For Corporate Decision Makers, Achieving Net Zero Demands Flexibility: The VCM Can Help.

Part I: The SBTi Controversy and Voluntary Action

If you’ve followed corporate sustainability or the carbon market for any length of time you’ve undoubtedly heard a lot about the ongoing controversy over at SBTi(1). In October 2021, SBTi released the first version of its Corporate Net Zero Standard, and at the same time, SBTi rendered carbon credits off-limits as a tool for helping companies meet their targets. That guidance on credits stood for over two years, though it was controversial and had the adverse effect of limiting corporate investment in climate action through the voluntary carbon market (VCM).

Then, in April 2024, the SBTi Board of Trustees released a statement encouraging the limited use of carbon credits to help meet Scope 3 emissions targets(2) — this was essentially a reversal of SBTi’s earlier anti-offset position.

According to reports that followed the announcement, the SBTi technical staff disagreed with the Board, and there has been much debate and discussion inside and outside the organization about how to proceed. Amid this controversy, SBTi’s CEO resigned.

In July 2024, SBTi delivered more discouraging news about the evolution of its view on incorporating the carbon market into the corporate net zero journey. While still calling for a review of its Corporate Net Zero Standard, SBTi continues to discredit carbon credits as a tool for companies to help reach their Scope 3 emissions targets.

SBTi has promised more guidance in 2025, thereby leaving corporations with a lack of clarity at a critical juncture. Many net zero-committed companies, including Amazon and, most recently, Air New Zealand, have abandoned or been kicked out of SBTi. According to Accenture, only 18% of global companies are cutting emissions fast enough to meet net zero goals, which begs the question: what good is SBTi’s guidance if companies can’t follow it?

Here’s the thing: we are relying on the corporate sector to provide the vast majority of the $130 trillion required for the energy transition by 2050. If we expect companies to help fund the solution, we need to create incentives that get them interested, not barriers to action that limit their options.

And if there is no support for even limited use of the voluntary carbon market to help meet emissions targets, many corporate actors will simply abandon their voluntary net zero plans because the acceptable path to meeting their targets is too stringent and inflexible.

SBTi is at a crossroads: it can either reconsider its Corporate Net Zero Standard to build a more resilient roadmap to net zero or pursue its current course while losing relevance, time, and influence. SBTi may earn applause from some for maintaining rigid and impractical net zero guidance, but it will miss the opportunity to lead the world through its most difficult challenge to date.

(1) The Science-based Targets Initiative (SBTi) is a UN-sponsored organization that helps companies set and validate ambitious climate goals based on the latest climate science to reduce greenhouse gas emissions and mitigate global warming.

(2)Scope 1 emissions are direct greenhouse gas emissions from company-owned or controlled sources, Scope 2 emissions are indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the company, and Scope 3 emissions encompass all other indirect emissions that occur in the company’s value chain.

Part II: Why Companies Need Options

By Dr Jennifer Jenkins, Chief Science Officer, Rubicon Carbon

Society must reach global net zero by 2050; the IPCC's 2018 report on the 1.5 ℃ pathway conveyed this message loud and clear.

SBTi’s Corporate Net Zero Standard translates the IPCC’s global goal into bite-size chunks, guiding firms in setting their targets over time as they make voluntary emissions reductions in line with global net zero.

There’s no magic in that really – a “science-based target” is simply a way to describe an emissions reduction trajectory for an individual firm that gradually reduces that firm’s emissions to a point where its remaining “residual” emissions can be counterbalanced in practice by permanent carbon removal activities(1).

At that point, presumably close to 2050, the firm is releasing no new net emissions to the atmosphere, and voila! It has reached net zero. Do the same thing for as many companies as you can (especially the largest and highest-emitting ones), get them all signed up to meet their voluntary targets in Scopes 1, 2, and 3, and you’ve got yourself a plan for reaching global net zero.

Easy, right?

Wrong.

It’s just not that simple. The first thing to remember is that the decision to create and meet a target itself is voluntary.

In a world without a global enforceable price on carbon, any company that signs up for this process is voluntarily doing so at its own expense. Those expenses are real, and there must be a benefit to the firm for incurring them. Right now, unless a company has an executive leader who believes strongly in corporate climate action, that benefit is typically limited to marketing and public perception: companies seek to mitigate their emissions and to make public claims about these reductions because they have stakeholders – such as investors, consumers, and internal associates – who care about the impact of the firm on the environment. All fine, but the recent anti-ESG backlash shows how ephemeral and fleeting these voluntary commitments can be. There’s nothing to stop a firm with a voluntary commitment from walking that commitment back when finances get tough or when public perception shifts.

