The Definitive Guide To Carbon and Climate Commitments:

Carbon Overload!

Every day we hear something new about climate change, greenhouse gases, carbon credits, cap-and-trade markets, carbon footprints, sequestration, environmental regulation, and so on. And we hear the names of many organizations that are taking action: the UN releasing a report; the California Air Resources Board setting emission rules for cars sold in California; Apple or PepsiCo saying they will reduce their greenhouse gas inventory by half in 10 or 15 years; or a power generation company using carbon credits to offset a portion of their emissions to meet requirements under a cap-and-trade system.

How do all of these organizations and systems relate to each other? As a representative for your company, which pieces of the puzzle matter most to you? What can you expect when your company needs to take action on its emissions?

The general principles for decreasing greenhouse gas emissions and carbon footprints are simple and straightforward. However, until recently, implementation was always the challenge. While improvements to ease and accelerate adoption of GHGe and CO2e reducing initiatives are ongoing, new standards and organizations continue to emerge.

For much of the last 30 years, the focus has been on reducing the negative impact of power generation and transportation. Now, CIBO Technologies and others are working to bring principles and practical implementation programs to life for agriculture. In this publication, we explore how the pieces all fit together.

How We Got Here

To understand how climate protocols and environmental awareness are organized today it helps to look at where we have been. There are three different phases of environmental awareness and protocols for action:

1. The time leading up to 2000 when the impact of global emissions was first being recognized and worldwide action was started
2. 2001-2012 when carbon trading markets matured and major corporate involvement started
3. The time since 2013, featuring the Paris Agreement, when increasing alarm over the need to accelerate emission reduction actions, drives the growth of corporate initiatives to take action on emissions and make and carbon climate commitments.

GHG Infographic- Nov 2021

Regulatory Markets vs. Voluntary Markets

Offsets are most known as tools in regulated markets where organizations are legally compelled to comply with emission limits. The Kyoto Protocol, EU Emissions Trading System, and California cap-and-trade programs were the first large-scale regulated markets, but now there are many others all over the world. In regulated markets, carbon credits often play a significant role since in theory, they provide an efficient means to reduce emissions across organizations and nations.

In voluntary markets, emissions reductions are driven not by legal requirements but by other factors:

• Investors who require environmental awareness and action in the companies they invest in
• Consumers preferring products from companies with a lower greenhouse gas footprint
• The marketing advantages of offering products that are more “green” than those from competing companies, etc.

A company that is not legally bound to reduce its emissions might still seek to reduce its emissions to entice investors or make its products more appealing to environmentally conscious consumers. In the mid 2010s, it was hypothesized that corporate sustainability goals could help business. These hypotheses have since been proven. Forbes outlines 6 ways in which corporate sustainability helps business. These include creating additional brand value and competitive advantage, especially as more than 65% of consumers have demonstrated willingness to pay more for similar, sustainably produced products. Harvard Business Review has performed even deeper analysis and found that incorporating sustainability and regeneration into business decreases risk, improves financial performance and fosters innovation. Such companies will face the same insetting vs. offsetting options as a company in a regulated market. But lately, organizations looking to reduce their emissions voluntarily are being called upon to achieve reductions without the use of offsets.

Carbon Credits: Efficient Tool or License to Pollute? Useful GHG Reduction Incentives or Harmful Distractions?

One of the main motivations for the use of carbon credits came from a simple economic argument: they provide an efficient mechanism to fund emission reduction projects that a) deliver larger emission reductions at less cost than other alternatives; and b) would not happen without the injection of additional funding.

Consider another example for Acme, Inc. Let’s say Acme finds that the best option for reducing its own emissions would cost $50 per tonne-year of reduced emissions, and that another organization, Trash Removal Services (TRS), has a proposal to reduce their emissions at a cost of only $10 per tonne but cannot fund the project itself. So for the same cost of reducing their own emissions by one tonne, Acme’s $50 could instead pay for TRS to reduce their emissions by five tonnes. That’s a lot more efficient, right? Simple!

As often happens, it’s not that simple:

• The $10 per tonne cited by TRS was a prediction. What if the prediction was wrong? History has shown it could be wrong for many reasons: innocent mistakes by well-meaning actors trying their best to predict the future; errors in assumptions about future savings; deliberate gaming by bad actors; and simple bad luck (market swings, weather effects, etc.)
• Acme’s estimate of $50 per tonne-year to reduce its own emissions is also an estimate. What if this estimate turns out to be high, as might happen if a new technology is unveiled that reduces the cost of capturing emissions to $30 per tonne-year? Or if the estimate is low, as might happen if it turns out Acme’s analysis of the complexity of capturing emissions was incomplete? Such uncertainties are common and create a risk that the company’s capital might either be applied where it isn’t needed or insufficiently applied where it is most needed.
• Climate science tells us that Acme will need to reduce its net emissions to zero in the next 30 years. Would it be better for Acme to invest its $50 per tonne in achieving this longer-term goal?
• Are there better ways to pay for TRS’s emission reductions? Landfills perform a trash disposal service. Charging additional fees to the service users (towns, cities, companies, etc.) could pay for the emission reductions while also incentivizing reductions in waste. If TRS were to do this on their own they would run the risk of making their services more expensive than those of competitors, which might threaten their business. Could fees be mandated for all organizations delivering waste to landfills?

