We are legally committed to become net-zero by 2050. According to United Nations, 140+ countries (incl. USA, China, EU) covering 88% of global emissions, and half of the world's largest companies have committed to Net Zero. By now, we know that net-zero cannot be achieved without carbon credits, and therefore increasing amount of companies are investing or purchasing these credits to neutralize their residual, hard-to-abate emissions.
As the large players are investing heavily in carbon credits, we think it is also important to discuss the role of carbon credits for small and midsize enterprises (SMEs). Therefore, this article aims to discuss the key benefits of using carbon credits for SMEs, and explore the potential risks of not using them in business planning.
The Top 5 Benefits of Carbon Credits for SMEs
Carbon credits are a vital tool for businesses to achieve sustainability goals. Here are 5 key benefits of using carbon credits.
1. Net-Zero Status
Achieving net-zero is not possible without carbon credits. The credits allow companies to offset their residual emissions, which usually account for about 10-15% of total emissions. By purchasing carbon credits (especially the removal credits), SMEs can neutralize their hard-to-abate emissions by investing in carbon removal projects, thereby achieving the net-zero status.
As mentioned above, all major economies have legally committed to net zero by 2050, with many pledged to take rigorous actions to halve global emissions by 2030. Therefore, to ensure businesses are compliant with future regulations and market expectations, it is important for SMEs to plan ahead and get to net zero emissions as soon as possible. Here, SMEs should know that after the business has done everything it can to reduce its emissions, it can use carbon credits to offset the residual emissions and become net-zero. (Further information on how to select carbon capture projects are here, and how to purchase carbon credits are here).
2. Financial Benefits
Today the average carbon credit price is c. US$ 17 per tCO2 (resale price in the voluntary carbon market space). Typically SMEs do not need a large quantum of credits as their emission footprint is low (we estimate it to be c. 70 tCO2 per year, ie 7 tCO2 to offset, equating to US$ 120 dollars of carbon credit per year). This is not a high price to pay to get to net-zero. Especially considering the benefits of net zero and the risks of neglecting it in the long term.
In addition, it is important to note that carbon price is expected to rise from US$ 17 per tCO2 to US$ 25 - 30 by 2030. This is driven by increasing demand for higher quality credits and potentially supply scarcity. Therefore by purchasing carbon credits early, SMEs ensures its own carbon credit stock and avenue to net-zero, while avoiding price increases in the credit space.
3. Reputational Benefits
Sustainability is becoming a key factor for consumers. A significant percentage of customers consider a brand's environmental efforts before making a purchase. According to McKinsey, 66% of consumers consider sustainability when buying a product, and this figure rises to 75% among Millennials.
By using carbon credits, SMEs can enhance their reputation and appeal to eco-conscious consumers. Demonstrating a commitment to sustainability can improve brand loyalty and attract new customers who prioritize environmental responsibility.
This reputational boost can also extend to business partners and stakeholders who value sustainable practices, potentially leading to stronger business relationships and opportunities for collaboration.
Example: Google
For example, Google has made one of Big Tech’s most ambitious environmental commitments. It aims to run its operations purely on carbon-free energy by 2030 and has purchased enough carbon credits to cancel out all the carbon dioxide emissions the company has released since it was founded in 1998. Google plans to remove all the carbon pollution it has ever released from the atmosphere by 2050.
This move has solidified Google’s reputation as a leader in sustainability, setting a benchmark for other tech companies and appealing to a growing segment of eco-conscious customers and investors. The company’s climate commitments have also garnered significant positive publicity, reinforcing Google’s position as a forward-thinking and environmentally responsible company.
4. Competitive Advantage
Embracing sustainability proactively provides SMEs with a significant competitive advantage. By demonstrating a commitment to reducing carbon emissions, these companies can differentiate themselves from their competitors, fostering stronger customer loyalty and enabling them to command a price premium.
In an environment where consumers are increasingly focused on sustainability, SMEs who prioritize and actively work towards net zero emissions are uniquely positioned to capitalize on this trend. Their efforts to sustainable practices not only meets consumer expectations but also sets them apart as leaders in their industry, paving the way for long-term success and growth.
