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Risks of Carbon Accounting and Offsets in a Single Business Model

Article Overview

Given its inherent conflicts, companies providing carbon accounting services should not be profiting from the sale of carbon credits.

This post outlines Persefoni’s official company position on this matter.

Since day one, Persefoni has held two core beliefs around the carbon credit (including offsets)  market:

  1. Carbon credits verified by a reputable organization can contribute to mitigating climate change, and we want to help facilitate the growth of these solutions where alternative reduction strategies aren’t readily available, and
  2. Providing carbon accounting services while profiting from the sale of carbon credits presents a conflict of interest.

Persefoni’s core mission is to enable organizations to calculate and report regulatory and investor-grade climate data, and ultimately move towards decarbonization.  We do this through enterprise-grade software that reduces the complexities and data management of carbon accounting, including financed emissions, so enterprises can “treat them with the same rigor and confidence as your financial data.” In fact, that was our first slogan.

Trust and transparency in this domain are paramount, as they are with any financial accounting software.

Performing carbon accounting while profiting from the sale of carbon credits creates a conflict of interest by creating a perverse incentive to use generic data in carbon accounting. Using generic data (e.g., amount spent) limits your ability to measure the impact of reduction efforts beyond those that correlate with cost reduction, which means that to manage or reduce your emissions, you're more likely to rely on offsets. Some emission reduction efforts, like buying preferred materials, can even result in higher costs and, subsequently, higher emissions estimates.

For example, a luxury clothing brand may be paying its suppliers a premium for higher-quality organic cotton. The supporting spend-based emission factors for estimating emissions from apparel manufacturing do not distinguish between material types, but assume a linear attribution between monetary and carbon impacts of the entire apparel manufacturing sector. So even if the company has made concerted efforts to use lower carbon materials, a spend-based calculation will never be able to capture emissions that have been reduced through this intervention. Moreover, the organization’s emissions will continue to appear higher compared to their peers that are on the lower end of the market because they pay their suppliers a higher price. As a result, they may also be purchasing higher volumes of carbon credits as a part of their interim strategy

Given the crucial interim role of carbon offsets in decarbonization strategies, we have supported efforts with partners to make carbon credits more easily accessible through our partner network. For example, in 2021, as part of an effort to simplify the process for customers, Persefoni created a commission-free carbon credit listing from through our partner Patch’s API service. As the site illustrated, no profit ever flowed to Persefoni, as we managed these transactions as complete pass-throughs to Patch.

Customers and potential customers frequently tell us that they appreciate this ethical stance, rigor, and transparency. As a result, we determined it was time to eliminate even the commission-free version of carbon credit listings out of an abundance of caution to avoid even the perception of conflicts of interest.

Not only is it a common practice for vendors in our space to sell carbon credits, but many also derive the majority of their revenues from such activities. Again, carbon credits are a vital, evolving, and legitimate business for the broader climate ecosystem, however, organizations that have inherent conflicts of interest architected into their business models almost always generate systemic issues down the line. At best, these end up being ethical in nature - at worst, they become fraud.

Separating business activities between the buy side and sell side is critical for scaling markets ethically and with integrity. Even if there is no foul play today, building such incentive systems only causes conflict in the future.

In our industry, this conflict manifests itself in many nuanced ways.

Taking a Stand

This is still an emerging market, and as such, trust and transparency are as important as ease and simplicity. We take this stance for the same reason that financial accountants, auditors, investment bankers, and lawyers run conflict checks ahead of client engagements and don’t engage in both sell-side and buy-side work: because conflicts hurt all stakeholders except those making money from them.

To reiterate, we still urge companies to invest in high-quality carbon credits as part of a broader decarbonization strategy. However, we suggest that they do so with project developers and brokers whose specialty includes project verification that does not come baked with a fundamental risk.

Collectively, we want and need to see the carbon credits industry succeed, and Persefoni will continue to refer companies to great partners like Patch and Carbon Direct that have deep expertise in these domains. We’re big advocates of the work that they and other great companies in the space do.

If you’re considering carbon accounting support, we recommend understanding whether the service provided will enable a pathway to meaningful decarbonization. Questions we recommend asking include:

  1. Do you profit from carbon credits? If so, are there steps being taken to manage the potential conflicts of interest?
  2. Do you support multiple calculation methods that will enable me to first measure my entire footprint and second measure the impact of reduction initiatives that I may implement?
  3. How will you help/enable us to move to higher levels of accuracy in our calculation methodologies over time? Do you have complete coverage of all Greenhouse Gas Protocol calculations to do so?

We are happy to discuss this with you in further detail, and hope you appreciate our transparency.

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