Carbon credits, including the types that have drawn flak recently, will continue to play an important role for corporates to meet their net zero targets in the long term, Ivan Li, Director of Sustainability Solutions at advisory firm Engie Impact, told S&P Global Commodity Insights in a recent interview.
Li’s comments come at a difficult time for the industry as companies wary of reputational risks are pulling back on investments in carbon projects and questioning whether carbon credits in circulation represent genuine emission reduction.
Carbon credits, including the types that have drawn flak recently, will continue to play an important role for corporates to meet their net zero targets in the long term, Ivan Li, Director of Sustainability Solutions at advisory firm Engie Impact, told S&P Global Commodity Insights in a recent interview.Decarbonization incentivesManaging uncertainty
“Are the emissions reductions real? I’ll say it’s never a simple question to answer. If we think outside of credits and talk about anything in terms of measurements, your methodologies get refined and improved over time as well,” Li said.
“I do have a firm belief that, at least within a portfolio basis, a lot of the existing project types, even [those] to do with conservation that have come under a lot of flak, do have a role to play,” Li said when asked about the role of offsets in clients’ decarbonization strategies.
To contextualize that, carbon credits issued from projects that conserve the natural ecosystem, such as avoiding deforestation, have been most heavily criticized in recent months, resulting in a significant drop in demand and prices.
Platts assessed prices of nature-based avoidance credits down 48% from January at $6.15/mtCO2e as of July 28, showed S&P Global data.
Li explained that Engie Impact, the advisory arm of French energy company Engie, always emphasizes that clients first work on reducing emissions and that carbon credits should only be deployed to offset the residual emissions that cannot be abated.
Decarbonization incentives
Li said Asia-Pacific subsidiaries of multinational corporations were starting to show a sense of urgency to decarbonize as their voluntary deadlines for meeting near-term targets of 2025 or 2030 were approaching, while local companies were also starting to ask hard questions on decarbonization.
“APAC does have a lot of influence or at least importance in the global scale, because MNCs operate quite significantly in this area,” Li said.
“Even local companies within the region, conglomerates very focused in an area without international exposure, are also asking themselves these hard questions of where they really want to be on that [decarbonization] scale, because they have a large enough presence internally within the countries they operate,” Li added.
He said there was increasing interest in transforming the power generation mix and decarbonizing the mobility sector, which mainly points to the electrification of transportation.
“The problem that this region is dealing more with is how to make two wheeler EVs [electric vehicles] work as opposed to four wheelers,” Li said, referring to Southeast Asian countries like Indonesia and South Asia where two wheelers are dominant.
Other Asian companies were navigating decarbonization strategies to stay competitive amid external pressures, like the carbon border adjustment mechanism, or CBAM, introduced by the EU that imposes a carbon tariff on emission-intensive imports, he said.
“CBAM kind of imposes an onus on certain countries that may not be in the same position economically as others to fulfill the [decarbonization] needs,” Li said.
“Conversations are being had of how this [CBAM] will impact me? How will it impact my competitiveness? What do I actually need to know? What do I need to get up to speed in order to deal with it?” he said.
Managing uncertainty
Besides existing types of projects or methodologies, Li said customers also expressed interest in new sources of carbon credit supplies.
He noted increasing interest in technology-based solutions like direct air capture, as well as new nature-based solutions like blue carbon projects, which leverage the ocean and coastal ecosystem to capture emissions.
The new methodologies to issue these new types of credits will take time to develop and prove at scale, he said.
“There is going to be maybe a shift slightly in terms of [carbon investment] portfolio to bring in the new solutions. But don’t discount that the existing methodologies are going to be important as well,” he added.
“I don’t think the public and private sectors are separate,” Li said when asked about whether Article 6 should only be considered for inter-governmental trading of emission mitigation outcomes.
He said more sophisticated clients had started navigating compliance with Article 6 requirements, so as to understand and prepare for “corresponding adjustments” which allows a host government of a carbon project to decide whether the carbon credits will count towards its national emissions reductions.
Moves by countries to stall the issuance of new carbon credits until these adjustments have been decided had triggered market uncertainty in the past.
Li said the nationalization of carbon credits had negatively impacted some people’s perception but it is a risk that can be mitigated by proper planning. “It is something to be wary of, how certain things can change all of a sudden,” he said.