Many of these companies are now focused on the more expensive task of reducing their own emissions
by AKSHAT RATHI, NATASHA WHITE & DEMETRIOS POGKAS
DELTA Airlines Inc has for the past few years been among the biggest corporate buyers of carbon offsets. That demand — from airlines, energy companies, automakers and logistics firms — drove forecasts of a market worth hundreds of billions of dollars in the coming years.
But after strong pushback from experts, Delta is now among a growing list of major companies that have ended purchases of these cheap credits. Alphabet Inc’s Google LLC and EasyJet plc have recently joined in the rejection of what had been an enormously popular approach to sustainability. Many of these companies are now focused on the more expensive task of reducing their own emissions.
As a result, there’s been a sharp decline in sales in 2023, according to a Bloomberg Green analysis of the most recent public datasets covering 320,000 offset transactions. While the data don’t include every transaction, the sample covers the vast majority. It’s the second consecutive annual decline, pointing towards an emerging trend.
Among the offset purchases seeing the steepest declines are credits tied to renewable energy (RE) projects, which fell 29%. Most experts have written off these offsets as junk because electricity from wind, hydro and solar plants is already low-cost. That suggests extra funding from the sale of the credits doesn’t contribute to further reduction in emissions.
“For many years, scientific reports have repeatedly questioned the credibility of offsets from RE projects,” said German research organisation Öko-Institut carbon markets expert Lambert Schneider. That scrutiny culminated over the summer with a decision by a crucial standard-setting organisation to classify a large portion of carbon offsets as useless.
Offsets Aren’t Dead
But don’t assume the least-effective offsets are dead. RE offsets may very well get a second chance in a different market. At the COP29 climate summit in Azerbaijan starting this week, countries are under pressure to advance the creation of a United Nations (UN)-backed market for trading carbon offsets between countries as well as companies wanting to meet climate goals.
So far, most of the credits eligible to trade through this UN-backed market are tied to RE. Already the creation of new registries that aren’t worried about the junk status of these credits has seen some new buyers flocking to them.
Declining sales of RE offsets last year is underpinned by the decisions from companies such as Chevron Corp, JetBlue Airways Corp and BP plc to end or severely cut their purchases.
But the drop would have been steeper were it not for some major companies — Volkswagen AG, Telstra Group Ltd and TotalEnergies SE, among others — continuing their purchases while new companies such as Japanese logistics firm Kobe Yamato Transport Co Ltd, Colombian conglomerate Grupo Argos, and US oil and gas company Civitas Resources Inc are now among the biggest buyers.
In response to questions about 2023 purchases, many companies told Bloomberg they are cutting investment in RE credits. A spokesperson for Jet2 plc said the company stopped investing in these credits earlier this year and will instead focus on cutting emissions through the use of sustainable aviation fuel.
Banco Bradesco SA confirmed that it does not plan to purchase new credits from RE projects. A spokesperson for the bank said there’s no longer a need to direct resources to incentivise the sector. Ernst & Young will likewise move to halt RE offset purchases, a company spokesperson said.
Some companies pointed to an even broader pull-back, stating they no longer plan to purchase any kind of offsets. Since July, Telstra has moved away from the instruments and no longer makes corresponding “carbon-neutral” claims, a spokesperson said. Norwegian Cruise Line Holdings Ltd and Delta also said they have shifted away from offsets procurement.
TotalEnergies, Shell plc and Engie SA, on the other hand, said they have confidence in the RE credits in their portfolios. Vattenfall AB said it does not use these credits to meet their climate targets. Civitas and EnergyAustralia also defended their use of renewables credits, while Grupo Argos said it’s still deliberating what to do about future purchases.
Boeing Co declined to comment. Kobe Yamato, Volkswagen, VistaJet Group Holding Ltd and Estra Energie SRL did not respond to a request for comment.
Voluntary Purchase
The initial boom for carbon credits came after countries signed the Paris Agreement in 2015, setting off a spree among companies to set targets to reach net-zero emissions within decades. These goals involve reducing emissions where possible and then buying offsets for emissions that the company finds too expensive or difficult to reduce.
Most carbon-offset purchases today are voluntary. And that means there is no punishment if the promise of paying for someone else to reduce emissions turns out to be made up.
Traders and financial institutions who are keen to see carbon markets grow realise the challenge. Unlike buying physical commodities, such as oil or corn, the buyer of carbon offsets doesn’t get to hold the tonne of CO2 they were promised. Thus, they’ve backed watchdogs to provide better standards for carbon offsets.
The biggest setback to RE offsets came earlier this year when the Integrity Council for the Voluntary Carbon Market, a key standards-setting group, decided against granting its much-desired Core Carbon Principles label. That effectively rendered a third of the credits on the market junk.
So far, there’s no indication companies are correcting their past carbon accounts or green claims based on offsets now recognised as shoddy. For example, a spokesperson for Banco Bradesco said there’s no need to recalculate inventories to account for past purchases of environmentally useless credits.
Some companies that have stopped buying junk offsets are instead choosing to buy more expensive and seemingly more credible carbon removals, which typically pay for technology that can verifiably draw down CO2 from the air and bury it underground.
“I don’t think the problem will go away until there is broader accountability for false statements in the voluntary carbon markets,” said Danny Cullenward, a closer observer of the market at the Kleinman Centre for Energy Policy at the University of Pennsylvania.
The backlash against RE offsets has led the biggest public registries, including Verra and Gold Standard, to halt their involvement in most RE projects and limiting those credits to only originate from the least developed countries. But that has been seen as an opportunity by new registries, such as the Doha-based Global Carbon Council, which are becoming home to these junk credits instead.
These “standard setters” are offering an outlet for cheap, environmentally-useless credits and making money from doing so. The trend is “disturbing”, said Cullenward.
New Market
Aside from new registries, country negotiators at COP29 in Azerbaijan could also give RE offsets a boost. Owners of several thousand older projects with about 925 million carbon credits have applied to transition to a new market being finalised under Article 6.4 of the Paris Agreement. More than half of these are tied to RE.
The fate of these offsets, created for the UN’s old carbon market known as the Clean Development Mechanism (CDM), have become one of the most infamously intractable disputes among climate diplomats. But there’s a prospect of breakthrough at this year’s UN climate summit.
Meanwhile, industry players are looking to the new UN market as a source of better quality credits to those available via the voluntary market. Commodities-focused hedge-fund manager Andurand Capital Management LLP has described some of these credits as carrying a “quasi-compliance” status that it expects will be more valuable.
But as a recent scandal in Germany shows, even compliance markets are vulnerable to fraud. Last month, German authorities rejected US$20 million (RM83.4 million) worth of carbon credits in China-based projects and are advancing on a fraud investigation.
“If programmes could ensure additionality and accuracy, then funds could flow to where they are urgently needed to reduce emissions,” said Berkeley Carbon Trad- ing Project director Barbara Haya.
Ultimately, there’s no feasible shortcut on extensive project-by-project quality checks. “Unless there are legal consequences for parties that continue to issue and transact in low-quality credits, this whack-a-mole problem will likely persist,” said Cullenward. — Bloomberg
- This article first appeared in The Malaysian Reserve weekly print edition