Critics are targeting a “wild western” carbon offset market

Coal compensation – as a financial product – has grown rapidly into a $ 1 billion market, accepted by many companies. But at the same time, banks and regulators have expressed growing concern about the integrity of compensations as a commodity.

As corporate boards rushed to announce their net zero carbon emissions targets, carbon offsets or “credits,” it rose from relative obscurity to become a widely used, and inexpensive, tool to enable successes to be claimed.

Typically, carbon offsets – in the form of projects that reduce emissions, such as newly planted trees – are purchased and then “retired” in an independent register, so no one else can claim the carbon reduction from them.

They come in two varieties: regulated and unregulated. The EU’s emissions trading scheme is the largest and grossed $ 34 billion in 2021. This so-called lip-and-trade a program measures greenhouse gas emissions and forces companies to buy extra compensation when they pollute too much, or sell carbon credits to others.

But, with the price for regulated EU compensation reaching record highscompanies are turning to the voluntary, unregulated, offsetting market to meet their carbon targets.

This voluntary carbon offset market hit $ 1 billion in 2021, more than $ 306 million in 2020, according to a report by investment management and financial services company Morgan Stanley. That figure compares to around $ 115 billion in the mainstream EU trade scheme. However, the unregulated market could grow to about $ 35 billion by 2030, Morgan Stanley adds.

Mark Carney, the former Bank of England governor, estimated a possible increase in the carbon offset market to $ 50 billion by 2030, though his count attracted examination.

But, even as market participants are working to establish best practices for the carbon offsetting market, it is facing growing criticism.

“[The] A voluntary carbon market is the “wild west” of carbon markets, “investment bank Credit Suisse said in a May report. It is a self-regulated market” with poor transparency “.

Credit Suisse noted that carbon offsetting credit purchases from Delta, the airline, and vehicle manufacturer Volkswagen in 2021 were about twice and five times larger than their 2020 purchases, respectively. However, the bank warned that, based on disclosures to the sustainable watchdog CDP, “we can see that most of the companies are buying carbon offsets with potentially critical environmental integrity. In particular, we found that most of the renewable energy projects do not located in less developed countries. “

Credit Suisse added that hundreds of companies make statements about carbon credit transactions, but use terms like “network zero” differently – which has caused confusion. As a result, “there is a growing scrutiny of investors, regulators and even consumers to make sure claims are appropriate and not a green wash.”

Attendees at COP26 climate talks in Glasgow

Attending last autumn’s COP26 climate talks in Glasgow © Bloomberg

Media attention to the COP26 climate conference last year prompted companies to set net zero targets, even if they did not put forward plans to achieve them.

So when choosing between cleaning by cutting natural gas, for example, or “this cheap, easy option to buy [carbon] market credit. . . Of course, it’s mandatory to do that, ”said Barbara Haya, director of the Berkeley Carbon Trading Project at the University of California.

The U.S. Securities and Exchange Commission, in a key announcement on climate change in March, called for greater transparency in their use of carbon offsets. If carbon offsets are used to achieve emission targets, information on carbon offsets should be disclosed. the SEC stated.

The U.S. regulator has been warned by industry experts about “problems with compensation verification, accuracy and quality,” SEC Commissioner Caroline Crenshaw said. said. “If companies claim to be reducing overall carbon emissions by other means, they need to tell investors how they do it,” she explained.

To help companies comply with new regulations, Annette Nazareth, a former SEC commissioner, has joined the Integrity Council for the Voluntary Carbon Market, a global governing body set up in September to set standards. Nazareth says the council’s first task is to set a benchmark for quality carbon credits and it wants to publish these standards in the third quarter of 2022.

Skepticism remains, however. Haya has been studying carbon offsets for two decades and says: “It didn’t work 20 years ago; it still doesn’t work. Why, after 20 years of ‘learning by doing’, is the quality still so bad? “

Current carbon offset initiatives are plagued by double counting, as well as unclear standards, Haya argues. Companies could supplement carbon offsets, she suggests, with investments in real coal-cleaning projects, such as environmental protection or new technologies that eliminate carbon emissions.

“We have to try to tighten the current market,” Haya adds. “It simply came to our notice then. And then there are many other ways that companies can compensate for their emissions. “

Climate Capital

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