Dealing with these questions and ambiguities has led to the creation of standards and practices that attempt to level the field for all players.

Standards and Protocols: Comparing Apples to Apples & Ensuring Value

Nearly every corner of modern industry is affected by general standards that allow regulators, investors, companies, consumers, and other entities to easily exchange products and information.

Consider a few examples:

• Generally Accepted Accounting Principles (GAAP) ensure that anyone looking at audited financial statements can build a basic understanding of a company’s financial status without having to delve into the obscure details of how each company happens to classify its assets, debt obligations, and transactions. GAAP ensures consistent treatment of each, and certified auditors provide assurance the company has been faithful to the standards.
• Thousands of standards govern the interoperability of computing systems: WiFi, USB, HTML, IP, programming languages, monitors, printers, keyboards, etc.
• ISO 9000 certifications tell investors and consumers that a company’s products are produced with processes that satisfy widely-held quality criteria.
• Food label standards ensure consumers can compare similar products by providing the same information for each product.
• ISO alone has developed nearly 24,000 international standards that cover a very wide variety of fields and topics.

With the rising importance of environmental accounting over the last 20 years, standards have also been developed for defining, measuring, and monitoring environmental processes, including emissions and CO2e equivalents. Consider a partial list of questions that stakeholders must address when accounting for and reducing emissions:

• Do we need to account for these items when calculating “our” emissions?
  • We make medical equipment. What about the GHG emissions that stem from our manufacturing, packaging and preparation processes?
    • Answer: Yes. These GHG and CO2 equivalent emissions count. They are typically counted as Scope 1 emissions.
  • If our factory burns fuel and emits CO2, that’s clear. What if the fuel we’re burning is a biofuel?
    • Answer: Yes, this still counts. But biofuel combustion is reported separately from other emissions.
  • What about the CO2 produced when generating the electricity we buy to run our plant?
    • Answer: Yes, this almost always needs to be tracked as Scope 2 emissions.
  • What about the CO2 emitted by products after they leave our production facility — computers or cars, for example?
    • Answer: It depends. These are increasingly tracked as downstream Scope 3 emissions. Key considerations include: Do the people receiving your emission statements want this included? Does the market want to know this information? Such requests are becoming more common.
  • What about our suppliers’ emissions, for example, the nitrous oxide released when nitrogen fertilizer is used to grow the corn we use in our products?
    • Answer: Yes. These are increasingly tracked as upstream Scope 3 emissions from the supply chain.
  • What about our subsidiaries?
    • Answer: It depends on ownership and/or control fraction of the subsidiary.
• How do we know whether a company’s reported emissions are accurate?
• If someone is selling credits because they reduced their emissions, how do we know that their claimed emission reductions actually happened?
• How do we know the credits we’re buying weren’t also sold to someone else (“double-counting”)?
• How do we know that the emissions reduction claimed by one project didn’t result in an emission increase elsewhere (“leakage”)?
• How do we know the credits we are buying are funding new emission reductions, and not emission reductions that would have happened anyway (“additionality”)? For example, if TRS is proposing to reduce its emissions by capturing the methane emissions from its new landfills, but new landfills are already legally required to capture methane emissions, then this reduction is not “additional”. It would have happened anyway.

Without standards, entities will answer these questions in different ways, making it much more difficult for one entity (e.g., an investor) to understand the emissions report of another (e.g., the greenhouse gas inventory released by a company). To fix this a wide variety of standards and protocols have been published to answer these questions in a consistent way and ensure that everyone is speaking the same language:

• Standards from organizations such as the IPCC, Greenhouse Gas Protocol, ISO, and the British Standards Institution focus mainly on defining rigorous processes that ensure high-quality and low waste while avoiding policy-related topics that affect how a standard is used. Standards, for example, rarely make statements concerning leakage or additionally.
• Protocols by carbon programs like the Clean Development Mechanism, Verra, Climate Action Reserve, CIBO, and many others also include requirements like those provided in standards, often by ensuring compliance with an existing standard. But these organizations must also ensure the results of the process capture real value: credits will be bought only if buyers believe they represent real emission reductions. So carbon programs design their protocols with policies to build buyer confidence.