Second, we need to remember that Scope 3 emissions – by definition – are emissions over which the firm has very little control. Sure, some firms – that have done the work to create a Scope 3 inventory(2) – can try to impose constraints on their suppliers to mitigate their emissions. Still, this process is complicated, labor-intensive, slow to implement, and difficult to enforce, especially given the long tail of suppliers whose behavior a company can’t directly control. Again, the truth is that we need to balance the requirement to mitigate emissions with the fact that all of this action is itself voluntary. If we make meeting these commitments too burdensome or expensive for companies, they will simply decide it’s too hard and abandon ship.

Finally, we need to remember that internal decarbonization is labor-intensive, and it’s expensive, and it’s nowhere near as easy as it looks, especially for companies in the Global South where government incentives for decarbonization are particularly hard to find.

As just one example, the aviation sector today makes up 2.5% of global emissions but has no viable alternative to low-cost jet fuels, and Sustainable Aviation Fuel (SAF) is not yet available in quantities that would encourage meaningful decarbonization. Even in 2050, SAF will enable only 65% of the emissions reductions required. Air New Zealand, for example, abandoned its SBTi target last month as a result of decarbonization solutions being too costly and scarce. To meet its aggressive decarbonization goals, the airline sector will need the flexibility the VCM offers.

We must also remember that companies operate in an environment of uncertainty. Unexpected events (like COVID-19) might lead to delays in planned mitigation projects or supply chain disruptions. Other factors – such as a corporate merger or a new technology like AI – might even increase emissions. Corporate leaders don’t want to miss their targets, but they also know that things can go wrong, so having optionality to meet their targets is critical.

Addressing emissions embedded in the value chain is especially hard for manufacturing firms, many of which operate on thin profit margins in globally competitive industries. Let’s not forget that our entire economy is built on fossil fuels, and many of our manufacturing processes rely on fossil energy and petroleum-based feedstocks to function as usual. Innovative work is underway in many quarters to replace these fuels and feedstocks with non-fossil materials and processes that are fit to purpose, but those innovations are not always available.

Where they do exist, many of the internal decarbonization options available today are simply value-destroying for companies because they are not accessible: they are not yet deployable at a scale that makes sense for companies whose climate action remains voluntary. This argument about the availability of decarbonization technologies for the manufacturing sector actually takes the need for flexibility one step further. To be comfortable with setting ambitious targets, the hardest-to-abate industries need to know they have options for meeting those targets in Scopes 1 and 2 as well, not just Scope 3.

So, as you think about how companies might deploy the VCM as they work to move society toward net zero, I implore you to put yourself in the shoes of the CEO. Many companies originally signed up for net zero targets because they felt pressure from external stakeholders to make a long-term emissions reduction commitment. The question they face now is:  How will they actually meet that commitment? Without the flexibility to tap the carbon market in case of unexpected events, to address Scope 3 emissions, or in the event internal decarbonization options fail to appear in a timely manner, we’ll likely see more and more firms drop their net zero commitments.

And this makes sense from a practical perspective: it’s easy to understand why a Board of Directors might reconsider its investment in an emissions reduction commitment when that commitment is voluntary, very likely will involve the adoption of technologies that are expensive and unproven, is unpopular politically, may make them less competitive with peers not undertaking similar commitments, and may even depend on actions by entities over which the Board has very little direct control.

Some dedicated firms may be willing to stay true to such a commitment if they have the flexibility to meet their targets using mitigation outside their value chain, such as by using carbon credits. But without that optionality, we’ll continue to see firms choosing not to set or stick to net zero commitments because they simply can’t meet those emissions reductions commitments within their value chains while also fulfilling their fiduciary responsibility to owners and shareholders.

No one is served if a few firms hit net zero emissions while the planet burns past the overall net zero target. In such a scenario, hitting net zero will be a virtue-signaling exercise for the few rather than an achievable goal for the many.

(1)  You don’t actually need SBTi to create your own science-based target, though SBTi is currently the best-known entity that creates and validates these targets for firms.

(2)  Though Scope 3 inventories themselves are difficult and uncertain (Ballentine, R. 2023. The unusual suspects: are well-meaning environmental stakeholders and institutions undercutting the contributions that companies can make to fighting climate change? Oxford Open Climate Change 3(1): kgad009. (https://doi.org/10.1093/oxfclm/kgad009)).

Part III: Then why do we still hear objections to the VCM?

By Dr Jennifer Jenkins, Chief Science Officer, Rubicon Carbon

“No!” Some will say. “I’ve been hearing all about how ‘worthless’ some of these credits are in the VCM. If we allow companies the flexibility they’re after, enabling them to use credits to help meet their targets, won’t we be making the emissions problems worse?”

This is an important point, and I’ll address it in two ways.

