Net zero emission targets and the carbon offset market

December 2020 was the fifth anniversary of the Paris climate accord, marked by a climate summit held in the UK with 70 world leaders. In advance of this milestone, the UK threw down the gauntlet to other countries by elevating their emissions reduction target to 68% by 2030 compared to 1990 levels, 11% higher than the previous target. These targets are considered the second toughest in the world, following only those of Sweden.

The announcement was followed by a full report from the Climate Change Committee, the government climate advisors, on how the UK intends to reach this goal. This includes major changes across many industries as well as significant consumer behaviour change such as a 35% reduction in consumption of meat and dairy and fewer flights taken. Other changes include the phase out of diesel heavy goods vehicles no later than 2040, steel and cement production will have to reach near zero emissions by 2035 and 2040 respectively, and tree planting rates will need to quadruple. This is all alongside significant investment into renewable energy sources and a reduction of oil and gas demand of 85% and 70% respectively by 2050. What was notably absent was the use of any international carbon offsets or credits, instead the report explicitly recommends corporates minimise their reliance on offsets and ensure only permanent emissions removals remain.

There is much dispute over the merit of carbon offsets. Many are concerned that it allows companies and industries to push out real action and investment to reduce operational emissions, instead paying currently low prices to offset emissions through projects that may have been financed anyway. The result is a slower path to emission reduction and much ‘greenwashing’ from corporates for a price which doesn’t reflect the real environmental damage being done by the business. Others believe that carbon credits enable important projects that would otherwise not go ahead and that many of the issues can be ironed out; it is not a market to turn our back on but to regulate and make more efficient. Some believe simply that it is a flawed but necessary steppingstone towards a universal carbon price through taxation.

Despite the controversy, carbon offsetting schemes are growing in popularity among corporations looking to reduce their net carbon emissions. They enable organisations to compensate or neutralise emissions not yet eliminated by financing the avoidance / reduction of emissions from other sources, or the removal of greenhouse gases from the atmosphere. The projects generating these emissions reductions can be grouped into two categories – reduction projects such as renewable energy or sequestration projects, such as reforestation or technology-driven carbon capture.

Although there are standards and certifications to help regulate the industry, there is undoubtedly greenwashing in the current market. Bloomberg recently published an article investigating the market in the US highlighting examples of poor-quality projects making false claims about carbon protection. Most concerning about the investigation is that it involves the world’s largest environmental group, the Nature Conservancy. According to the article JPMorgan, Disney and BlackRock are funding and marketing projects to protect carbon-absorbing forests that were in fact already part of well-preserved forests. The companies can take credit for saving land that was already well protected, presenting a clean climate profile while they continue to emit carbon through operations.

An example of such a project is in Hawk Mountain, an area east of Philadelphia which has formed part of JPMorgan’s offset programme. There are 2,380 acres of trees which are estimated to have absorbed half a million tonnes of carbon dioxide in their trunks, branches and roots. If the area were to be deforested this would be released into the atmosphere so the landowner, working with the Conservancy, has issued carbon offsets in order, according to the project documents, to protect the land from the aggressive timber harvesting that could ‘feasibly occur’, wiping out 89% of the living trees in only five years. The problem is that this land was not in peril; it was bought by a philanthropist 85 years ago who created a non-profit to preserve the land and has done so ever since. The director of the non-profit organisation was led to believe that the carbon offsets are generated by the use of the revenue to help them take better care of the land and improve the forest health. The project document, however, shows that almost all the credits come from the assumption that the land would have been heavily harvested, something the non-profit would never have allowed. The calculation of the amount of carbon saved assumes a highly unlikely worst-case scenario. In defence of the Nature Conservancy, they were following the rules of the American Carbon Registry, but its of no small concern that following the rules allows this kind of exaggerated calculation.

In recent months we have seen former Bank of England governor Mark Carney throw his weight behind the expansion of the carbon offset market, calling it an ‘imperative’ to help reduce emissions. Mr Carney recently co-founded the Task Force on Scaling Voluntary Carbon Markets along with the Standard Chartered CEO Bill Winters and backed by 50 organisations. The task force estimates that the voluntary carbon market will need to grow by 15-fold at a minimum by 2030 in order to support the investment required to deliver the 1.5℃ pathway and should ultimately transform from a $300m market today to $50-100bn annual market. The intention is not to be the regulator but ensure sufficient scale and transparency in the market to reduce these bogus projects.

This call to grow the market for carbon offsets is also in recognition of the great challenge faced by countries to reduce their emissions to net zero by 2050. While the rising ambition of governments in recent months represents an important, if not somewhat overdue step, the hurdles to reach this goal should not be underestimated. Where technology gaps exist, carbon offsets can support greater carbon sequestration and reduce net global emissions.

The Task force expects to launch a pilot trading program ahead of the next UN climate change conference in November in Glasgow next year. “The demand for this is going to be huge because we have this big shift. More and more companies — and it will be a tsunami by Glasgow — will have net zero emissions plans,” said Mr Carney. “They will be looking to reduce emissions . . . but for a period of time, they will also need the ‘net’ in net zero, and they can only get that from a credible global market that needs to be developed.”

In our view this market can serve to mobilise a great amount of investment in projects that are still uneconomic and would otherwise not be financed, and it should not go unrecognised that many businesses large and small are now essentially paying a fee for their carbon emissions by sponsoring carbon offsets. The elusive global carbon price may become less elusive through the expansion of this market, as long as it is sufficiently regulated and monitored.

As we look at our own carbon footprint, we may take the step to offset it through carbon offsets in the future, and we will make sure to do our due diligence to ensure the project finances true emissions reduction.