What are the challenges involved in the allocation and accounting of carbon sequestration by companies?

This article is the third and final installment in a series on carbon sequestration published as part of the Net Zero Initiative in late 2024.

In its previous series of articles, Carbone 4 analyzed the accounting of anthropogenic and non-anthropogenic carbon sinks, which presented the global absorption potential and studied the challenges and limitations of goal-setting methods.

It is now time to assess the implications of the carbon accounting rules currently being enacted, particularly the guide GHG Protocol: Land Sector & Removal (currently in draft form and scheduled for release in late 2024), and the SBTi FLAG. Indeed, these accounting methods determine how claims for sequestration are made, and thus how the financial and operational burden of well development is shared among the various stakeholders.

The Role of Carbon Credits and Specific Considerations Related to Their Claiming (GHG Protocol)

The SBTi calls on companies to “offset residual emissions,” meaning to set a 1-for-1 target^[1]  in the long term, but at this stage remains unclear on the following key issues:

• What emissions scope should be considered when setting carbon sequestration targets? Setting targets based on Scope 1 or Scopes 1–2–3 has a decisive impact on the double-counting issues highlighted in the previous article.
• What carbon sequestration trajectory should we set, and by when? Interim targets are necessary to ensure that carbon sinks are mobilized at the appropriate level by 2050.
• How can we achieve our carbon sequestration goals, and what financial instruments should we use? The issue of carbon credits is particularly pressing and is currently the subject of discussions within the SBTi, following an initial controversial announcement regarding the potential use of carbon credits as a lever for reducing emissions—a use that was ultimately restricted to carbon credits within the value chain and remains under discussion (see Carbone 4 article^[2]).

Beyond the current controversies surrounding carbon credits, The SBTi appears to be aligned with the GHG Protocol, which states that one metric ton of sequestered carbon cannot be counted twice if it is sold as a credit to meet sequestration targets^[3] :

“Companies shall not double-count a metric ton of GHG reduction or removal that has been credited and sold if the credit is used (or could potentially be used) as an offset or for compensation. To avoid double counting of credits used as offsets or compensation, companies shall deduct emission reductions or removals associated with the sale of credits used as offsets from the company’s GHG target accounting.”

This rule raises questions if multiple companies that account for a shared volume of emissions in their carbon footprint cannot simultaneously claim the same metric ton of sequestration to offset those shared emissions, as proposed under the NZI framework. In fact, the sequestration potential highlighted in the first article is very limited on a global scale: approximately 8 GtCO2/year over the 2020–2050 period, compared with net emissions estimated at 56 GtCO2e/year over the 2010–2019 period^[4].

Thus, the cumulative global sequestration target—if all companies set sequestration targets based on their induced emissions without double-counting—would be far greater than the global sequestration potential (and likely unattainable). Setting ambitious carbon sequestration targets is necessary, but targets that are unrealistic relative to global potential are likely to lead to the purchase of low-quality carbon credits and encourage the hoarding of carbon sinks by the most economically powerful actors.

Furthermore, setting purely individual carbon sequestration targets limited to Scope 1—which would allow us to overcome this obstacle—would, conversely, hinder the collective ambition to develop carbon sinks and absolve the largest economic actors of their responsibility for emissions in their value chains.

Given the SBTi’s reputation for setting emissions reduction targets and net-zero goals, further clarification is still expected from the SBTi regarding the scope of carbon sequestration targets and the issue of double-counting to address this challenge, in order to promote the development of high-quality carbon projects. The NZI aims to contribute to these methodological developments through the approach presented in the previous article, which calls for setting targets for Scopes 1, 2, and 3, with operational responsibility differentiated between Scope 1 and Scope 3.

Furthermore, the rule of credit uniqueness and the prohibition on double-counting may lead stakeholders in the land sector to secure their sequestration potential in order to be able to meet their own targets. In other words, this means that stakeholders in the land sector would no longer be able to receive financial support from carbon credits for carbon sequestration projects, which could delay the development of carbon sinks worldwide.

This rule could gradually change carbon markets in the coming years if a growing number of actors in the land sector shift away from selling carbon credits in order to retain the benefits of carbon sequestration for meeting their own goals. The generation of carbon credits could then gradually be limited to certain specific actors or territories: small-scale actors not connected to industrial and commercial value chains, who are not interested in meeting a carbon sequestration target; actors and territories with sufficient potential to exceed their own targets; restoration of degraded ecosystems; and so on. This rule therefore reinforces the land sector’s responsibility to develop carbon sinks, a point highlighted in the following section, which details the global effort allocation proposed by the SBTi.

