Procure natural climate solution carbon credits

Unless appropriately addressed, climate change will lead to significant, material economic risks that will directly impact company operations. Reducing nature loss is also critically important for maintaining a thriving economy.

We urgently need to close the significant financing gaps if we are to reach the 2030 global targets. Realigning with the 1.5-degree-Celsius pathway requires total annual climate finance to grow by almost tenfold, increasing from $0.6 trillion in 2020 to $5.2 trillion by 2030 (1). Meeting global biodiversity conservation total needs by 2030 will require us to bridge the $0.7 trillion annual financing gap from the current level (2). Based on trends, an even further capital injection will be needed to reverse the trend in inequality, although that figure has not yet been calculated.

While the primary focus should be reducing emissions, as a secondary priority, in line with robust net-zero emissions targets and strategies, companies should reduce emissions outside their value chain to counterbalance at least part of what they cannot abate. Together, these principles comprise what’s called the “mitigation hierarchy” (3).

Natural Climate Solutions (NCS) carbon credits are pivotal in this hierarchy. They can:

• Counterbalance all or, if not economically feasible, part of unabated residual emissions year over year.

• Neutralize residual emissions, which refers to high-quality removals that can address required long-term decarbonization.

• Compensate for historical emissions, which can play a role in a company becoming climate positive (or carbon negative), meaning they absorb more emissions than they emit once they have reduced as much as possible.

• Go beyond net-zero emissions and contribute additional reductions or removals towards the global goal to reduce emissions.

Figure 1: The role of NCS credits in a net-zero journey

Source: Natural Climate Solutions and the Voluntary Carbon Market: A Guide for C-Suite Executives, NCSA & ERM

Natural Climate Solutions are Nature-based Solutions addressing climate change. Natural climate solutions (NCS), include actions that protect healthy ecosystems, improve the management of working lands, and restore all types of land and coastal ecosystem; they can provide around 30% of the emissions reductions needed to limit global warming to 1.5°C by 2030. In addition, they provide many socio-economic and environmental benefits, such as the preservation and restoration of biodiversity, the provision of ecosystem services and supporting sustainable livelihoods.

This combination has the potential to drive meaningful, widespread impact, as long as financing is sufficient and projects and programs are executed correctly.

By investing in high-quality NCS carbon credits, companies can take positive action on climate, nature and people, will address material and physical risks posed by climate change and nature loss and improve their relations with major stakeholders that are demanding leadership from companies on climate.

Companies can purchase high-quality NCS carbon credits on the voluntary carbon market (VCM). One NCS carbon credit represents 1 metric ton of CO2e either reduced (emission reduction) or removed (emission removal) from the atmosphere.

The following eight-steps give an overview of how companies should procure high-quality NCS carbon credits. These steps are critical to ensuring high quality and avoiding the reputational risks associated with purchasing low-quality carbon credits. Transparency is fundamental across these steps, including on how credits factor into company net-zero transition plans. To learn more about the steps involved in the procurement of NCS carbon credits, consider joining the NCS Procurement Hub - a one-stop-shop for businesses interested in navigating the procurement process for NCS carbon credits.

Figure 2: Eight steps for purchasing high-quality NCS carbon credits

Source: A Buyer’s Guide to Natural Climate Solutions Carbon Credits, NCSA

Step 1 – Integrate nature into corporate climate strategy and budget

Once companies have developed their overall climate strategy, they should set their strategy and budget for the use of NCS, including NCS credits. The budget should, at a minimum, reflect the scale of the company’s yearly unabated emissions. Companies may also go beyond this to address historic emissions and seek to surpass the net-zero emissions goal. By engaging with the VCM and purchasing NCS credits now, companies can gain experience and build a supply pipeline to better prepare for procuring credits to neutralize emissions once they reach net zero (3).

Figure 3: NCS in-value chain and beyond value chain interventions

Source: A Buyer’s Guide to Natural Climate Solutions Carbon Credits, NCSA

How much of a company’s annual unabated emissions should be counterbalanced? Although there is currently no defined guidance, in general, companies should prioritize the quality of NCS credits over quantity, understanding that there is a premium on high-quality credits. It is important to only buy high-quality NCS credits, even if this results in purchasing fewer credits.