Let’s continue our Acme, Inc. example. Acme needs to know that the credits it is buying from TRS to offset its own emissions represent actual emission reductions (i.e., that there is real value behind the asset it is purchasing). The simplest way to do this is by buying the credits from a third-party registry (Verra, American Carbon Registry, Climate Action Reserve, etc.) that has done the work to insure the credits are genuine (because an independent third party has certified that the credits were created through strict adherence to one of the registry’s protocols).

The process would look like this:

• TRS registers its project with the registry.
• TRS contracts with a registry-approved third-party verifier that will ensure TRS adheres to the rules of the registry’s protocols.
• TRS executes the project, reducing its emissions.
• The third-party verifier audits the project. They certify the project was executed as expected and that the emission reductions have been proven to be real.
• TRS submits its report to the registry, including the certified third-party audit results.
• The registry issues credits to TRS for the proven emission reductions.
• Acme buys the credits from TRS. In some cases the registry provides the market in which this sale takes place. In other cases the sale happens outside of the registry, and TRS arranges with the registry to assign ownership of those credits to Acme.
• Acme retires the credits it purchased from TRS to offset its emissions.

Who Certifies the Certifiers? Who Audits the Auditors?

As with most asset valuing systems, ensuring trust is vital to most greenhouse gas programs, especially those involving carbon credits. Modern programs include extensive checks and validation requirements to reduce the risk of confidence-sapping events caused by methodological errors and bad actors that have been seen as programs have matured over the last 30 years.

But who ensures that the rules are followed? How do we know that all of those checks and validation requirements were faithfully followed? The most common features of programs looking to secure the trust of all stakeholders are transparency and third-party audits.

Consider some examples:

• Bodies like ISO create standards but do not certify who is following them. Only independent third-party companies that are themselves certified to audit a specific standard can certify that the standard is being followed.
• ISO doesn’t even certify which companies can audit a standard: that is done by a national accreditation bodies such as ANSI in the United States. Thus the ISO organization itself receives no direct financial rewards when organizations use their standards. (To be clear, organizations and individuals who contribute to a standard are often closely involved with the standard’s subject and might benefit from the standard’s adoption.)
• Carbon registries like The Gold Standard, Verra, American Carbon Registry, Climate Action Reserve and others require that their protocols must be developed in open, transparent processes where industry experts and the public can comment and challenge aspects of the proposed protocol. Responses to these comments are generally required before the protocol is adopted and often result in changes to the protocol.

These registries also require independent third-party verification at several stages of their processes:

• Certification that new protocols adhere to relevant standards and are complete, relevant, consistent, accurate, and transparent.
• Certification that emission reduction project proposals adhere to relevant protocols and will result in valid credits if executed as described. This includes ensuring that leakage and additionality requirements are satisfied.
• Certification that before credits are issued, the emission reductions have actually taken place, including verification of any physical measurements needed.

These registries generally publish a list of accepted independent third-party verifiers and criteria that must be satisfied to add new organizations to the list.

• The Carbon Disclosure Project provides a well-known platform for companies to report their greenhouse gas inventories and progress against public reduction targets. The CDP also provides a yearly list of scores of the companies’ reports, including an “A-List” for companies that are reporting the best results and displaying the most leadership in their industry. To qualify for the best scores and inclusion on the A-List, a company’s disclosed greenhouse gas inventory must be certified by an independent third party.

Scopes: Which Emissions Count?

As mentioned earlier, the “scopes” originally defined by the Greenhouse Gas Protocol have become a popular way of categorizing emissions.

The three scopes are:

In all cases the “Kyoto Seven” gases described earlier must be tracked. Standards and protocols allow optional tracking of other emissions as well.

Greenhouse Gas Statements: What Is Being Counted?

When discussing greenhouse gas accounting three types of document are frequently cited: a corporate greenhouse gas inventory, a product inventory, or a reduction project report. Note that “footprint” is often used as a synonym for “inventory”.

Corporate Greenhouse Gas Inventory

A corporate inventory is an accounting of the greenhouse gas emissions a company is responsible for. One of the first requirements in documenting the inventory is to choose the organizational and operational boundaries:

• Organizational boundary: Which parts of the organization should be included? Any operations directly owned and operated by the company are obviously included. For other operations there are two approaches (“Equity share” and “Control”) with rules for determining whether they should be included and what portions of each operation’s emissions to include.
• Operational boundary: in essence, this is a statement of which scopes should be included in the inventory. Scopes 1 and 2 are generally required. Whether Scope 3 is included depends on the purpose of the inventory and who will be looking at it. In the past the inclusion of Scope 3 emissions was often optional, but at the time of this writing (August 2021) the importance of Scope 3 emissions is rising and they are increasingly required.