Breakdown of Carbon Sequestration Efforts (SBTi)

In the paper by Roe et al.^[5] (2019), the potential for additional carbon sequestration from the total land sector (compared with sequestration trends) is estimated at 7.6 GtCO2/year.

The SBTi’s FLAG framework, which is based on this publication, outlines a path to carbon neutrality for the sector with a mitigation potential of 12 GtCO2e/year^[6] by 2050, broken down into carbon sequestration totaling 4.6 GtCO2 and emissions reductions totaling 7.4 GtCO2e/year (representing a 72% reduction in gross emissions)^[7]. Carbon sequestration is distributed among forest restoration within value chains (1.7 GtCO2/year), improved forest management and agroforestry (1.6 GtCO2/year), and carbon sequestration in soils through biochar and changes in agricultural practices (1.3 GtCO2/year).

Furthermore, for other sectors, the SBTi’s NZS framework sets a cross-sector emissions reduction target of -90% in absolute terms by 2050, as well as higher specific targets for certain sectors (energy, cement, steel, construction, etc.)^[8].

Figure 10 presents the vision of global carbon neutrality underlying the FLAG and NZS frameworks by 2050, and compares the emission reduction and carbon sink development targets of the associated methods. A majority of the agricultural and forestry sinks (4.6 GtCO2/year) are thus allocated to FLAG enterprises in the Land sector, while the remaining sequestration (3 GtCO2/year) are allocated to other sectors, with a view to “offsetting residual emissions.”

SBTi FLAG: Self-Financing of Carbon Sequestration by the Land Sector

The SBTi FLAG methodology is designed for companies in the land sector and requires them to reduce their emissions while increasing their carbon removals. Companies must focus their efforts on both the operational and financial fronts, as external financing through the voluntary carbon credit market is compromised by the GHG Protocol: Land Sector & Removals (see previous section). In fact, this provision prohibits a market participant from selling a carbon offset and counting the sequestered metric tons of CO2 toward its own carbon sequestration target. In this context, it is likely that a stakeholder in the land sector would want to retain for itself the benefits of sequestration within its value chain^[9], which would force it to finance them on its own.

Stakeholders in the land sector are thus encouraged by SBTi FLAG and the framework of the GHG Protocol to be the sole funders and beneficiaries of carbon sequestration efforts within their value chain. Mitigation efforts should therefore be funded by the agricultural sector and/or subsidized, and would serve solely to achieve the sector’s objectives. Incidentally, investments in and funding for these actions could lead to an increase in production costs and, consequently, in the price of agricultural commodities.

Consequently, agricultural and forestry stakeholders involved in SBTi FLAG could gradually stop issuing carbon credits within their value chains in order to meet their own targets, which would ultimately reduce the volume of the voluntary carbon credit market. For companies not covered by the SBTi FLAG but eager to contribute their fair share to the development of carbon sequestration, The remaining potential sequestration capacity (3 GtCO2/year) lies primarily in the restoration of certain ecosystems (1.9 GtCO2/year) or through technological carbon sinks, whose potential is more uncertain(1.1 GtCO2/year). Furthermore, additional theoretical potential could be tapped, provided that substantial funding is secured and significant technical and organizational obstacles are overcome.^[10].

The SBTi, FLAG, and NZS frameworks and the guide GHG Protocol's Land Sector & Removals (draft version) could affect the availability of carbon credits for carbon sequestration on the voluntary market. And important questions remain regarding the setting of sequestration targets for actors outside the land sector within this framework. Nevertheless, The SBTi's work on the NZS and FLAG frameworks represents major methodological advances:

• It offers a coherent vision of global carbon neutrality by 2050 as applied to the various economic sectors, and a breakdown of carbon sequestration potential between FLAG stakeholders and non-FLAG stakeholders.
• It establishes a specific, robust carbon sequestration target for stakeholders in the land sector, which could eventually be adopted as objective C1-C2 under the Net Zero Initiative.

Carbon accounting and target-setting methods have real normative power, regulating approaches that are currently voluntary. These technical methods continue to evolve, and the upcoming release of the final version of the guide Land Sector & Moving Services from the GHG Protocol should shed light on certain unresolved issues. The NZI Pillar C will continue to critically assess the rigor and ambition of these methods, ensuring that they promote the best possible utilization of carbon sinks, which are essential to global carbon neutrality.