What types of NCS carbon credits should companies invest in? The ideal investment is in a portfolio of different NCS and other carbon credit types, as this approach helps mitigate risks and maximize the opportunities associated with the different types of NCS carbon credits.

Step 2 – Define roles and responsibilities

Companies should assess their existing in-house capabilities to help them decide how to select a team with the requisite expertise in NCS procurement. To do this, they should bring together an internal team to advise and decide on NCS carbon credits. Building internal capacity should include upskilling internal stakeholders, such as risk and legal teams, and establishing roles and responsibilities for these stakeholders. Companies may also decide they need external expertise, seeking third-party support or partnering with NGOs. Seeking third-party support instead of dedicating funding to building an internal team may be a preferred financial decision for smaller companies.

Step 3 - Set procurement criteria for NCS climate change mitigation, biodiversity, and people

It’s critical that companies have a clear set of NCS procurement criteria to assess the contributions of projects and programs to climate change mitigation, biodiversity gains, and benefits to people. To do this, many companies use a combination of existing standards, which are increasingly going beyond climate change mitigation to cover many biodiversity and social components. Others go beyond and add incremental criteria based on their company values and biodiversity and social strategies. Regardless of the approach, criteria should align with global best practices, existing standards, and the company's priorities and should have the approval of the company’s key decision-makers.

Align these criteria with global best practices, standards, and the overarching priorities of the company. Regularly reassess the strategy, budget, team composition, and NCS criteria to maintain adaptability to evolving circumstances.

Step 4 - Identify sources of NCS carbon credits

Companies should explore diverse sourcing methods for NCS carbon credits, including Request for Proposals, spot market transactions, and partnerships with trusted entities. Define high-level terms and volumes, and collect pertinent information from project developers to ensure a well-informed decision-making process.

Step 5 – Conduct due diligence

Once potential projects and programs are identified, due diligence must be performed to determine which one(s) meet high-quality climate, biodiversity, and social criteria. Alternatively, a third party can conduct due diligence, along with independent project/program verification. Before commencing due diligence, ensure credits uphold high integrity in climate change mitigation and cause no harm. If this requirement is met, proceed with an iterative due diligence process. Some of the potential risks companies should be aware of have been identified in the potential side effects section.

Step 6 - Make the purchase/sign the contract

Once the due diligence process is complete, the company can make a final decision on projects/programs whose credits they will purchase. At that point, contracting with the developer or intermediary begins. They can purchase credits directly from a project developer or through a portfolio manager, a broker, credit marketplace, credit exchange, or carbon fund. These entities will have contract templates they can provide to the company to initiate the contracting process.

Step 7 - Report transparently

It is important for companies to be transparent on credits used annually. Disclose details of any carbon credits, including credit type, projects financed, process or policies for evaluating projects, practical concerns such as scalability and cost-effectiveness, and third-party verification. As companies report on their NCS carbon credit use, they should ensure that they disclose the use and intended use of carbon credits separately from their gross emissions and gross emissions reduction targets.

Step 8 – Make credible claims

The use of NCS carbon credits can lead to three types of claims:

1. Claims associated with climate mitigation by counterbalancing annual unabated emissions in line with the company’s science-based targets.

2. Claims associated with contributing to a country’s or jurisdiction’s commitment to decarbonization.

3. Claims associated with the biodiversity and people benefits linked to the NCS carbon credits.

Ongoing processes through the Voluntary Carbon Markets Integrity Initiative (VCMI) and SBTi may impact claims in the future. The VCMI has developed a Claims Code of Practice that companies can use to make credible and transparent claims about their net-zero emissions commitments.

Natural climate solutions represent one of the best methods to address the gap in net-zero GHG emission targets that technology-based solutions won’t be able to fill. Their benefits extend far beyond climate change mitigation, promising lasting impact on local environments and communities.

The business sector has a clear role to play in providing the necessary funding that will give the NCS market the power to be this viable force. Although the voluntary carbon market is developing rapidly and organizations are forging standards and verification mechanisms, companies cannot afford to wait to engage.