Example:
Fashion brands like Stella McCartney and Eileen Fisher are actively incorporating carbon offsetting into their sustainability strategies. These companies invest in high-quality carbon offset projects, including forest protection initiatives and renewable energy projects, to mitigate their operational greenhouse gases and promote environmental sustainability.
By doing so, they not only reduce their carbon footprint but also appeal to eco-conscious customers, gaining a competitive advantage in the market.
5. Attracting Investors
Investors are increasingly seeking companies with strong environmental credentials. A study by Amazon revealed that 83% of investors prefer to support more environmentally sustainable startups. The research also found early-stage investors are now requesting detailed information on the sustainability strategies of startups before deciding to invest.
For SMEs, this trend means that by committing to net zero emissions and integrating carbon credits into their sustainability strategy can attract more investment opportunities. Investors recognize the long-term value and reduced risk profile associated with sustainable practices. By positioning the companies as environmentally responsible, SMEs not only support a healthier planet, but also tap into a growing pool capital that is eager to support green businesses. This is a dual benefit, and it strengthens SME's financial stability and fosters continued business growth.
The Risks of Not Using Carbon Credits
For SMEs, neglecting the usage of carbon credits can significantly undermine their business success and stability. Here we would like to call out 6 potential risks.
1. Regulatory Risks
New regulations and policies aimed at reducing emissions are on the horizon. Regulatory risks are escalating as governments worldwide are implementing stricter carbon emission policies. SMEs that do not prepare for these changes may face fines, operational restrictions, and other types of penalties.
By securing carbon credits now, businesses can stay ahead of regulatory changes and avoid potential financial risks.
2. Reputational Risk
Failure to invest in carbon credits can harm a company's reputation. As consumers and investors increasingly favor businesses committed to sustainability, companies that do not demonstrate actionable plans to reduce emissions risk being perceived as neglecting environmental responsibilities. This can result in lost customers, diminished brand value, and overall negative publicity.
3. Loss of Competitive Edge
Without carbon credits, SMEs may fall behind competitors who are actively reducing their carbon footprint. This is a major disadvantage and can result in loss of market share, investors, and customer loyalty.
By purchasing carbon credits, SMEs can ensure they remain relevant and attractive to both customers and business partners who prioritize environmental responsibility.
4. Supply Chain Disruption
An increasing amount of large companies are now requiring their suppliers to meet specific sustainability criteria, including carbon footprint reduction. SMEs that do not use carbon credits to actively reduce their emissions may find themselves excluded from profitable supply chains, loosing out to competitors who are better aligned with these sustainability standards.
5. Financial Risk
The financial risks associated with neglecting carbon credits cannot be overlooked. As the market increasingly values sustainability, SMEs that do not invest in carbon credits will find int harder to secure investment or financing, which in turn hinders their growth potential.
Carbon credits offer a cost-effective way to manage these risks and support long-term financial health. Investing in carbon offsets can also provide a buffer against future financial uncertainties related to climate change and environmental regulations.
6. CO2 Prices
The demand for carbon credits is outpacing supply, which drives up prices. For example, California’s carbon price is projected to average around $42 per metric ton in 2024 and $46 in 2025, up from $34 in 2023, according to BloombergNEF. The price could reach $93 by the end of the decade.
If SMEs delay purchasing credits, they may face higher costs in the future and limited availability of high-quality credits. Securing credits now ensures that businesses can lock in lower prices and access credible projects. This strategic move can provide long-term cost savings and stability in a market where prices are expected to rise significantly.
Conclusion
For SMEs, the benefits of carbon credits are clear. The credits offer a cost-effective solution to reaching net-zero targets, while also boosting the company's reputation and providing a competitive advantage. Additionally, they attract investors and ensure compliance with future regulations. By investing in carbon credits, SMEs can ensure their sustainability efforts, mitigate financial risks, and enhance their overall market positioning.
With the rising demand for carbon credits, limited supply of carbon credits, and tightening policies on emission reductions, we think the time to act is now. According to Morgan Stanley, the market is expected to expand from nearly $2 billion in 2022 to almost $100 billion by 2030, and potentially reach $250 billion by 2050. This trend highlights the growing importance of carbon credits in the business world. By buying carbon credits, SMEs can secure their place in a sustainable future and avoid the pitfalls of being left behind in an increasingly green economy.
Embracing carbon credits is not only a strategic business move but also a proactive step towards a more sustainable future.