One for the natural climate solutions policy wonks
Policy considerations to expand US private sector investment into natural climate solutions (NCS)
A couple of months ago I put together a brief for a client outlining key voluntary and compliance policy barriers and opportunities to increase private sector engagement in NCS in the United States. Fortunately, they were happy to have me share it publicly as a potential source of ideas/information for others who are working in this space. Hope you find some value in it!
Private sector investment and engagement into Natural Climate Solutions (NCS) in the US primarily occurs through two mechanisms:
Within value chain mitigation (insetting) by corporates to reduce their negative impact or have positive impact.
Beyond value chain mitigation (offsetting/compensation or contributions) by corporates to have a positive impact outside of their value chain.
Affecting both within and beyond value chain mitigation action, both voluntary and regulatory mechanisms are driving U.S. private sector engagement with NCS. Note that NCS investments by American corporates is both domestic and abroad depending on the mechanism driving action.
Voluntary Policy Mechanisms
The Science-based Targets Initiative (SBTi) is the main driver of corporate voluntary action and private sector finance of NCS within the United States.
Problem #1: SBTi has largely focused on driving emission reductions within corporate value chains rather than allowing for beyond value chain mitigation to play a role in corporate climate commitments. From an NCS perspective, this has led to corporates, such as the agricultural sector, to increase their investment into NCS within their value chains to reduce their emissions. But, especially for hard-to-abate sectors where the cost of reducing emissions is prohibitively high, it doesn’t allow/incentivize corporates to source lower cost credits outside of their value chain (many of which are nature-based) to meet their climate commitments.
Policy Recommendation #1: Lobby SBTi to allow for beyond value chain mitigation within their main corporate net-zero certification framework. This is the recommendation in corporate guidance released last year by the Voluntary Carbon Markets Integrity Initiative (VCMI).
Problem #2: Multiple corporates have also highlighted the issue that SBTi’s definition of value chain and how the value chain boundaries are defined is too constrictive. For example, if Starbucks is sourcing specialty coffee from a small farm in Ethiopia, it can only count its reduction in emissions from the exact plots where coffee is produced, it cannot count reforestation efforts in the fields directly adjacent to the coffee farm.
Policy Recommendation #2: Lobby SBTi (and other compliance mechanisms) to expand their definition of the value chain to include all areas adjacent to the plot that impact the productivity of that plot. This is particularly important as the focus expands beyond natural climate solutions to nature-based solutions looking at forests contribution not only to climate mitigation, but other ecosystem provisioning services and biodiversity (see Key Policy Recommendation #5 below).
Bonus: The US Dept of Energy is launching a Carbon Removal Purchasing Challenge, likely at the end of the summer according to my sources. As far as I’ve seen, they want to encourage carbon removal across the engineered to nature-based spectrum and I’m hoping they use a bit of their weight to endorse specific standards and pathways (and potentially even claims structures with those credits) that provide more air cover and confidence for corporates to take action and ramp up their purchasing.
Compliance Policy Mechanisms
Reporting and disclosure: The new US climate risk reporting directive (similar but not as robust as the EU CSDR) requires disclosure of climate related risks for corporates. This requires disclosure of corporate emissions (insetting) but does not appear to require reporting of carbon credit purchases. Note that California did pass a law last legislative session (AB 1305) that requires corporates to report on their carbon credit purchases and disclose information on the quality of the credits purchased.
Mechanisms to drive investment into NCS: Existing Cap and Trade programs in states of California, Washington and the RGGI in Northeast US states. These structures primarily incentivize insetting activities but do allow for a small percentage of offsets to be used to meet requirements within the jurisdiction of operation of the legislation.
Problem #3: In certain compliance mechanisms, natural climate solutions are expressly included in the legislation/directive but in others it is more opaque as to whether NCS will be permitted.
Key Policy Recommendation #3: Engage with state and federal agencies and legislators to ensure that any existing and future climate policy clearly allows and incentivizes the use of Natural Climate Solutions to achieve near-term climate mitigation.
