ANALYSIS: Is corporate carbon insetting poised to take over from offsetting?

Quantum Commodity Intelligence - Companies' use of carbon credits to meet their greenhouse gas (GHG) emissions has increasingly been under the microscope in recent times, with high-profile legal challenges questioning the integrity of the offsets and the corporates' climate claims.

In addition, a big issue for companies looking to address their carbon footprint is how to deal with Scope 3 value-chain greenhouse gas (GHG) emissions. Scope 3 emissions fall outside a firm's direct control  and so have proven difficult to account for, let alone reduce.

Focus on these issues has intensified with the debate over whether or not the main arbiter of corporate climate targets, the  Science Based Targets initiative's, upcoming revised Corporate Net-Zero Standard, should allow the use of carbon credits, specifically CO2 removals, albeit for Scope 1 direct emissions. One approach to potentially address all of these issues that is gaining traction is carbon insetting rather offsetting.

Initiatives

Carbon insetting involves companies investing in carbon reduction projects within their own supply chain, as opposed to offsetting, where companies invest in projects elsewhere to offset their GHG emissions. Recently a number of insetting initiatives have launched, while US-based registry Verra is working with Luxembourg-based registry SustainCert on a Scope 3 standard to be officially launched later this year.

Work to quantify Scope 3 reductions is not new, however, with Switzerland-based registry Gold Standard (GS) having published Value Chain Intervention Guidance back in 2018. And last year GS released a comprehensive guide for so-called 'beyond value chain mitigation'. But a series of recent announcements from a number of companies and organisations has put more of a spotlight on insetting.

Last month, UK non-profit Social Carbon Foundation launched an insetting framework to offer a certification and reporting structure for organisations looking to reduce Scope 3 GHG emissions through direct interventions in their own value chain.

The framework, which covers practices within the forest, land, and agriculture sectors, "provides flexible requirements to accommodate situations where data can be linked directly to a company's specific supply chain, as well as instances where the affected supply may not align perfectly with the supply received by the company", said Social Carbon.

The credits to be issued under the framework are non-transferable, and are known as Social Carbon Insetting Units. It uses the concept known as 'Supply Sheds' in order to "credibly attribute emissions outcomes even when exact sourcing origins are unknown".

Supply sheds

The registry defines Supply Sheds as a "defined group of suppliers within a specific geography or market (e.g., national or subnational level) that collectively contribute goods or services associated with a company's value chain".

"While it may not be feasible to trace goods to individual suppliers, it should be demonstrable that the group as a whole supplies materials to the company's direct suppliers," the framework document said. "This concept addresses situations where direct traceability to individual suppliers is unavailable, but sourcing from the group can still be verified," it added.

Social Carbon said eligible insetting projects could include, but are not limited to: afforestation, reforestation and revegetation (ARR); agroforestry; sustainable agriculture practices and sustainable grazing management. Projects need to be aligned with approved registry methodologies, in particular, reducing methane emissions from rice production (SCM0002), regenerative land management (SCM0005), and ARR (SCM0009).

But, Social Carbon noted, "if an activity is not explicitly covered by an existing methodology but the methodological approach enables quantification of its impact (e.g., reduction of livestock heifers), the activity may be included with a justified methodology deviation".

Deviations could be applied where emission sources are not explicitly addressed by the existing methodology, and must be clearly documented, including the rationale, assumptions, and calculation methods used to ensure transparency and credibility, it added.

Accuracy

The developer must also show that the deviation does not compromise accuracy, completeness, consistency, comparability, or transparency in impact quantification.

Mike Davies, Social Carbon chief executive, told Quantum that interest in the standard is "strong", with about five projects already in the pipeline. He declined to give specific details on the projects, but said the interest is from the cocoa, coffee and regenerative agriculture for grains sectors.

Later this year, Verra and SustainCert will launch of a Scope 3 Standard (S3S), which was first announced in June 2023. S3S will be fully digital, aiming to enable project validation in significantly less time than current methodologies.

