High-quality carbon offsetting can help companies offset their unavoidable residual emissions. Conducting a thorough due diligence helps the purchasing company assess the offset’s quality and protect it from potential negative publicity. Any impropriety on the part of the offsetting partners reflects badly on the company and its environmental claims. In this article, we discuss key aspects a due diligence exercise should look into.
Net zero pledges and carbon markets
Companies globally are committing to net-zero emissions, which means cutting their net greenhouse gas (GHG) emissions to as close as zero as possible. The number of companies on the Forbes Global 2000 list having net-zero targets increased from 417 in 2020 to 702 in 2022.[1] These corporate net-zero pledges have led to an increase in purchase of carbon credits through the voluntary carbon markets (VCM). The voluntary market for carbon credits enables a company to voluntarily offset its unavoidable emissions by purchasing carbon credits produced by projects aimed at removing or reducing GHGs from the atmosphere. The Draft Blueprint on “National Carbon Market” released by the Bureau of Energy Efficiency (BEE) observes that the demand for carbon credits is likely to increase in VCM significantly because of the growing number of corporate net-zero commitments. The Taskforce on Scaling Voluntary Carbon Markets estimates the market for carbon credits to grow upward of USD 50 billion in 2030.
The need for diligence
Carbon markets are a powerful way to drive capital towards projects that reduce or prevent emissions. They provide an additional source of financing for carbon offsetting projects.An inferior carbon offset, however, may offer no real environmental benefit. But it may also become a reputational risk for the purchaser. Therefore, companies should conduct carbon offset quality due diligence to assess the quality of the offset.
The quality of a carbon offset is the extent or degree to which the offset can substitute for GHG emission reductions that an entity could undertake itself. Companies should conduct a rigorous examination and evaluation of offset documentation and data before purchasing offset credits. Due diligence helps these companies become familiar with how the carbon offset credits in question are generated, transferred and used.
Typical due diligence for a carbon offset project consists of reviewing the documentation from the offset seller and from third-party sources; visiting the project site and meeting with those responsible for day-to-day operations; and reviewing verification reports (if a project has already been verified). Below are some important factors to consider when assessing the quality of carbon offset projects:
- Additionality: Ensure that the emissions that the company avoids or eliminates through a particular project would not have been avoided or eliminated without its investment. This can be assessed by reviewing past financial information on the project, project details, potential carbon reductions and similar projects under development.
- Singularity: Ensure that each metric tonne of carbon dioxide equivalent should be attributed to a single carbon credit and a single entity. Therefore, carbon offsets must convey an exclusive claim to GHG reductions; they should not be double counted.
- Leakage: Leakage occurs when a carbon offset project inadvertently generates emissions outside the project boundaries. This typically happens in situations where resources are being protected. For example, protecting forests in one area leads to deforestation in another area. To prevent the leakage, the community and the surrounding area where the project is to take place must be carefully studied.
- Permanence: For the principle of carbon offsets to be truly effective and successful, the GHG reductions or removals must be “permanent”. Buyers should invest in projects which are not temporary methods of reducing carbon or GHG sequestration.
- Side effect: The carbon offset project should demonstrate that it has no negative social or environmental side effect. At a minimum, the project must meet all the legal requirements in the jurisdiction where it is located.
- Co-benefits: Some projects have the potential to provide a wide range of sustainability benefits beyond simply reducing GHGs. This includes improving the livelihood of local people, improving environmental quality, preservation of biodiversity and protecting habitats.
Conclusion
High-quality carbon offsetting can help companies offset their unavoidable residual emissions and accelerate the transition to a low carbon economy. Conducting a thorough due diligence helps the purchasing company assess the offset’s quality and protect it from potential negative publicity. Due diligence on carbon offset quality is a form of risk management. Any impropriety on the part of the offsetting partners reflects badly on the company and its environmental claims, and could lead to the company being criticised for greenwashing. Just as a company screens potential suppliers for risks and opportunities, it should also evaluate offsetting partners. A thorough due diligence provides the assurance that the carbon reduction is real and that the investment will support the achievement of measurable impact on the ground.
This article is authored by Ashutosh Senger and Anirudh Rastogi. For more on the topic please reach us out at contact@ikigailaw.com
Image credits: Freepik
[1] https://zerotracker.net/insights/pr-net-zero-stocktake-2022