The Durability Challenge
Across both voluntary and compliance mechanisms, there is one major critique of natural climate solutions that has limited the growth of investment into and application of these solutions in the context of offsetting.
Problem #4: The critique is that natural climate solutions do not have sufficient durability to be used as an offset for emissions or compensation for residual emissions.
For a carbon credit to be able to offset a historical emission, from a climate accounting perspective, the carbon credit (avoided emission or removal) must last as long as the atmospheric lifetime of carbon dioxide. Nature-based credits often cannot guarantee that level of permanence/durability due to the natural carbon cycles and risks to those cycles. Therefore, critiques claim that nature-based credits should not be allowed to be used for any offsetting or compensation purposes by corporates. California bill AB 1305 is an example of this critique. The bill outlaws the use of carbon credits for offsetting or compensation that don’t have the durability of the lifetime of atmospheric carbon dioxide. Which could result in corporates ceasing their use of natural climate solutions as a source of offsets/compensation credits because of a fear of litigation.
Given the critical role of nature in near-term climate mitigation, policymakers, both voluntary and regulatory must recognize and allow for the use of nature-based carbon credits, even if they don’t have the same durability as engineered carbon removal. Buffer pools currently address the issue of providing insurance for reversal events, insurance on carbon credits can also play a role and the ultimate fix is transforming carbon accounting from a static to a dynamic accounting system. In a dynamic system, if a credit experiences a reversal, then corporates would need to replace that credit with another credit on their books, either from a buffer pool, an insurance mechanism, or an additional purchase. Given existing digital monitoring, reporting and verification (dMRV) tools, it is feasible today to monitor carbon credit reversals in most contexts. Shifting from a static to a dynamic accounting system on the corporate emissions ledger would allow for credits that are perceived to be temporary or may experience a reversal to still play a critical near-term role in climate mitigation.
Key Policy Recommendation #4: Lobby SBTi and regulatory disclosure reporting mechanisms to transition from a static to a dynamic accounting system tracking all historical emissions and credits purchased to offset/compensate for historical emissions.
Nature beyond climate (from NCS to NBS)
It is also important to note that nature has significant value beyond climate mitigation, more broadly known as Nature-based Solutions (NBS), which also incorporates the value of other key ecosystem service provisioning (freshwater, nutrient cycle, air quality, rainfall, etc) and biodiversity.
Problem #5: In the US, there is not currently any regulation requiring corporates to engage in reducing their impact on nature or take positive action. But progress is being made - both the Taskforce for Nature-related Financial Disclosure (TNFD) and Science-based Targets for Nature (SBTN) are beginning to drive voluntary corporate activity to reduce nature-related risks and negative impacts.
Key Policy Recommendation #5: Creating both voluntary, and ideally regulatory policy, that requires corporates to have net positive impact on nature, such as the Net-positive Biodiversity Gain law recently passed in the UK, would result in new revenue streams for nature-based carbon projects and increase the financial viability of ecosystem conservation and restoration projects write large. This likely starts with supporting the implementation and update of TNFD and SBTN and should expand overtime to push the passing of legislation that incorporates those directives into law.
We’ve just covered the ~10,000 foot view of the policy landscape for supporting NBS and NCS in the US, largely focused on the private sector and market-based mechanisms. Important to note that there are a plethora of other initiatives that are more regulatory in nature that are evolving quickly, especially outside of the US (such as the EU’s Nature Restoration Law, which is now facing opposition so please support if you are in Europe!). My humble opinion is that in the near-term we need both market-based mechanisms and regulatory to make progress in today’s political climate and economic structures.
Longer-term, well that’s a longer conversation 🙂.
Thanks for reading and as always, feedback and insights most welcome! Eric
A good list of recommendations. I agree that SBTi is unnecessarily restrictive in its approach. Hopefully things will begin to move on that now the CEO and board have signalled their desire to include carbon credits.