First, we need to recognize—as an industry—that some of the earliest methodologies adopted and used in the first round of the VCM had loopholes, and some developers in VCM 1.0 exploited those loopholes. For example, many of the largest and earliest REDD+ projects have not held up to scrutiny when their impact has been assessed in recent years using improved satellite monitoring techniques. But it’s equally important to recognize that those projects are not emblematic of the entire VCM.

The industry is moving actively toward VCM 2.0, in which new methodologies, stricter standards, and better-informed market participants are moving the market to a place where a credit represents a true tonne of CO2e and the impact of projects is transparent, measurable, and verifiable. At the same time, companies like Rubicon Carbon are creating techniques to assess and adjust for risk, using the tools of finance to de-risk investments in climate action, thus enabling greater scale and increased confidence. VCM 2.0 is designed to learn from and prevent the mistakes of VCM 1.0 while reducing the risks for buyers, sellers, and investors in carbon projects.

The second reason carbon credits don’t actually make emissions worse comes from empirical evidence about corporate behavior. Time after time, research on this topic has shown that companies that use carbon credits as part of their net zero journey actually do more, not less, internal decarbonization. Many companies do want to make progress! They are interested in climate action and have taken important steps to set voluntary targets. But today, there are simply not enough options available for them to take meaningful action at scale.

The next objection to carbon credits might be that we’re not “holding companies accountable” if they are “allowed” to mitigate using reductions in emissions outside their inventories and value chains.

Certainly, any firm would prefer to mitigate emissions inside its value chain rather than outside. But in many cases, taking such action simply isn’t practical for a company, given the scant availability of accessible decarbonization technologies today. Instead, we need to get rational here: let’s use economic theory to look at what is best for society. The climate doesn’t care where a tonne of mitigation occurs – the impact on the atmosphere is the same whether that reliable emissions reduction occurs inside or outside a corporate value chain. So it makes sense to use our limited mitigation dollars to achieve the most climate impact possible. As Roger Ballentine says:

“If companies are directly incented and rewarded for achieving more measured emissions impact, they will then try to get the most impact per dollar of climate spend. And if the next marginal dollar of corporate climate spend yields more impact outside of an inventory than inside, that is where the climate wants that dollar to go.”(1)

Many projects in the VCM today are creating climate impact that is less expensive (on a $ per tCO2e basis) than deploying internal decarbonization. Why not incentivize companies to fund that climate impact NOW rather than wait for all of the new decarbonization technology to mature? There are some low-hanging fruit opportunities for mitigation, and it makes sense to invest in and scale those today while we also work to build the decarbonization technologies that will be instrumental in our post-2050 net-zero economy.

By giving firms the flexibility to use credits to meet their targets, we’re not letting those companies off the hook forever; we’re simply giving them a way to participate today in an accessible and cost-effective manner. This flexibility makes economic and climate sense because corporate climate action is voluntary – and the unfortunate alternative, my friends, is for companies to do nothing.

(1) Ballentine, R. 2023. The unusual suspects: are well-meaning environmental stakeholders and institutions undercutting the contributions that companies can make to fighting climate change? Oxford Open Climate Change 3(1): kgad009. (https://doi.org/10.1093/oxfclm/kgad009)

Part IV: Conclusion

By Dr Jennifer Jenkins, Chief Science Officer, Rubicon Carbon

Back to basics: the key word here is voluntary. Because there is no enforcement mechanism to ensure every global firm decarbonizes at the same pace, unnecessarily restricting the use of carbon credits does not increase corporate ambition. Rather, it decreases climate action because the lack of flexibility encourages companies to abandon goals they simply cannot hit. Meanwhile, a lot of good climate action goes unfunded.

The world faces an unprecedented challenge: how do we swap out the fossil-fueled engine of the global economy in midflight? How can we achieve net zero through entirely voluntary commitments? Al Gore has referred to this challenge as a global sustainability revolution, a sea change in our society that requires “the scale and impact of the industrial revolution, coupled with the speed of the digital revolution.” The answer must not be to ban carbon credits but rather to insist on their high-integrity use as complementary tools alongside decarbonization activities.

We no longer have the luxury of operating with an “either-or” approach to climate mitigation: we must adopt a “yes and” mindset. Given the precarious state of our efforts to fight climate change, we need, to quote UN Secretary António Guterres, to do “everything, everywhere, all at once.”

Our roadmap to net zero must be based on realistic scenarios and pragmatic solutions rather than theoretical and ideological frameworks divorced from the practical concerns of finance and economics. Our net zero pathways must be flexible enough to accommodate unforeseen events and market changes.

We all share the same goal: let’s get practical about reaching it, rather than creating unnecessary barriers that stall climate action and limit access to the climate finance we know we need.