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August 2022 – Taking climate action has never been more urgent. A major contributor to climate-changing greenhouse gas emissions, companies now have the opportunity to accelerate their reduction through supply chain reduction measures such as energy efficiency, switching to renewable energy and adopting sustainable sourcing and production practices. Climate action, however, can – and must – also extend beyond the supply chain, to compensate for corporate emissions that are today unavoidable due to technological limitations or excessive costs.

A key way to achieve the balancing of unavoidable emissions, complementing reduction plans, is the climate finance of carbon credits generated by certified mitigation projects. The opportunity for climate action today is within reach for companies that want to be part of a low-emission future.

But what are mitigation projects?

Mitigation projects are activities that reduce or remove greenhouse gas emissions in a given location, helping to mitigate the effects of climate change on the environment and communities. They are mainly divided into two categories, according to the way in which they address emissions: avoidance and removals. Avoidance projects, which include energy efficiency, renewable energy and deforestation protection activities, avoid GHG emissions compared to a baseline scenario, while removals projects remove GHG emissions through activities that absorb or capture CO2 directly from the atmosphere. Regenerative agricultural practices and sustainable forest management belong to the latter category, capturing and storing CO2 in plant biomass and/or soil in the form of organic matter. While mitigation projects bring clear benefits to the environment in which they are implemented, the protection and sustainable management of natural resources also have an important social impact on local communities, stimulating virtuous practices that improve people’s health and well-being, in harmony with nature.

“Investing in certified mitigation projects within a climate strategy allows companies to mitigate unavoidable environmental impacts in line with the Sustainable Development Goals, acting for climate and communities”- Gianluca Persia, Climate Project Expert, Carbonsink

Often implemented in developing countries, mitigation projects are much closer to us than it seems, playing a key role in the decarbonisation process of companies on our territory. Indeed, to reduce their residual emissions, companies can invest in mitigation projects through climate finance – buying carbon credits generated by the projects themselves.

Carbon credits: acting today towards tomorrow’s net-zero

A carbon credit is a financial instrument representing one tonne of CO2 equivalent avoided, removed or absorbed from the atmosphere thanks to activities implemented in mitigation projects that follow precise methodologies and international standards. Born out of the flexible mechanisms established by the Kyoto Protocol in 1997, the carbon credit market has gradually structured itself to support the climate commitments of the Paris Agreement, promoting climate finance to empower the most industrialised and large emitting countries.

The regulated carbon market is flanked by the voluntary carbon market, which tends to be more fluid and less regulated (over the counter), and which companies engaged in decarbonisation paths can access by buying an amount of credits corresponding to their residual emissions, balancing them within net-zero climate strategies.

“By purchasing high-quality carbon credits, companies have the opportunity to take climate action today, as part of a long-term net-zero strategy – action that is both immediate and forward-looking”- Matteo Esposito, Portfolio Assistant, Carbonsink

As on any other voluntary free trade market, the quality of credits varies according to the process through which they are created. To ensure the high quality of credits, corresponding to a verified environmental, economic and social impact, mitigation projects must follow good practices and methodologies defined by accredited international bodies such as Verified Carbon Standard (VERRA), Gold Standard and Plan Vivo, which independently verify and certify the robustness of projects and the reliability of credit-generating mitigation. Some key criteria that projects must meet to generate certified credits are:

  1. Additionality: ensures that mitigation activities can only be certified if implemented through climate finance incentives i.e. investment in carbon credits.
  2. Permanence: where carbon removals from the atmosphere are concerned, it is necessary to ensure the non-reversibility of storage through continuous monitoring over time, from a minimum of 20 years up to a century.
  3. Traceability: data collected in the field and calculations made to quantify the impact of the project must be fully traceable, making them comparable, replicable and verifiable.

Once the project passes the data validation and verification process, it is certified and starts generating carbon credits, which are placed as securities on the carbon market that can be bought and traded by companies directly from project developers or credit traders.

Carbonsink, from January 2022 part of South Pole with which it forms the world’s largest climate solutions and climate risk management group, guides companies in the process of reducing emissions and develops mitigation projects that generate high quality carbon credits, certified by the most important international standards (Gold Standard and Verified Carbon Standard). As the only Italian company that is a member of the International Carbon Reduction and Offset Alliance (ICROA), an organisation that promotes good practices in the voluntary carbon credit market, Carbonsink guarantees the companies it supports a pathway to high quality net-zero.

Challenges and future opportunities

More and more companies are integrating emissions reduction and offsetting into their climate strategy, recognising the opportunity to amplify corporate climate action. It is no surprise, then, that the market for carbon credits is booming and constantly evolving in response to growing corporate demand. To meet the goals of the Paris Agreement, McKinsey predicts further growth in the market, estimating a 15-fold increase in demand for carbon credits by 2030 and a 100-fold increase by 2050. Driven by a shared responsibility and awareness of high public awareness, companies tend to favour investments in projects with high communication potential, as well as high environmental impact, such as Nature based solutions (NBS) projects, increasingly wanting to be involved in co-design.

The mitigation sector is characterised by a strong element of innovation, and one of the technologies with high potential for the near future are technological removals projects, which involve the removal of CO2 from the atmosphere through the use of next-generation technologies and long-term, safe storage in natural or artificial reservoirs. Although they are currently difficult to realise, both in economic and methodological terms, projects based on technological carbon removals, such as Direct Air Capture plants, are attracting the attention of many and are shaping up to be one of the big investment areas in the coming years. One example is the NextGen CDR Facility developed by South Pole, one of the most advanced platforms for the development and large-scale implementation of next-generation removal projects certified to international standards.

Another trend that can be observed is the willingness on the part of companies, investors and developers to bring credit-generating projects to Italy and Europe, an operation that is currently extremely complex. The potential that the Italian territory offers is high, lending itself above all to activities related to improved forest habitat management, plastic management and recycling projects, and biochar-related removal projects. Potential that Carbonsink and South Pole are ready to seize and realise thanks to many years of expertise in cutting-edge climate solutions and continuous involvement in the definition of standards and development of carbon credit certification methodologies.

“Thanks to our years of expertise in the field of climate solutions, Carbonsink and South Pole are ready to seize the opportunities of a fast-evolving industry to guide companies towards a net-zero future.” – Ernesto Gonnella, Portfolio Manager, Carbonsink

Technological evolutions and the forthcoming expansion of mitigation projects in geographies such as Italy represent a clear opportunity for companies to accelerate their decarbonisation strategy also from a local perspective. Working with local and international stakeholders to define methodologies and develop standards applicable in Italy and Europe, Carbonsink and South Pole are actively working to realise this opportunity as soon as possible together with companies, contributing to the ecological transition also in our country.

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