Carbon Reduction and Offsetting Accreditation (ICROA). You can check this by ensuring the projects you support are registered with a third-party internationally-recognised verification standard, such as the Gold Standard, Verra's Verified Carbon Standard (VCS), Social Carbon and Climate, Community and Biodiversity Standards (CCBS), or standards verified by the UNFCCC.

Further, The Integrity Council for the Voluntary Carbon Market (ICVCM) has published the Core Carbon Principles (CCPs) as a benchmark for high-integrity carbon credits, raising the bar for high quality attributes such as additionality and permanence of each climate action project methodology. ICVCM estimates that by the end of 2023, the first “CCP-labelled" carbon credits will be available on the market.

All South Pole's projects adhere to and have been verified to ensure their alignment with one or more of the mentioned standards. Ensuring that the project is additional to what could happen without the project being in place. In addition to that, South Pole has developed its own set of additional integrity measures. These measures address key project risks such as partner/participants risks, technical/carbon integrity risks, environmental and social risks and reputational risks.

In general, the standards also highlight additional benefits beyond carbon – all South Pole projects contribute to multiple UN's Sustainable Development Goals. This could be improving health, creating better education opportunities, improving wildlife conservation, or building sustainable communities.

At South Pole, we believe that every credible climate solution should be continuously evaluated and improved as climate science, new technologies, and methodologies evolve. We are continuously working towards the highest standards at all times - above and beyond the requirements of carbon standards.

We are committed to continuous improvement, through the periodical review of our own quality criteria and integrity processes.

Read our principles for carbon credit use.

South Pole's projects are certified under ICROA-approved carbon certification standards that have designed robust multi-step verification processes which projects must go through to issue carbon credits. This ensures that the project and the associated emission reductions are real, permanent and additional.

Although initial estimates are made when a project is set up (referred to as ex-ante), carbon credits can only be issued once the emissions reductions have taken place (called ex-post) to ensure accuracy. Therefore projects undergo continuous monitoring throughout their lifetime: the length of these monitoring periods vary but must adhere to certain limits. The data from the monitoring period is submitted to the standard in reports which are approved by external validation and verification bodies (VVBs) , double-checked by the carbon standard auditor and uploaded on the publicly available registry for anyone to see – see one example of one of our portfolio project’s registry here!

For extra transparency and to prevent the risk of double counting, once certified, carbon credits are then issued, transferred and permanently retired with unique serial numbers in publicly accessible emission registries.

There are lots of checks and balances at each step of the way to issue carbon credits and the carbon certification standards are constantly reviewing and improving their methodologies and processes as new technology or best-practice develops.

This can often be the trickiest part of carbon credits (or known as carbon offset) to understand, but theoretically, it's simple.

Additionality means that the emissions reductions achieved by the project must be "above business-as-usual". That means they would not have happened unless the project was implemented.

Assessing additionality involves considering several aspects, such as:

1. Financial additionality: Can project activities sustain themselves financially without revenues from carbon credits?
2. Policy & regulatory: Are there regulations or incentives that enforce or encourage the project's actions?
3. Common practice: Are the project's practices and methods unusual, or are they typical for the region?

Another crucial factor to ensure additionality is assessing the risk of over-crediting. This risk varies depending on the project type and can be influenced by factors such as baseline emissions, leakage modelling, carbon stock estimates and land class emissions quantification. These considerations help determine whether the volume of credits issued for a project is justified.

Projects reduce or remove the amount of greenhouse gas (GHG) in the atmosphere.

• Examples of projects that avoid or reduce greenhouse gas emissions include replacing fossil fuel-derived energy with energy from renewable sources and protecting forests that are at risk of being cut down.
• Examples of projects that remove emissions from the atmosphere include planting trees, which sequester carbon from the atmosphere and heating biomass to produce biochar that durably stores carbon that can also be utilised as a natural soil fertiliser.

South Pole has facilitated hundreds of climate action projects of different technology types, which cover the following areas:

Nature-based solutions

Including reforestation, land restoration, forest protection, sustainable land management and agriculture.

Renewable energy

Including hydropower projects, wind projects, solar power and geothermal, mainly in developing economies.

Technological carbon removals

Including projects based on technologies that essentially 'hoover up' carbon dioxide and other greenhouse gases from the air and store them permanently, so that they will not be re-released for at least a thousand years.

Community and households

Including improved cookstove technology and access to safe water.

Waste-to-energy

Including biogas from landfill and industry, and biomass.

…and many more, like industrial, chemical and manufacturing projects, biofuel and electric vehicles projects, as well as energy efficiency projects to name a few!

You can see a small selection of South Pole's climate protection projects here.

Carbon avoidance projects contribute to climate action by preventing carbon that would have been released into the atmosphere. This could be building a wind farm to lower reliance on fossil fuels, repairing boreholes to replace the need for purifying water by boiling it on open fires and preventing deforestation.

Carbon removal projects, as the name suggests, remove carbon from the atmosphere. Broadly speaking, they are split into 2 categories: natural carbon removals, like tree planting which sequesters carbon as the trees grow, and technological carbon removals, for example, direct air capture.

Find out more about our carbon removal solutions here.

There are no fixed rules in selecting which project a company should support. However, there are some key considerations to take into account, such as:

Location: The location of a project can have an impact on its effectiveness. Projects in regions with high emissions levels, like emerging markets, can make a bigger difference than projects in regions with lower emissions. It is also important to consider whether the host country has laws or policies in place that might impact the project. Moreover, it is more impactful to focus on projects that share a country with the company's main operations.

Technology types: The technology used in a project affects the scale of the emissions that the project can reduce. Organisations are encouraged to support projects that align to their value chain or industry type. For example, a coffee company might finance technology projects related to sustainable coffee bean growing.