Once the boundaries are selected, the work of actually measuring and reporting the emissions begins. Many organizations provide guidance on how to do this, and a wide array of consultancies are available to accelerate the learning and execution processes. And new approaches and technologies — such as those developed at CIBO for agriculture — are being developed to independently quantify and validate ag-related emissions and simplify the process of assessing Scope 3 emissions.

Greenhouse Gas Reduction Projects

Corporate and product inventories are designed to assess the total emissions associated with their subjects. An emission reduction project is intended to measure how much emissions are reduced when specific actions are taken. This is an important difference: projects are designed to connect a cause (e.g., reduced fertilizer use in agriculture) with its effect (reducing NO2 emissions).

As used in the emissions reductions world, a project is something that can be funded in order to reduce emissions. They are used extensively in carbon credit systems that tie the cost of changes (such as reducing fertilizer for growing corn, including any impacts on crop yield) to the value of resulting carbon credits (the effect). Whenever cost is less than the resulting value, there is potential for carbon credit buyers to fund these projects to reduce emissions.

Any credits that emerge from a project are real assets. Real money is spent to buy them. Buyers and auditors must be assured that the credits are worth what they are paying for, namely an assurance that the project lowered net emissions. To provide this assurance, most carbon programs delivering credits require that each project satisfy several criteria before getting started:

Well-known Project Standards and Protocols

• Greenhouse Gas Protocol for Project Accounting
• ISO 14064-2: Specification with guidance at the project level for quantification, monitoring and reporting of greenhouse gas emission reductions or removal enhancements
• Verra: VCS Program Guide, VCS Standard, and related documents
• The Gold Standard: Principles and Requirements, and related documents
• Climate Action Reserve: Reserve Offset Program Manual, and related documents
• American Carbon Registry: American Carbon Registry Standard, and related documents

Inventories vs. Projects: Reductions are Reductions. Right?

Let’s say Acme, Inc. needs to reduce its net emissions. After reporting its own greenhouse gas inventory it has a deep understanding of its own emissions and where they originate. Think about the short- and long-term differences between these two scenarios:

1. Acme has identified projects within its own value chain that can reduce 40% of its emissions at a cost of $30 per tonne-year for the first three years. Once implemented these changes will also reduce all its future emissions by the same 40% at a cost of only $10 per tonne-year saved. It has intimate knowledge of how these reductions will be implemented and how emissions will be reduced.
2. Acme can purchase carbon credits from participants in a well-known registry for $30 per tonne. These credits were generated by project proponents who worked hard to create valuable credits by working with emitters, regulators, and the registry over several years. The credits will offset Acme’s emissions for this year but they won’t do anything for future emissions.

Note option 1 corresponds to “insetting” and option 2 would be “offsetting”. One benefit of the insetting approach is that it avoids the extensive bureaucracy required by carbon credit programs to ensure the authenticity of the credits. And it is not subject to policy-related concerns like additionality.

What should Acme do? In reality, there will be many more facets to the decision, but recent developments in climate science tell us it is increasingly important to ensure all organizations adopt long-term zero-emission targets. This suggests it is important for Acme to embark on reducing its own emissions, and for finding ways to fund emission-reduction measures in businesses that otherwise would not be able to make those changes.

Final Thoughts

Hopefully this primer into greenhouse programs has been helpful in understanding some of the history and the relationships between different organizations and processes when taking action on climate change. Many specific organizations have been referenced here, mostly as helpful examples and to make connections to names you are likely to have heard already. We do not specifically endorse those organizations and encourage readers to learn about alternatives before engaging with any of them.

Further Topics & Reading

• Greenhouse Gas Protocol documents. These are well-written and, as standards documents go, are easily readable. Many include helpful sections of guidance in addition to the standards that they were written to define.
• The ISO 14xxx standards focus on environmental management systems. For standards covered by both ISO and the Greenhouse Gas Protocol (e.g., on greenhouse gas inventories and project accounting), it probably isn’t necessary to read both. The Greenhouse Gas Protocol documents are free and, in this author’s opinion, more readable. Some ISO standards such as those that govern the processes of validating and verifying environmental claims do not have Greenhouse Gas Protocol equivalents.
• Science-Based Targets initiative criteria
• Marginal Abatement Cost Curves can be a useful way to look at the cost vs. benefit analysis of different emission reduction projects a company might pursue. Think of it as a visual description of all possible emission reduction approaches:
• On the left are the least expensive approaches. Often there are projects that would reduce the company’s costs and reduce emissions. Win-win!
• On the right are projects that would cost a lot of money compared to the impact on emissions, often because they take a long time and/or require significant process change. These are the projects that require the most planning, development of new technologies, or negative emissions (carbon capture and storage/sequestration) elsewhere to compensate for unavoidable emissions.