Understanding leakage and uncertainty in CO₂ projects

When purchasing carbon credits, sustainability managers must consider a project's risks. Two key elements are leakage (counteracting CO₂ impact) and uncertainty about the actual amount of CO₂ a project actually avoids/removes. We'll now take a closer look at these two factors to provide you with a basic understanding and prepare you for your next carbon credit purchase.

Leakage in CO₂ projects

Definition of leakage: It refers to unintended and adverse consequences when emissions decrease in one area but increase elsewhere, negating the overall benefits of the project. Here's a simple example: Consider a forest conservation project that protects Area A. This may cause deforestation to increase in another area, Area B, thereby undermining the net emissions reduction at the global level.

Why does this happen? Here are some driving factors:

• Global demand remains unchanged: Let's stick with the same example as above. Although a particular forest area is protected from deforestation, global demand for timber has not decreased, and thus deforestation activity simply shifts to other areas.

• Leakage doesn't respect geographical boundaries. It can occur due to different carbon treatments in different regions and under different circumstances. Protecting one forest can increase pressure to clear another, leading to elusive, transboundary leakage.

• Shift in market prices: A shift in demand from fossil fuels to renewable energy could lead to low fossil fuel prices as fossil fuel suppliers seek to attract customers. This, in turn, could lead to an increase in fossil fuel consumption.

• Another example: Improving forest management through more sustainable practices can reduce deforestation and thus decrease the supply of timber in that area. This could lead to rising market prices and thus create an incentive for increased deforestation.

Uncertainty in CO₂ projects

Every project is associated with factors that cannot be guaranteed. It is important to understand these factors and consider them in due diligence before purchasing carbon credits. This is typically covered by the project's MRV (monitoring, reporting, and verification) practices. This is performed either internally by the project or by an MRV provider. There are three main types of uncertainty:

• Data uncertainty: Changing climate conditions affect the reliability and availability of data, which impacts baseline emissions assessments and project performance data. Reliable data is the cornerstone of effective carbon accounting.

• Technological uncertainty: New or emerging technologies used in carbon projects may be impacted by climate change, increasing uncertainty. This impacts project performance and resulting emission reductions.

• Behavioral uncertainty: As climate change affects energy consumption patterns, predicting human behavior becomes more difficult, increasing the uncertainty of project outcomes.

Dealing with uncertainty: How can these uncertainties be managed effectively?

It's important that you conduct a thorough analysis of each project to fully understand the elements of uncertainty and how they are considered in the calculation of avoided/removed CO₂. If there are uncertainties that are not accounted for, you can follow this guideline when purchasing carbon credits.

• Consider uncertainty in cost calculations: To understand real-world outcomes for different project types, robust uncertainty characterization must be incorporated into cost metrics. Apply a percentage (residual uncertainty) to the tons of CO₂ you purchase to obtain a discounted number of tons by risk. This can then be applied to the price of the CO₂ certificate to account for these residual risk factors.

• You can also decide whether you want to use CO₂ certificates to neutralize a specific number of emissions and therefore need to consider risk factors. Or whether you want to support the innovation of future technologies (depending on your strategic goal for purchasing certificates). If the latter is the case, you can simply purchase all the certificates (or invest a specific amount of money in climate protection projects), as you are not dependent on the exact number of tons of carbon dioxide avoided/removed.

Mastering the challenge

The challenge for sustainability officers and ESG leaders in the B2B market is not to shy away from these uncertainties, but to embrace them. Understanding leakage and uncertainty can lead to informed purchasing decisions that enable you to select the right carbon projects and steer the course toward a more sustainable and responsible future.

Remember that the path to sustainability is not a sprint, but a marathon. This is your chance to purchase carbon credits to offset your unavoidable emissions or support innovative technologies. Seize the opportunity to shape a greener future. Contact us and schedule a meeting to learn more about these factors and high-quality carbon projects.