By following a rigorous, disciplined approach, such as that delineated in this guide, and maintaining active involvement, companies can move forward in investing in high-quality projects and programs that will make a difference.

Climate impact

NCS credits can have a supplementary role in a corporate’s high-ambition net zero pathway. They can contribute to net zero goals by counterbalancing unabated emissions, addressing historical emissions and reducing and neutralizing value chain emissions.

Figure 4: Achieving net zero with natural climate solutions

Source: Natural Climate Solutions and the Voluntary Carbon Market: A Guide for C-Suite Executives, NCSA & ERM

Nature impact

Some examples of the impacts that high-quality NCS projects can have on nature and ecosystems:

• Protecting forests, wetlands and grasslands

• Enhancing soil health and fertility through regenerative agricultural practices

• Rehabilitating degraded ecosystems, such as degraded mangrove forests and degraded coastal habitats

• Better management of timberlands, croplands and grazing lands

• Restoration of forests and peatlands

• Protection of endangered species and return of previously eradicated species

• Protect/conserve wildlife corridors

• Promoting sustainable land use planning to minimize habitat fragmentation and encroachment

• Supporting indigenous and local communities in traditional land management practices that promote biodiversity conservation

Business impact

Benefits

Investing in high-quality NCS voluntary carbon credits not only addresses climate risks but also aligns with stakeholder demands, provides commercial benefits, and contributes to global sustainability efforts. Some benefits include:

• Keeping pace with policy changes: Policymakers across the world are introducing more targeted policies to halt and reverse the current trajectory for climate, nature and equity. As such, businesses priming themselves to navigate the future policy landscape can take advantage of policy tailwinds.

• Secure access to finance: Voluntary disclosure frameworks are starting to request information on beyond-value chain actions as part of their scope, which suggests that financial institutions and investors acknowledge the role of such initiatives in mitigating risks. Companies undertaking consistent efforts enhance business resilience and improve prospects for stable financing.

• Respond to stakeholder demands: With public awareness of environmental and societal issues at peak levels, 83% of consumers now expect businesses to actively shape ESG practices. Civil society, governments, and investors also demand climate leadership from companies

• Achieve brand differentiation: Attract and retain talent, foster a sustainable corporate culture. Leadership in climate action drives differentiation and competitive advantage, enhancing credibility and brand value.

• Commercial benefits: Securing a supply of high-quality carbon credits early mitigates future transition risks related to carbon pricing mechanisms.

Costs

The price of high-quality NCS credits varies due to factors like geography, project type, and market dynamics. For instance:

• Market dynamics impact spot market prices, while offtake agreements provide price stability.

• Projects under development may offer lower prices due to delivery risks.

Prices change rapidly, making it challenging to establish a minimum price for quality. While high prices don't always indicate quality now, high-quality credits are expected to command a premium in the long term.

Online databases track VCM and credit prices, but may not cover all transactions. Alternatively, companies can conduct internal analyses or visit projects for pricing insights.

Impact beyond climate and business

Co-benefits

Well-designed and properly implemented NCS projects and programs deliver climate mitigation benefits and biodiversity gains, and generate socio-economic benefits in particular for Indigenous Peoples and local communities (IPs and LCs), who often in turn improve the effectiveness of NCS projects and programs. Some examples of the benefits include:

• Economic opportunities in rural and Indigenous communities

• Supporting local businesses involved in the restoration and maintenance of natural ecosystems.

• Health and well-being e.g. through improved water or air quality

• Community resilience e.g. by mitigating climate impacts or diversifying livelihoods.

• Preserving and revitalizing traditional knowledge and cultural practices of Indigenous communities.

• Supporting Indigenous communities in obtaining formal land titles.

• Supporting food security.

• Providing opportunities for education and capacity building

• Gender equality.

Potential side-effects

Performing due diligence on projects and programs (4) to ensure they are high quality can help mitigate the various risks (5) associated with carbon credits, which include:

• Reputational risk, which includes being branded a “greenwashing” company, particularly if buyers are not reducing emissions to Paris Agreement-aligned targets alongside purchasing credits. Reputational risk can also come from investing in projects that are not of high quality. Reputational risk can be mitigated mainly through proper due diligence to ensure that credits are of high quality. Consider also the perception of equity if prices increase, as buyers may be paying a lower price due to forward contracts if they do not have a price adjustment clause.

