Many companies have made promises to shareholders and the public to pursue sustainability. While most are trying to fulfill their pledges — despite some relaxation in mandates — they aren’t finding it easy.
In response, the market has tried to help by developing decarbonization credits that allow businesses to increase their sustainability rating, but their use has been criticized for not directly reducing emissions in corporate supply chains and production. That’s one reason why book and claim accounting systems were created: They address the problems decarbonization credits currently face with a flexible approach to funding and managing sustainability initiatives.
Its most attractive business benefit is the system’s ability to decouple low-carbon products from the associated decarbonization claims and allow companies to separately sell the carbon attributes. This decoupling can streamline sales efforts while stimulating decarbonization efforts.
Book and claim accounting explained
Book and claim systems are several years old, but only a limited number of companies have caught on to their potential. A market-based solution, the book and claim approach allows companies to buy low- or zero-carbon products, such as sustainable aviation fuel (SAF), without taking physical delivery of the product or passing it through their supply chains.
This enables decarbonization financing to be unbundled from purchase of the underlying products and physical supply chains. It’s a carbon accounting system that streamlines sales, so gains can be realized.
With this unbundling, the direct physical consumer of a lower-carbon product may not have to pay the so-called green premium when there are buyers downstream willing to pay this premium for the right to claim the decarbonization certificate. For instance, corporate travelers can buy the rights to claim credit for SAF used by airlines without having to exclusively fly on planes fueled by SAF. Thus, the SAF market itself also benefits with more financial support for the product, which can be used to expand capacity.
Book and claim operates on a carbon inset principle, which involves replacing existing carbon intensive processes with more sustainable alternatives within an industry’s or company’s own extended value chain, making it more credible and actionable. This differentiates book and claim mechanisms from carbon offsets where no action is necessarily taken that directly affects a company’s or even an industry’s supply chain. Instead, emissions are offset through investment in projects most often unrelated to the supply chains or production of the company buying the credits, such as tree-planting.
Markets where book and claim is utilized
Currently, the book and claim market is mostly used in energy and transportation markets. Sales of the claims can be handled by either clean energy producers, such as those that make SAF or utilities that generate renewable energy, or users, such as airlines or any company buying low-carbon substitutes. Here’s how it works in aviation: A SAF producer sells SAF at regular jet fuel prices to airlines. Separately, the SAF producer sells the decarbonization claim attached to the SAF sale to companies with extensive travel budgets. The emissions generated by these corporate passengers represent the airlines’ downstream Scope 3 emissions. The sale, in the end, helps both the airline and company buying the claim reduce their carbon footprints.
By decoupling the purchase of SAF from its physical delivery, book and claim facilitates greater investment in low- or zero-carbon fuel initiatives, promoting the overall growth of the SAF market by making it cost-competitive with traditional jet fuel. We also are starting to see book and claim initiatives take root in agriculture, cement production, iron and steel manufacturing, maritime shipping fuels, and railroads.
When it comes to buying green claims on renewable energy, it often involves long-term power purchase agreements (PPAs) that allow companies and consumers to buy long-term supplies of green energy. PPAs typically span five to 20 years and are usually at a premium to market-rate energy.
These agreements let buyers claim the use of green energy for the duration of the contract, while providing the seller with the financial stability required to invest in the development of sustainable electricity production from wind and solar farms. However, the energy used by the buyer may not actually come from electrons generated by a specific green production farm, but rather from the grid. Thus, PPAs help streamline electricity access and build energy reliability.
How business can benefit from book and claim systems
Implementing a book and claim system can offer numerous advantages for all participants of the transaction. For producers of green products, book and claim systems can help scale capacity by streamlining the sale of green products to willing buyers. With book and claim, producers realize prices they need to make businesses viable. Consumers can substitute green products for traditional carbon-intensive products at cost, and buyers of the claims shrink their carbon footprints by subsidizing that purchase. It is a win-win-win situation, with all participants contributing to lower emissions.
In addition, there is no need for costly segregation of complex supply chains to ensure traceability. The system is also flexible, as green premiums and their corresponding claims can be sold in more granular lots than physical products — most likely expanding the market by allowing buyers with lesser buying power to participate.
One last perk of book and claim is its enhanced transparency. Leading book and claim systems often use digital ledger technologies, open application programing interfaces that are publicly available, and verified central registries, which ensure a transparent and verifiable process. This transparency builds trust with stakeholders, customers, regulators, and the public, and reduces the risk of double-counting.
It also boosts additionality, which is the principle that a green claim must result in carbon reductions that would not have occurred without the project. By allowing companies to support various projects without needing direct links to their physical supply chains, well-designed book and claim can direct capital to initiatives that might not otherwise receive investment, thereby enhancing overall emissions reductions. For example, think about early-stage or hard-to-finance decarbonization projects, such as low-carbon direct reduced iron or climate-smart feedstocks made from waste streams from other industrial processes.
What makes book and claim different from other green claim accounting systems
While book and claim offers unique advantages, it is essential to understand how it differs from other decarbonization accounting systems. For instance, a mass-balance approach is designed to track the total amount of sustainable content that is put into producing a product. This allows companies to mix sustainable materials with non-sustainable materials, while still making claims about final outputs. Its disadvantage: Unlike book and claim, mass-balance requires direct links to be established between the claims and physical supply chain, which are labor-intensive to audit.
Then, there is the segregated supply chain approach. Segregated supply chains ensure that specific claims are directly linked to a particular product or batch. While this offers high traceability and additionality, it can be extremely cumbersome and may create increased indirect costs and emissions, requiring such things as separate shipping routes and storage for green products or sub-scale batch production. This would not be feasible for all businesses, especially ones early in their decarbonization journey, as it requires building a concentrated supply and corresponding demand. For instance, green hydrogen hubs have struggled to get off the ground because they don’t have the concentrated, scaled demand needed for this.
Ultimately, book and claim creates more flexibility in the supply chain, allowing producers to tap into a larger pool of potential customers.
How book and claim drives progress in monetizing sustainability
As businesses navigate the complexities of sustainability in a rapidly changing world, book and claim accelerates monetization of sustainability through establishment of a functioning market for decarbonization claims. This is a particularly attractive market for those interested in meeting Scope 3 emissions reduction targets, which often depend on the ability to control supply chain emissions or end-user behavior. By providing flexibility, cost effectiveness, and transparency, this innovative mechanism allows companies to align their operations with their decarbonization goals, while supporting projects making genuine impact across various sectors.
In a landscape where every action counts, understanding and leveraging book and claim positions can be at the forefront of the transition to a low-carbon economy. As demand for sustainable practices grows, embracing such mechanisms will be essential for the acceleration of a low-carbon economy and sustainable environmental stewardship.
In our next piece on book and claim, we will outline how market-driven book and claim systems can benefit on their own terms before new regulation disrupts markets.
