If there’s one thing we don’t have enough of, it’s climate finance. The International Energy Agency estimates that annual investment in clean energy must triple to $4.2 trillion by the end of this decade in order to keep the door open to meeting the 1.5°C limit. Most of that investment needs to come from the private sector – and it needs to happen overwhelmingly in developing countries and emerging economies. Initiatives like the Energy Transition Accelerator (ETA), which C2ES is helping to develop, aim to help meet this need.
At the same time, leading multinational companies are increasingly taking on ambitious net-zero climate commitments. Many of these companies have supply chains stretching throughout the same countries, regions, and sectors where finance is so desperately needed. Emissions from those supply chains (part of what’s known as “Scope 3” emissions) often make up a significant part of a company’s carbon footprint – and because they are outside a company’s direct control, they are challenging to address.
An emerging tool – carbon credits from within a company’s supply chain – could simultaneously help to fill the climate finance gap and enable companies to address their Scope 3 emissions.
A new brief from Winrock International’s Net Zero Services Unit, written to inform the development of the ETA, explains how this could work, using a simple example of a hypothetical company that indirectly uses a commodity (like copper) that requires a lot of electricity to produce. By buying ETA credits representing verified emissions reductions from the electric power sector in developing countries, the company could effectively address a large chunk of its upstream electricity Scope 3 emissions.
This is a powerful approach that could apply much more broadly: think of all the sectors, from food and beverages to consumer goods to technology, for which emissions from electricity make up a large portion of companies’ supply chain emissions.
Using within-value-chain carbon credits to decarbonize a supply chain is a significant departure from the role carbon credits have typically played in corporate climate action. Traditionally, credits have been from activities outside a company’s value chain and used as a means of “offsetting” part of a company’s carbon footprint. For example, a cement company might buy carbon credits generated by reducing tropical deforestation to offset the emissions from its cement factories. Or a clothing company might offset the emissions from its supply chain with carbon credits generated by replacing dirty cookstoves with cleaner ones in villages in South Asia. In both cases, the credits used as offsets – even if they are generated using high-quality methodologies so that they represent real, additional tons of emissions – have little to do with the company’s own operations.
That’s not necessarily a problem from a scientific point of view: climate change is driven by the accumulation of greenhouse gases in the atmosphere, and a “ton is a ton” regardless of where it is emitted.
However, many companies seek to prioritize emissions within their own value chains. That approach may partly stem from a sense of corporate responsibility – of “cleaning up your own mess.” It also acknowledges that getting to net-zero emissions will require transforming how businesses produce and transport goods – and seeks to use corporate sustainability goals to drive those transformations.
This brings us back to within-value-chain carbon credits.
Like any carbon credits, within-value-chain credits can be a powerful mechanism for channeling capital to where it’s needed most – allowing companies to cut more tons faster.
But like other within-value-chain mitigation activities, such credits can also enable a company to take responsibility for the emissions embedded within the products and services it sources from its suppliers – while transforming business models and supply chains in the process.
The Science-Based Targets Initiative (SBTi) recognized this distinction in its recently-released Scope 3 discussion paper, which usefully explores a range of potential scenarios for how companies might use environmental attribute certificates (a category that includes carbon credits) to address Scope 3 emissions. Scenario 3 in the SBTi paper concerns carbon credits from within-value-chain mitigation activities.
The Winrock brief published today provides one example of how this scenario could play out in practice. The credit use case explored in the brief – which was outlined in the ETA Core Framework released at COP28 – has received overwhelming interest from the companies working with C2ES and the ETA Partners (the U.S. State Department, the Bezos Earth Fund, and The Rockefeller Foundation) to develop the ETA.
The world desperately needs more climate finance. Companies need better tools to cut emissions and accelerate business transformation in their supply chains. Using carbon credits to address within-value-chain emissions can fill both gaps – and bring us further and faster on the path to low-carbon prosperity.