• Financial/market risk, which can stem from future price and demand fluctuations. Financial risk can also be mitigated by having a diverse portfolio across several projects/programs, types of NCS and geographies.

• Operational/execution risk, which – in the case of forward contracts – can include the risk of the emissions reduction or removal not happening as planned due to project disruption from climate change or other events. Execution risk can also stem from the difficulty of addressing drivers of ecosystem loss, such as loss of forest due to the expansion of illegal mining or agricultural practices. Companies can best mitigate risks by running due diligence, including on the buffer pools in place and having geographic diversity in their portfolio. Operational/execution risk also includes the risk of an incorrectly calculated baseline, which you can mitigate if a third party has audited the project/program and if the company has a carbon credit portfolio that spans several projects/programs.

• Political/regulatory risk can depend on the geography of the project or program as some countries are currently negotiating the level of their participation in the VCM or face political instability that can interfere with project or program implementation, lack the legal and regulatory infrastructure to support project design and implementation, or have inadequate political will to do so (6). To mitigate this risk, companies can build a portfolio that includes credits from several geographies and should track regulation. Article 6 is an example of a regulation that companies should keep track of, where the best risk mitigation currently is full transparency.

For a list of suggested questions that companies on biodiversity and people criteria during due diligence in Step 5 and example answers, please refer to Annex 2 of the Buyer’s Guide.

Typical business profile

Businesses in all sectors, regardless of size, can invest in high-quality NCS carbon credits through the voluntary carbon market to counterbalance their unabated value chain emissions, thus contributing to global climate mitigation and biodiversity recovery targets.

Approach

Businesses who already have in place a robust, science-based net-zero emissions targets should consider purchasing and retiring high-quality NCS voluntary reduction and removal credits during the transition to net zero to counterbalance unabated value chain emissions. These credits should not be used in lieu of or delay the emissions reductions necessary to meet long-term science-based targets for Scopes 1, 2 and 3. They can also go beyond net zero by purchasing and retiring high-quality NCS voluntary carbon credits to counterbalance historical emissions and contributing towards climate recovery.

Stakeholders involved

The VCM is complex and evolving quickly and some stakeholders hold multiple roles in the procurement process. Across the VCM, six main groups of stakeholders play important roles

Land stewards and carbon rights holders: Primarily Indigenous Peoples and local communities, they are crucial for delivering high-quality NCS projects, requiring their full participation and consent.

Project developers: Design and implement projects, collaborating with land stewards, carbon rights holders, and local communities. They ensure agreements with carbon rights holders and provide support services.

Non-governmental organizations (NGOs): Provide technical support, partner with project developers, and advocate for high-integrity standards, especially regarding conservation and human rights.

Governments: Can act as program developers, setting regulations, issuing permits, and supporting projects through tax initiatives. They are pivotal for establishing registries under Article 6 of the Paris Agreement.

Intermediaries: Facilitate transactions between developers and end-buyers, offering services like portfolio management, brokerage, and marketplaces.

End-buyers: Purchase NCS credits to offset emissions. They counterbalance unabated emissions, neutralize residual emissions, and compensate for historical emissions.

Other key entities include carbon crediting programs, validation/verification bodies, registries, governing bodies, and carbon credit rating agencies, each contributing to the credibility and transparency of the VCM.

Figure 5: The key players in the voluntary carbon market

Source: A Buyer’s Guide to Natural Climate Solutions Carbon Credits, NCSA

Implementation and operations tips

The NCS Procurement Hub is a one-stop-shop for navigating the procurement process for NCS carbon credits. It is an online community platform designed specifically for carbon credit buyers & investors, featuring curated content related to the procurement process. The Hub is supported by the NCS Alliance and a dedicated Taskforce of experts in the fields of Natural Climate Solutions and the voluntary carbon market.

By signing up for free, businesses can have exclusive access to one-on-one clinics with industry experts, stay up to date on the ever evolving NCS market and emerging trends and have access to curated content, publications, templates, news and events, all in one convenient place.