Carbon Offset Markets Need Some Major Upgrades

Carbon Offset Markets Need Some Major Upgrades
A member of Mikoko Pamoja, Swahili for “Mangroves Together,” plants a mangrove tree at Gazi Bay, in Kwale county, Kenya, June 12, 2022 (AP photo by Brian Inganga).

Carbon markets are set to explode on the world stage. In 2021, the value of traded global markets for carbon dioxide swelled by 164 percent to a record $851 billion. Compliance markets—in which regulated companies can trade carbon credits in order to meet government-mandated emission targets—took the lion’s share, with the European Union’s Emissions Trading System accounting for 90 percent of the total. California’s cap-and-trade market weighed in at $19 billion. The voluntary market, whereby companies buy carbon credits to achieve their own climate targets rather than government mandates, is relatively small—only $2 billion in 2021—but growing fast. By 2027, the voluntary global carbon market is projected to swell to $17 billion.

Companies face increasing pressure from investors, consumers, advocacy groups and governments to reduce their greenhouse gas emissions in line with the “net zero by 2050” target of the United Nations Paris Agreement on climate change. In a May 2022 survey, some 58 percent of Fortune 500 CEOs said they have a plan to achieve net zero by 2050 or sooner.

For the most part, corporate climate strategies target Scope 1 and 2 emissions: direct emissions from manufacturing and indirect emissions from energy sources. Reducing these primarily entails switching to renewable energy sources. But reducing Scope 3 emissions—from the upstream supply chain and downstream consumption—is tougher. For global companies with thousands of suppliers and huge distribution networks, Scope 3 emissions comprise 70 to 99 percent of total emissions. Amazon’s Scope 3 emissions, for example, accounted for 77 percent of its total greenhouse gas footprint between 2019-2021. Only half of the surveyed Fortune 500 companies had a plan targeting Scope 3 emissions.

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