How to leverage your BVCM strategy to fund carbon dioxide removal

How to leverage your BVCM strategy to fund carbon dioxide removal

April 5, 2024

By Chris Pocock, ClimatePartner UK

On 28 February 2024, the Science Based Targets initiative (SBTi) released their guidance on how companies should engage in beyond value chain mitigation (BVCM). The Above and Beyond report gives practical guidance to companies on how to build a strategy for BVCM.

The guidance does however leave a question open. 

In its Corporate Net-Zero Standard, the SBTi requires that companies must specifically use carbon dioxide removals (CDR) to counterbalance their residual emissions to become net zero. CDR projects are those that remove greenhouse gas emissions from the atmosphere and store them, as opposed to those that reduce or avoid emissions. The two main types of removal projects are nature-based solutions such as afforestation, and technical removal projects such as carbon capture and storage (CCS). 

This requirement from the SBTi seems to imply a hierarchy where CDR should be prioritised ahead of other types of BVCM, such as avoidance or reduction projects. However, credits in CDR projects are often more expensive and less readily available. So, how can companies contribute to global climate action by investing in CDR, and should this be prioritised ahead of funding avoidance and reduction? 

Below are answers to some common questions about how a company might go about building a strategy for investing in CDR, addressing where it should be prioritised against other types of BVCM. 

Should companies even be investing in “offsets”?

The Intergovernmental Panel on Climate Change (IPCC) is clear in its special report Global Warming of 1.5 °C that financing climate projects, and in particular CDR, is an essential component of the global effort to limit global warming in line with the targets of the Paris Agreement. Its primary emphasis is on reducing or avoiding emissions via mitigation efforts such as transitioning to renewable energy sources and implementing sustainable land-use practices, but the report makes it clear that carbon removal technologies should be used as a complement to emissions reduction, not a substitute. 

The SBTi builds on this guidance by strongly recommending that companies go above and beyond their science-based targets to invest in mitigation beyond their value chains – it calls this activity “beyond value chain mitigation”, or BVCM. 

A recent study by Ecosystem Marketplace also showed that, contrary to popular belief, companies who invest in BVCM are more likely to be actively reducing emissions and have a more ambitious climate strategy than those that do not.   

So, the short answer is: Yes. Investing in BVCM, including investment in CDR, should form a key component of an organisation’s ESG or climate strategy. So, after investing in abatement within their own value chain, the question becomes which CDR technologies or projects to invest in, based on the best options available.

How should carbon removal be prioritised within a climate action strategy?

Referring to the IPCC, mitigation efforts via reduction and avoidance should be prioritised ahead of CDR. This is true whether that mitigation takes place within a company’s value chain (i.e. abatement while working towards a science-based target) or outside of it (i.e. BVCM). This follows the logic that it is better to avoid emissions being released into the atmosphere in the first place, rather than removing them after they have had time to warm the planet. 

However, this doesn’t mean CDR should be deprioritised entirely. The high cost of carbon removal often results in companies excluding these projects from a BVCM strategy, which in the long term will lead to limited supply and a consistently high unit price. Removals need investment in the near term to lower their cost and deploy them at the scale required to meet global climate goals. 

The principles stated in the SBTi’s new BVCM guidance are helpful here. These principles state that companies should maximise mitigation outcomes per dollar invested, fund underfinanced mitigation, support the UN’s Sustainable Development Goals (SDGs), and address inequality. 

There is no one-size-fits-all answer here, but companies should use these principles to consider their own “theory of impact” and develop a strategy accordingly. 

For example, for a company with a high impact on land-based emissions (e.g. a meat or dairy producer), investments in land-based projects such as regenerative agriculture or forest protection could be prioritised. For a company with a less direct impact on land-based emissions and a greater focus on innovation (e.g. finance or tech), investment could be placed in smaller and less proven CDR technologies to enable their scale for the future.  

Linking your company’s values, expertise and purpose to the type of projects you support will mean consistent communications and a higher potential for value-add (e.g. tech companies providing advisory to tech removals).

How can companies reasonably invest in carbon removal when the cost is so high today?

Again, the SBTi’s new BVCM guidance is helpful here. In the past, companies have invested in BVCM primarily via a ton-for-ton approach, whereby the tonnes of carbon emitted by the company are “offset” by purchasing an amount of carbon credits equal to a proportion of that company’s emissions. 

This approach has received criticism, with leading reasons including that this structure incentivises companies to seek the lowest price per tonne possible, which can compromise carbon credit quality, and that companies often choose to only compensate for some categories of scope 3, rather than all emissions. 

Other approaches to create a budget for BVCM are money-for-ton, whereby an internal carbon price is applied to emissions (i.e. 1,000 tonnes CO2e across scopes 1–3 priced at US$75 gives a budget of US$75,000), and money-for-money, whereby a company allocates a share of revenue or profit towards BVCM (i.e. 2% of profit = US$75,000). 

The SBTi recognises that all approaches are valid, as long as the contribution amount is meaningful, but it recommends following a money-for-ton approach. 

This new recommendation is important as it enables companies to invest in climate projects with a higher cost per tonne, without necessarily allocating more budget, thereby channelling funds into developing technologies which need investment. 

Companies should however take care when choosing their approach to BVCM. The SBTi has recommended that – whatever approach they choose – companies use a portion of their budget to purchase verified carbon credits equivalent to at least 50% of the company’s unabated scope 1, 2, and 3 emissions (i.e. a minimum of 50% via ton-for-ton).  

In practice, leading companies have applied a mix of these approaches and tend to end up contributing 1-2% of annual profits to BVCM. Companies should bear this in mind when trying to gauge a BVCM budget which is seen as “meaningful”.

What practical options exist today for companies looking to invest in CDR?

After determining a budget for BVCM (via any of the specified approaches), a company should consider the short- and long-term options available to them. 

The nature of carbon removal projects, especially technical removals, often means that up-front capital investment reduces the cost of purchase in the long term. Most projects are still in their infancy and therefore sell the promise of a future credit (ex-ante) rather than one that has already demonstrated a carbon saving (ex-post). 

We can take enhanced rock weathering from project developers such as UNDO as an example. Crushed basalt rock needs to be purchased (often as a by-product of other industries), transported, and distributed evenly across soil, thus geochemically sequestering carbon through natural rock chemical reactions. A fixed amount of basalt (i.e. a predictable cost) produces a highly predictable amount of carbon sequestration over a period of roughly 7 years, meaning the financial investment is up front but the benefit (sequestered carbon) occurs over 7 years. 

Companies with a lower budget are likely limited to spot transactions on the voluntary carbon market (VCM) and are thus vulnerable to price fluctuations, especially with a ton-for-ton approach. On the other hand, companies able to invest in their own project development can "lock in” a climate impact for periods of between 5 and 25 years, depending on the project and technology used, with lower long-term investment required.

An intelligent way to increase impact and reduce long-term costs

Building a strategy for CDR alongside a broader BVCM strategy is an intelligent way for companies to reduce their risk, reduce their long-term investment requirement in BVCM, and commit to meaningful action, both for the sake of impact and for communication. ClimatePartner is one of several companies beginning to offer guidance on how this can be done, alongside offering opportunities for co-investment. Reach out to find out more about financing climate projects. 

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