Once verified, projects must choose between the insetting pathway under S3S or the offsetting pathway under Verra's Verified Carbon Standard (VCS). They cannot pursue both. The S3S programme will operate on five-year "assurance periods," analogous to the crediting periods used in the VCS.

Several companies began piloting the adaptation of existing VCS methodologies for use under S3S last year. The first four projects were unveiled in August 2024 adapting three methodologies. They are: VM0042 Methodology for Improved Agricultural Land Management, v2.0; VM0043 Methodology for CO2 Utilization in Concrete Production, v1.0; and ACM0009: Fuel switching from coal or petroleum fuel to natural gas, v5.0.

The initial pilot projects cover the apparel, agriculture, construction and communications services sectors and are located in Europe, Asia, and North America. The developers involved are 3Degrees, Bayer Crop Science — with partners ATOA Carbon and Perennial Climate — Klim and Patagonia with technical advisor Anew Climate.

Then in November a further three pilots for S3S were announced. Truterra adapting and piloting VM0041 Methodology for the Reduction of Enteric Methane Emissions from Ruminants through the Use of Feed Ingredients, v2.0. Rabobank adapting and piloting VM0047 Afforestation, Reforestation, and Revegetation, v1.0. And American Forest Foundation adapting and piloting VM0045 Methodology for Improved Forest Management Using Dynamic Matched Baselines from National Forest Inventories, v1.1.

The first adapted iterations of VM0042 and VM0043 are expected to be live by year-end. A second iteration of each will follow in 2025, opening the door to co-claiming across a value chain. VM0041, VM0045, VM0047, and ACM0009 will launch next year.

Marion Verles, the former Gold Standard CEO who co-founded SustainCERT in 2017, said "every major player in the food and agriculture sector" is already dipping their toes into the insetting space. Stefan Jirka, Verra's director of agriculture and supply chain innovation, agrees, but said it is impossible to know how many of the VM0042 projects currently working their way through the VCS process are for insetting.

"Given the level of interest in Scope 3 across the agri-food sector, I'd say a good portion likely are [using VM0042 for insetting]," he said. "It's especially true for those working with major commodities — for example, corn, soy, beef cattle — where the potential for Scope 3 uptake is strongest."

The first iteration of S3S will cover the issuance of so-called Intervention Units (IUs) that verify the implementation of a recognised intervention, such as no-till farming. The second iteration will include provisions for assessing an intervention proponent's "right to report", which is based on whether a product in the company's value chain is equivalent to the impacted product in the intervention.

Units

Once the right to report is established, the company can receive Scope 3 IUs, but then it is up to SBTi and the GHG Protocol as to whether those will be recognised in corporate climate claims. S3IUs cannot be bought or sold, but they can be shared by the "intervention proponent" that receives them and then divides them up among others along the supply chain.

May also saw the launch of another insetting initiative that is looking outside of the nature-based sector. The developers claim that it is the world's first carbon inset registry built specifically for the e-waste and IT asset disposition (ITAD) sector.

The launch involved UK-based climate and circular economy platform Bloom ESG issuing over  300,000 so-called verified inset certificates to ITAD and electronics recycling provider Dynamic Lifecycle Innovation.

"Until now, circular economy operators in the e-waste sector — from recyclers to ITADs — have been excluded from mainstream carbon finance opportunities, despite their critical role in emissions reduction," the duo said at the launch.

"The new registry … closes that gap, making it possible to generate and monetise verified insets for activities such as device reuse, lifecycle extension, and material recovery," the partners added.

Software

Bloom was set up three-and-half-years ago with the aim of dealing with "messy sustainability problems" that could be dealt with by using technology, said Sebastian Foot, a founding partner at the company.

The product developed was a software solution that determines the avoided CO2 emissions from the recycling and refurbishing of e-waste. "We were asked really early on as well, if we can avoid emissions, can we not get a carbon credit for it?," Foot said.

The company spent about two years looking at potential options for generating offsets, but eventually decided that insetting was the most applicable approach to take, he said. The result was a third-party verified methodology approved to International Organization for Standardization ISO 14064 level for measuring and reporting GHG emissions.

