The Both/And Era

It has been an eventful summer in the world of corporate net zero standards. Recent developments show a clear shift toward a “both/and” approach, echoing calls from The Nature Conservancy and others for a clearer complementary role for carbon credits and direct reductions. While direct reductions rightly remain the centerpiece, systemic barriers to direct decarbonization at the speed and scale needed have prompted a shift in guidance toward “best efforts,” making this approach key to maintaining climate ambition.

Each of these updates is deeply substantive and multi-faceted. And while no single blog post could capture the range of updates and their implications, here we focus on what they mean for carbon markets and the significant alignment emerging around the role of carbon credits in net zero.

Why This Matters to Us

For The Nature Conservancy, two factors make these developments particularly important, reflecting our focus on both our commitment to advancing credible climate action and delivering meaningful outcomes for nature and people.

First, climate is a central part of our mission, and carbon markets are a central part of climate action. To align with global climate goals, governments and companies must rapidly decarbonize vast and complex economies and value chains. This is both necessary and extremely difficult. Wise use of high-quality carbon credits as a flexible and cost-effective complement to decarbonization efforts can provide an “on-ramp” to actors just starting on their climate journey, can act as a net to catch countries or governments struggling to meet an interim climate target and can provide climate leaders with a credible way to show ambition and achieve increased climate impact. We believe carbon markets are critical to keeping the global project of net zero on track, particularly in the face of headwinds.

Second, nature is key for climate mitigation—we will not reach our global climate goals without it. Yet nature-based solutions are historically underfunded. Carbon markets are a crucial tool to finance nature: carbon markets are too small today but are projected to reach $5-20B annually by 2030 and $60-$270B per year by 2050, which would make them among the largest conservation funding sources ever. Carbon markets are currently the only tool we have to finance directly and at scale many of the projects and communities that need support most, including those in the Global South and those owned and managed by Indigenous Peoples and local communities.

A Turning Point for Net Zero

In our complex world, standards play an important role in telling companies and governments what “good” climate action looks like. Until now, Net Zero standards generally held that investments in reducing emissions outside companies’ own value chains played only a minimal role, especially in the near term.

Under SBTi’s first Corporate Net Zero Standard, any investment in so-called “Beyond Value Chain Mitigation” was optional and only allowed for the small sliver of companies already on track to meet targets. Removals credits could neutralize any leftover “residual” emissions but were only required upon reaching the target date (typically 2050). Reporting of companies’ GHG inventories formed the basis for target progress, but these inventories had no specified place to report mitigation achieved (including through carbon credits), either within or outside companies’ value chains.

The result was a system focused almost entirely on companies reducing their own emissions—a laudable goal, but one that has shown to be infeasible at the level needed to bend the emissions curve as quickly and dramatically as necessary due to systemic gaps, available technologies, challenges addressing value chain emissions and cost.

In recent years we have seen an astounding growth in companies setting net zero targets. Unfortunately, most companies are not reducing emissions fast enough to meet their goals—some research shows as few as 18% of companies are on track. Meanwhile, research also shows that companies investing in carbon markets are also decarbonizing faster, reporting more transparently and generally performing better on climate than their peers.

Clarity and Convergence on the Role of Carbon Credits

Recent changes in both target setting and GHG reporting show a shift toward near-term action. While direct reductions appropriately remain the centerpiece, guidance from both SBTi and ISO emphasizes “best efforts,” making a both/and approach to investing in carbon credits key for maintaining climate ambition.

Recent updates include a clear role for carbon markets and nature, with growing convergence between SBTi and ISO on how credits and other contributions to mitigation outside value chains should be used in the transition to net zero.

There are differences too. For example, in SBTi’s standard, addressing ongoing emissions is optional, though highly encouraged, whereas in ISO, it is required. To use credits to address a target shortfall, each standard has its own set of guardrails (e.g., on the amount of shortfall allowed, claims guidance, etc.), and whereas ISO requires it, SBTi only recommends. ISO also includes an additional use case for credits: for ambitious companies, to address historical emissions.

Creating Credible Systems

In order for carbon credits to play these roles well, we also need transparent reporting frameworks to differentiate between value chain mitigation and carbon credits, as well as strong guardrails for credit quality. Here, too, standards are converging to create a robust and credible system.

The multi-statement GHG reporting frameworks coming from the Task Force for Corporate Action Transparency (TCAT) and GHGP’s developing Actions and Market Instruments Standard underpin this: creating a standardized way for companies to clearly and transparently report on their use of credits and other market instruments in separate and distinct categories, so that anyone reading a company’s GHG reporting can tell what mitigation was achieved through value chain reductions and what was achieved via market tools, including carbon credits.

There is also increasing alignment around credit quality, especially around the IC-VCM’s Core Carbon Principles, CORSIA and Article 6’s Paris Agreement Crediting Mechanism (PACM). SBTi’s credit quality criteria are well aligned with IC-VCM’s, and SBTi intends to formalize its alignment with other standards in the coming months—watch for a chance to weigh in in the coming months.

Time to Move Toward Implementation and Scale

In the meantime, the direction of travel is clear: we are heading toward a net zero system where all types of climate action play a critical and complementary role, with smart guardrails to ensure credibility in the use, quality and reporting on carbon credits.

Ultimately, we hope this means more investment in nature, making faster climate progress and using all the tools in our toolbox for a smarter approach to net zero.