ANALYSIS: SBTi carbon credit controversy a microcosm of the debate over offset usage

Quantum Commodity Intelligence – The announcement earlier this month by the board of trustees of the Science Based Target Initiative (SBTi) regarding the possible use of carbon credits by companies to meet some of their supply chain (scope 3) carbon emissions has probably generated the biggest response about the voluntary carbon market, since the last market controversy.

However, according to the group's chief executive in a more recent statement, the announcement has signalled the first stage of an exploratory process and did not represent a departure from the SBTi's standard operating procedure, according to the group's chief executive.

"The SBTi standards have not changed," Luiz Amaral said on April 19 in a blog post, noting that the SBTi – the leading standard for voluntary corporate climate action globally – has approved Standard Operating Procedures for Development of SBTi Standards which must be followed before making changes to any of its standards.

"This includes definition of the workplan by the Board, research and drafting by our Technical team, public consultation, review and approval by our independent Technical Council and consideration and adoption by the Board," Amaral said.

The SBTi said on April 9 that it "recognizes that, when properly supported by policies, standards and procedures based on scientific evidence, the use of environmental attribute certificates for abatement purposes on Scope 3 emissions could function as an additional tool to tackle climate change." Consequently, it added, "SBTi has decided to extend their use for the purpose of abatement of Scope 3 related emissions beyond the current limits."

The announcement immediately divided opinion, with voluntary carbon market (VCM) participants welcoming a potentially significant boost to VCM demand, but a number of NGOs decrying what they saw as a likely disincentive for corporations to tackle their own emissions.

NGO Carbon Market Watch said in a statement that the SBTi "appears to have buckled to pressure from carbon market players and corporate interests to allow companies to meet scope 3 targets with carbon credits, raising the risk that corporations can appear to be improving their climate performance on paper while actually spewing out more greenhouse gases into the atmosphere".

But most notably, the announcement triggered a swift backlash from a number of SBTi staff, who called for Amaral's resignation, arguing that the group's board of trustees had ignored SBTi processes and protocols by apparently announcing a decision while a key committee, known as the Technical Council, was still making assessments to determine a final decision on the matter.

Amaral's blog post, apparently aimed at clarifying and taking the heat out of the situation, was conciliatory and combative in turn.

"I acknowledge and deeply regret the concern and distress this situation has caused and want to reassure my SBTi colleagues and stakeholders that the SBTi's dedication to science-based decarbonization, public consultation and standard-setting governance is unwavering," he said.

The SBTi is "exploring changes to tackle the challenges that exist around scope 3, including exploring responsible use of environmental attribute certificates with the right guardrails and limits," Amaral said.

A first draft paper will be published in July, and "once the revision process is complete, I am confident we will have a more robust standard that will  deliver greater impact," he said. However, that "I refuse to avoid a difficult discussion if it could potentially improve our standards to deliver a bigger impact," he added.

Amaral also suggested that "it's perhaps a sign of our maturity as an organisation that we do not shy away from even the most challenging debates – and I for one am not afraid to discuss, revisit and rethink our approach based on scientific evidence and following pre-established processes."

Amaral stressed the need for all businesses, especially those in high-emitting sectors, to take urgent steps to decarbonise both their own operations and their value chains. "The mitigation hierarchy shall always apply: companies cannot buy their way out of acting," he said. "Also, the battle on climate change will be won or lost on scope 3, as it is an engine to promote change."

But, he added, "we also must recognise that not all scope 3 emissions are created equal. Some are more material, some less so. Companies have significant control over some emissions, less over others. Some emissions are upstream, others are downstream."

The difficulty of factoring in Scope 3, or indirect value chain emissions, remains the key barrier to companies setting net zero targets, the SBTi said last month in a report detailing the outcome of its 'Business Ambition for 1.5°C' campaign. scope 3 was mentioned frequently in the qualitative feedback from campaign participants, and was ranked as the top barrier to setting net-zero targets, said the SBTi.

The SBTi is in the process of evolving from an initiative to "a voluntary standard setter in our own right," and will be applying to join ISEAL, the global membership organisation for sustainability standards, Amaral said.

"I look forward to working collaboratively with the SBTi team, Trustees, members of the Technical Council and advisory groups, partners, businesses, academics, scientists, and the NGO community, to ensure we get the best possible outcome from this process," he said.

Industry sources said the ongoing uncertainty about SBTi's position has dampened the mood in the VCM in the short-term. Prices have been largely stayed stable over the past 10 days: some contracts, such as the N-GEO futures, have inched up, but not others.

"All this noise around SBTi is extremely unhelpful. They've handled the situation very badly," said one carbon market source. "We're concerned that, even if SBTi stick with the decision, it will look tainted now because the scientists disagree with it and it was taken prematurely," the source said.

But according to research by Bloomberg New Energy Finance (BNEF), last week, if the SBTi proposal does go forward, the VCM can expect a "mega boost", regardless of the reports on dissent within the organisation over the decision,

Without limitations on carbon credit use from SBTi, annual demand for carbon offsets will rise to 1.37 billion tonnes of carbon dioxide equivalent (tCO2e) in 2030 and 5.9 billion tCO2e in 2050, Kyle Harrison, head of sustainability research at BNEF said in the note published on April 16.

In 2023, corporates with voluntary emission reduction targets purchased and retired 164 million carbon credits, up 6% from 2022, BNEF data shows. Due to an oversupply of carbon credits and early-stage climate targets, average carbon credit prices will climb to only $20 by 2030 from their current level of about $13/tCO2e. But prices will shoot up to $243/tCO2e by 2046 as demand catches up and the market becomes undersupplied by then, Harrison said.

As a result, BNEF estimates the annual value of a high-quality voluntary carbon market would reach $1.1 trillion in 2050, a magnitude higher than current market size estimates of $2 billion. "While some details of SBTi's announcement are awaited, a demand boost is almost certain," said the note. "Its decision … changes the game substantially," he added.

But the sources said they have seen little of that demand in the short-term, with sellers still seen chasing buyers amid prompt oversupply. A conference held last week in Florence, Italy, was attended mostly by carbon credit sellers and intermediaries, sources also said.

"I'd rather the SBTi hadn't announced anything...this will confuse corporate buyers even more," said a second carbon market source, a seller. "I only see a few usual buyers in Florence. There were some banks, but they are only interested to buy at low prices to resell at a later stage," the source said.

To an extent the debate about the SBTi here is a microcosm of the ever ongoing debate about the use of carbon credits that often clouds a reasonable discussion on the merits or not of their use. There is also a wider question, not answered in this discussion, about how companies actually deal with the difficult issue of cutting scope 3 value chain emissions.