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How should the private sector step up climate action?
A position paper prepared by South Pole
In the void created by government inaction on climate change, urgent leadership and action by the private sector is imperative to keep global warming from overshooting the 1.5°C climate target of the Paris Agreement.
The private sector should play a key role in accelerating global decarbonisation through setting science-based targets to reduce emissions within their operations and value chains, and compensating for their residual emissions through buying carbon credits. This compensation is critical in catalysing faster climate action: it puts a price on carbon, it attracts funding to eligible and deserving projects, it allows companies to do something (rather than nothing) on their way to net zero, and in the meantime it develops and supports solutions that will dramatically reduce emissions today.
We need to stop fighting over the question of whether internal carbon reduction or compensation is better. If we want to stand any chance to get to net zero by 2050, it is not 'either, or', but 'both, and'.
However, private sector climate action remains timid. Why? There are three reasons.
The cost of carbon
First, the cost of emitting greenhouse gases – in other words, the carbon price set by governments– is still too low. At around USD 5–10/tonne, the price of carbon does not accurately reflect the true cost of the damage of emissions from polluters. One tonne of carbon needs to be priced at more than USD 100 to correctly reflect its true cost.
Rate of return
Second, the flip side to a low price on carbon (which allows companies to emit at a low penalty), is that it does not provide sufficient incentives for companies to reduce their own emissions significantly, nor drive financing into green projects because the rate of return is too low.
Why is that? If the carbon credits these projects generate cannot be sold at more than USD 10/credit, then investors are not interested in financing these projects.
The path is unclear
Third, private companies do not see a clear path for action. In the media, using carbon credits to compensate for their emissions is criticised by actors who claim that it is 'greenwashing'. They insist that the only credible path for companies is to fully avoid all emissions throughout their operations and value chains.
However, we do not have the technologies at hand at an affordable price to allow all companies to reach zero emissions within their own operations and value chains today. And critics do not offer an alternative solution for companies: they insist on full decarbonisation now. Would this mean stopping operations, to not emit at all?
Is carbon compensation greenwashing?
No, not when companies are setting science-based targets and roadmaps to decarbonise their operations and value chains, and use carbon credits to compensate for residual emissions on their way to net zero.
Using the voluntary carbon markets to funnel financing to projects around the world that lower GHG emissions, certified under the highest quality carbon standards, ensures that these carbon credits drive faster climate action. It is an efficient, cost-effective and transparent way to catalyse global decarbonisation. It is also just one among many tools in the climate toolbox: it is an effective strategy and a robust solution that allows companies to act today, while more climate-friendly technologies are being developed to help them decarbonise as well.