However, there wasn't a registry for dealing with the results and so Bloom decided to set up its own. "So most of this has happened because there wasn't the infrastructure available. And even when we tried to find the infrastructure, it just didn't work," said Foot.

When the registry was launched, Bloom said it was looking for additional ITADs, electronics refurbishers, and circular operators interested in quantifying and monetising their climate activities. A trading interface has been set up that is offering early access for up to five partners to the end of 2025.

But Foot said interest has far surpassed the plan for just five partners. "We're already oversubscribed. We said five, we've already got more than five that want to sign up now. So we've got to figure out resources," he said.

Unlike units generated under Social Carbon's and the upcoming S3S standards, the Bloom certificates are tradeable. "Dynamic is now eligible to trade these insets directly with clients, enterprise buyers, or third parties seeking high-quality, Scope 3-aligned emissions reductions," the partners said on May 20.

Prices

They said each unit is tied to a verified circular action and can be tracked from issuance through to retirement. "The registry follows global best practices for carbon accounting and is developed in consultation with independent advisory groups and third-party auditors," they added. Foot said the exchange of units follows the Gold Standard guidance and applies the 'Supply Shed' concept.

The registry also includes a built in feature that allows the price to be inputted for insets bought or sold. "We've begun to engage with brokers to help understand where they think the value of these will sit, and so for all the broker conversations I've had are saying they expect to trade at a decent premium to carbon offsets. We're going to test that in the next few months," said Foot.

May also saw a raft of other announcements related to insetting. UAE-based logistics group DP World  issued its first inset credits from its Carbon Inset Programme and extended the trial period after a "strong demand" signal with more than 150,000 carbon import containers registered since the launch in early January.

"With 150,000 TEUs [twenty-foot equivalent unit] worth of registrations since January, the trial has been an undeniable success so far and its extension to the end of the year is a testament to the confidence we have that more cargo owners stand to benefit from the programme's incentives," said John Trenchard, DP World's commercial and supply chain UK vice president.

The programme is running from DP World's UK logistics hubs, London Gateway and Southampton, under which importers will receive 50 kilogrammes of CO2 equivalent in carbon credits for every loaded import container they move through its UK terminals.

The inset credits are generated through DP World's Unifeeder subsidiary, Greenbox, a carbon insetting service launched in June last year, which deploys incrementally lower-carbon fuels across its Northern European shipping network.

Meanwhile, a trio of Japanese companies started a biochar demonstration project in collaboration with a Brazilian coffee bean supplier that could lead to a carbon insetting scheme to reduce supply chain emissions.

Trading house Kanematsu and dairy producer Morinaga Milk will use Japanese agri-tech start-up Towing's "high-performance" Soratan biochar on Daterra's plantations in the state of Minas Gerais in southeast Brazil.

The demo will evaluate the impact of the biochar on the yield and quality of coffee beans, the amount of carbon sequestered in the soil, and the potential for widening the project depending on the results.

"In the future, the experiment will aim to further promote the sustainable coffee production system implemented by Daterra and to realise carbon insets… thereby creating a more sustainable supply chain," the partners said.

Elsewhere, snack food giant Mondelez International invested in agricultural technology start-up eAgronom that could help the US-based conglomerate launch carbon credit generating soil carbon initiatives within its supply chain in Europe. The US-based food company raised an unspecified amount of money for eAgronom as part of the latter's Series A2 fundraising.

The maker of Cadbury and Milka chocolates did not elaborate on whether and how it will use insets that eAgronom will help generate, but it will likely be used towards Mondelez's voluntary emission reduction targets including a net zero goal by 2050.

The company has not reported any carbon credit purchases and insetting initiatives yet, but, along with announcing the goals in 2021, it set up an impact investing platform called Sustainable Futures "to incubate, finance, and support ventures addressing critical global challenges", such as climate change.

The investment in eAgronom was made through Sustainable Futures with the help of impact investment firm Sagana advising on the deal and conducting due diligence.