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By Tiffany Cheung, Corporate Engagement Lead
The likelihood to buy model came from the ambition to identify where future corporate demand for the voluntary carbon market (VCM) may come from, and understand the key drivers or signals of this.
AlliedOffsets’ modeling utilizes extensive corporate purchasing history and a range of company characteristics, or base features, to compare known buyers against similar companies that have been inactive in the market for a few years, or are yet to enter. An estimation of likely future activity can then be produced. In this blog, we’ll take a closer look at some of the features that have the most significant influence on the probability that companies will purchase carbon credits, in the current iteration of the model.
Abatement potential
In the current iteration of the likelihood to buy model, the company characteristic which has the strongest influence is abatement potential.
For inputs to the model, the emissions abatement potential for each sector is categorized as either “easy” or “difficult” to abate. While this is a simple binary, in reality there are a combination of complex factors involved, such as energy intensity, marginal abatement cost, and regulatory context. This will all vary over time and with geographical and political context.
The model found that abatement potential in either direction increased likelihood to buy; this is potentially because for those that are easier to, reaching carbon neutrality with carbon credits alongside emissions reductions is feasible, while companies in hard to abate sectors may be responding to consumer demand for lower emission products for which credits are used, such as gas.
Headquarter Country
The country in which a company is headquartered also has a significant bearing on its likelihood to participate in the voluntary carbon market. A further look into this feature found that it correlated strongly with the infrastructure that companies need in order to access market-based mechanisms, such as the VCM, to support wider decarbonization and sustainability goals. Perhaps more than any other feature used in the model, headquarter country also stands in for both regulation of the corporate use of and claims based on carbon credits, and wider public perception about the desirability of carbon offsetting.
Countries with large proportions of existing or recent participants generally have a positive influence on likelihood to buy, with the United States, Russia, China and United Kingdom falling into this category. Countries where LtB declined included Japan, Israel, Oman and Kuwait.
Buyer sector
The industry that a company operates in also plays an important role in determining its participation in the VCM.
Sector characteristics influence emissions intensity, distribution of emissions among scopes (which will pertain to greenhouse gas footprinting and ease of abatement), financial margins (which dictate budget for often discretionary sustainability commitments), reputational risk, and ability to access the voluntary carbon market.
In the AlliedOffsets model, the range of in-house sectors used to categorize each company has its own specific impact on likelihood to buy. The sectors with the greatest impact include:
- Financial services
- Technology and telecommunications
- Energy
Revenue and company
Revenue can act as a proxy for company characteristics such as global operations and exposure to carbon pricing schemes. Vitally, it also often represents the ability to resource sustainability ambitions, such as dedicated ESG or carbon procurement teams, as well as carbon credit purchases themselves.
However, purchasing behaviour varies across revenue bands and is dependent on other factors such as sector, compliance exposure and sustainability commitments.
Data centre usage
Companies that rely on data centres are also more likely to purchase carbon credits for reasons that are myriad and interconnecting.
Data centres are highly electricity-intensive with consistent high load factors, often meaning that they can produce residual emissions even when renewable energy procurement strategies are in place. Carbon-intensive grids, diesel-based backup generation and market-based electricity accounting gaps can all contribute to remaining emissions.
Simultaneously, rapid growth in digital infrastructure and uptake of AI across many different business sectors means that demand for data centers may outpace the development and deployment of clean energy and transmission capacity.
Furthermore, many companies that require data centers operate in highly visible, consumer-facing sectors such as Technology and Telecommunications, Consumer Goods and Consumer Services. Whether this motivates companies to account for their emissions through the VCM, or the widely discussed environmental impact of such sites is something to be hidden, varies company to company. This is an area of ongoing and rapid development; although the first on-registry retirement attributed to a data center took place in 2020, since then, fewer than 20 companies have ever made similar claims.
Carbon credit commitment
Drawing on data from Net Zero Tracker, carbon credit commitment describes whether a company has publicly disclosed that it intends upon or is using carbon credits. The model finds that those that do have a strongly increased probability of purchasing credits
Those that have not made such commitments show a lower probability of market participation.
This is no revelation, but it’s good to know that the model definitely works on this front!
Identifying future VCM participants
Taken together, these signals help explain which companies are most likely to participate in the VCM.
Understanding these drivers is essential on two fronts. For both the supply side of the market, and policymakers, these signals are useful for anticipating and potentially stimulating future demand. On the demand side, companies may recognize much of themselves in the details underlying these base features and realize that it’s a matter of when they should enter the market, not if - especially if their peers are already present.
Want to explore the companies most likely to buy carbon credits and the data behind these signals?
Download the full report here