In the coming decades, carbon removals technology will grow in importance as we get closer to both public and private net zero targets. Once we reach net zero, all new residual emissions must be neutralised with carbon removals.

SDGs: It is important to align a project's co-benefits and contribution to the SDGs with the company's business, values and operations. A consumer goods company, for example, might support a waste-handling project or a community-based project. A beauty company might finance a project that supports women's empowerment, such as clean cookstoves. By supporting climate action projects, companies address more directly the impacts they create beyond the reach of their value chains.

Financing carbon avoidance or reduction projects today through high-integrity carbon credits is crucial in the transition phase to net zero emissions because simply put, they stop more emissions from entering the atmosphere.

They also serve climate justice and protect our existing carbon sinks such as forests and with them, biodiversity.

In the coming decades, carbon removal projects will grow in importance as we get closer to both public and private net zero targets. Once we reach net zero, all new residual emissions must be neutralised with carbon removals.

Companies can start investing in carbon removal technologies to be scaled in the future. However, this must not delay or impact urgent efforts to decarbonise and prevent emissions from being released in the first place.

There are several reasons of why prices of carbon credits vary, for instance:

• supply and demand dynamics;
• the value projects deliver beyond carbon, for example, some projects empower women or have direct impacts on people's lives;
• varying implementation costs depending on the size and location of a project;
• the mitigation technology used;
• and carbon pricing regulation.

The SBTi, among others, explicitly encourages companies to not only reduce their own footprint but also invest in activities outside of their value chain in the transformation to net zero because of the urgent need to move the dial on climate change mitigation, today.

Carbon credits are a transparent, measurable and results-based way for companies to support activities, such as protecting and restoring irrecoverable natural carbon sinks, like forests or marine ecosystems and scaling nascent carbon removal technology, that keep global climate goals within reach.

Funding climate action with high-integrity carbon credits…

• catalyses faster climate action on the way to net zero,
• ensures companies are measuring their footprint and putting a price on the damage they are creating,
• attracts funding to eligible and deserving projects that dramatically reduce emissions and facilitate sustainable development.

Science says that companies must invest in emission reduction activities beyond their direct operations – for example, through verified carbon credits – all while working on the long-term task of decarbonising their value chain. The SBTi terms this "beyond value chain mitigation", where companies are called to invest in climate projects outside their value chain to balance out their existing remaining emissions.

Further, recent studies by Trove and Sylvera indicate that companies that use carbon credits are decarbonising at a higher rate than companies that do not.

Read about our approach to high-impact climate action.

For 17 years, South Pole has been engaged in carbon markets. Our expertise spans advising on emission reduction activities, preparing technical documentation for a project to generate carbon credits under the leading global carbon standards and stakeholder management.

Through our global network, we connect certified projects run by our local partners with climate conscious organisations looking to tackle their carbon footprint.

Our project implementation partners include NGOs, Indigenous community groups, landowners and private organisations who need carbon finance to fund their planet-saving activities.

As a leading carbon project expert and climate consultancy, South Pole has helped channel finance to over 850 climate action projects in renewables, forestry, agriculture, industry, households and public institutions, spanning the globe.

With our clients' and partners’ support, we have, saved over 200 million tonnes of CO2 or around 5x the annual emissions of Switzerland! Find out more here.

Companies need to build a robust foundation to make bold claims through ambitious, measurable, and time-bound climate action. Claims must be built on a holistic climate strategy that clearly shows what your company is doing to meaningfully reduce its carbon footprint while helping to fund climate action and scale carbon finance, which is critical to supporting global climate change mitigation and adaptation efforts in parallel.

It is important to note that your organisation's efforts to decarbonise its own emissions will draw the most scrutiny from investors, consumers, and civil society – and even employees. At the same time, beyond value chain mitigation is essential. According to the Science Based Targets initiative (SBTi), "companies must scale up investment and go beyond their science-based targets by channelling additional climate finance towards mitigation activities outside of their value chains now to contribute towards reaching societal net-zero."

Click here to see our key principles for companies to follow when pursuing best-in-class communications around climate claims to avoid accusations of greenwashing.

Traditional ways of talking about climate action are being challenged. This is understandable: claims about climate or carbon neutrality have proved prone to misinterpretation, and recent years have seen heated public debate around voluntary corporate climate action and corporate climate claims, resulting in calls to find viable alternatives.

For this reason, South Pole launched a global stakeholder consultation in 2023, which proposed industry alignment around the phrase 'Funding Climate Action' (FCA). The result of this consultation led to a new Paris-aligned corporate claim and associated label.

Tested with over 130 companies, leading NGOs, policy experts and over 1500 consumers, this new claim is intended for use by companies who fund climate action beyond their value chain, in line with their residual carbon emissions, using high-quality verified mitigation contributions. It provides companies with a clear pathway to scaling up climate investment without being criticised for it.

Click here to learn about the 'Funding Climate Action' claim.

Companies can withstand scrutiny by supporting their net zero commitments with science-based targets and communicating transparently about it.

South Pole provides a range of climate labels for companies to demonstrate that they are starting or accelerating on a Climate Journey. Experts from the Funding Climate Action label's team will help validate that your climate action credits meet our label's best-in-class requirement with science and aid in communication by protecting your reputation risks against scrutiny through a radical transparency approach.

The label supports your sustainability communications in a way that is aligned with the goals of the Paris agreement and your pathway to net zero emissions. It provides a framework to fund global climate action, accelerating global net zero and rebuilding on SBTi's beyond value chain mitigation guidance.

Your company can achieve a label to show that you are taking responsibility and action for your climate impact and have a clear plan to reduce this over time.

To get more information: find out more here.