The Science Based Targets initiative (SBTi) recently permitted use of carbon credits for abating Scope 3 emissions, concluding a six-month long stakeholder consultation on evaluating the use of environmental certificates as a tool for supply chain decarbonisation. As per the decision, a third-party agency will be responsible for validating the quality of carbon credits. Rules and standards for effective use of offsets will be issued by SBTi before July 2024.
Scope 3 emissions encompass all indirect emissions that occur in a company’s supply chain and, depending on the sector, account for 30-90% of companies’ total emissions, as per the World Economic Forum (WEF). Corporates and sustainability frameworks have been taking a more lenient approach towards this category as these emissions are more challenging to quantify and control compared with Scope 1 and 2. Notably, in April 2023, SBTi classified 16 Indian companies, including Flipkart, Adani Energy, Welspun and Godrej & Boyce, in the ‘commitment removed’ category as they failed to achieve their targets on time. One of the main stumbling blocks identified by these companies was Scope 3 emissions, which also became the key driving factor behind SBTi allowing offsets. Among Indian companies participating in the Climate Disclosure Project, only 31% report Scope 3 emissions and only 22% have net zero goals encompassing Scope 3 emissions, as per WEF.
Under the Business Responsibility and Sustainability Reporting framework developed by the Securities and Exchange Board of India, it is mandatory for companies to report their Scope 1 and 2 emissions, whereas disclosure of Scope 3 emissions is voluntary. Furthermore, SBTi only defines Scope 1 and 2 targets and is still working on Scope 3 target-setting criteria.
The carbon credit market is likely to benefit from this additional avenue of demand, particularly after facing a setback last year when questions regarding quality and integrity of credits arose and prices plummeted for all types of carbon credits. As per S&P Global Platts, renewable energy credit, mostly from India and China, shed 41% of its value to USD 1.80/ MTCO2e in December 2023 from USD 3.05/ MTCO2e in January. Nature-based avoidance credit, household credit (improved cookstoves) and land use-based credit plummeted by 70%, 41% and 96%, respectively. That said, carbon credits related to renewables, cooking stoves and avoided deforestation are strongly opposed by SBTi and are not expected be permitted.
Figure: Price of carbon credits in 2023 (USD/ MTCO2e)
Source: S&P Global Commodity Insights
Meanwhile, India is developing its own carbon offset scheme and will allow non-obligated entities to register projects for issuance of carbon credits. But it is still being evaluated if high-quality credits from Verra and Gold Standard will be allowed. In recent years, the effectiveness and integrity of carbon offsets have come under scrutiny. A recent example is Verra’s, Verified Carbon Standard rainforest project, which attracted controversy due to the use of unreliable methodology, resulting in over-issuance of credits and overstated claims.
In the milieu, use of carbon credits should be allowed only if stringent standards and guardrails are established to ensure the use of high-quality offsets. Further, use of offsets must be considered a short-term solution, and not as a substitute for emission reduction initiatives.
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