Carbon credits can be an efficient mechanism to fund least-cost carbon abatement projects, and in the best cases, this is what they deliver. However, there are three main drawbacks to overreliance on carbon credits:
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(1) Carbon credit purchases do not reduce a company’s own emissions, but rather address emissions elsewhere. For this reason, they are an expense that does not generate cost savings or other business value, and function like a financial penalty. Without also making investments in reductions, companies should expect their carbon credit investment to increase each year, without a traditional economic return to the business. Many companies want to invest in projects that decrease their emissions, which in turn decreases the costs of their climate programs over time and generates other tangible business value. This is where VCA is preferable.
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(2) Carbon credits have risks. At best, carbon credits are an efficient vehicle to direct funding into effective climate projects. Yet the voluntary carbon market is still evolving and limited project experience increases the potential that stated emissions reductions do not materialize. The eligibility requirements for carbon credits put forth in the Certification Standard help safeguard against this worst case scenario. But carbon credit purchases, like all investments, do have risks, and companies should consider those risks when choosing between VCA and BVC projects.
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(3) Carbon credits aren’t always the cheapest option. The most permanent or “durable” carbon credits are often more expensive than typical value chain abatement costs. In other words, it may be cheaper to look inside the value chain for the best opportunities to cut emissions.