FINANCIAL POST — Can planting trees in Guizhou province cancel out emissions from natural gas burned for energy in offices and homes across China? That’s the idea behind a deal struck in July by oil major Shell to supply PetroChina with an undisclosed quantity of liquefied natural gas branded “carbon neutral”.

The deal was part of a nascent but growing trend, in which fossil fuel shipments are paired with carbon offsets — units that organizations can buy to compensate for their emissions and help their carbon-intensive cargoes appear greener.

“With this deal, PetroChina will be able to provide carbon-neutral gas to Chinese businesses and households in line with China’s 2060 carbon-neutrality aspirations,” Shell explained: the trees would absorb millions of tonnes of carbon over the coming years, balancing out the pollution from the production and use of the fuel.

“This is the latest attempt to try to market fossil fuels of any type as part of the transition (to clean energy),” says Gilles Dufrasne, of the not-for-profit group Carbon Market Watch. “I don’t think there is such a thing as a ‘carbon neutral’ fossil fuel, it’s a bit of an oxymoron.”

Companies around the world have flocked to buy offsets from groups that plant and protect trees, install renewable energy, or do other activities that aim to clean up the atmosphere. The trade is simple: one offset equals one tonne of carbon saved or removed, which can be banked against a polluter’s own emissions.

British Airways, for example, says customers can “fly carbon neutral”. A passenger enters their flight details, the airline estimates how much carbon the trip will generate, and the customer neutralizes the pollution by buying offsets from a seller that British Airways has a partnership with. London to Rome, one way, will cost about £1.06.

However, who is using offsets, and how many, is often unclear. There is no requirement for buyers to disclose this information. The system is voluntary and unregulated, unlike compliance markets such as the EU’s emissions trading system.

Concerns over the quality and integrity of offsetting schemes have plagued them since they were first introduced more than 20 years ago. Critics say they often do not capture as much carbon as they claim. Many view offsets as providing companies with a license to pollute and say they represent a bad use of money that would be better spent on efforts to cut emissions.

The current offsets market “operates in the shadows”, with some good “but lots of bad” in the system, says former Bank of England governor Mark Carney, now U.N. special envoy on climate action and finance. “That does actual harm.”

Former Bank of Canada Governor Mark Carney. PHOTO BY PETER SUMMERS/ REUTERS

With the pressure to prevent runaway climate change intensifying, Carney and Bill Winters, chief executive of Standard Chartered, launched a task force last year to address the problems with offsets once and for all.

The private sector initiative hopes to transform the offsets market from a fragmented and mistrusted system into something that traders at a bank would recognize. It aims to thrash out new rules for ensuring credits are of high quality and develop a “core reference contract” to make offsets “fungible” and relatable to those on a trading floor. All to be policed by a new governance body to add enforcement to the system.

Designing watertight rules is proving difficult, however, and disagreements among the more than 250 groups, from market infrastructure providers to academics, working on the project are common. Getting these groups, which have wildly divergent opinions, to agree on how to solve complex problems is not easy, says one person involved in the process. “Some people believe A and some people believe Z, so what do you do?”

One point of contention is how quickly to design and scale up any new, multibillion-dollar trading system. The task force hopes to have laid out the broad architecture by November’s international climate conference, COP26. But some are fearful that scaling up in a hurry could cause more harm than good.

“If we rush . . . trying to scale up something before it is fully operational, in the sense that we can ensure credit integrity, then I think it will be really bad” for the climate, says Juan Carlos Castilla-Rubio, chair of Space-Time Ventures and a task force participant.

The fundamental questions about what makes for a “good” offset should be carefully answered “before we actually attempt to scale up and treat (offsets) like a standard commodity,” he says. These are questions that “people have spent many years…trying to sort out.”

Between 2017 and 2019, more than US$750 million worth of offsets were traded globally, according to Ecosystem Marketplace, which tracks the market. Unnamed financial institutions were the largest users of offsets in 2019, followed by the chemicals and petrochemicals industries, according to the Trove Research group.

Offsets are supposed to represent climate benefits — carbon that has been avoided or removed from the environment — that would not have occurred if the project generating them did not exist. In theory, the trade works for everyone: buyers can claim lower emissions, and the environmental schemes they buy from get money they would not otherwise receive. Carbon financing can help steer money into new technologies, such as those that remove carbon from the air. It can also prevent damage, such as deforestation, by supplanting an environmentally harmful revenue stream, such as logging tropical rainforests.

“Carbon offsets are an important tool . . . to help the world get to net zero,” said Bernard Looney, chief executive of BP Plc., the oil group, speaking at a Bloomberg conference in July. “We need a proper, effective market…and we must make sure that quality is at the core of that.”

Some companies, including Shell, have invested in the development of offset-generating projects. Last year, BP acquired a majority stake in a prominent offset developer, Finite Carbon.

However, the price of the credits has remained stubbornly low, with many available to buy for less than US$5. Low prices are partly the result of a glut of offsets that were generated years ago — when standards were even less robust than today — that no one bought. But even offsets from more recent projects tend to be much cheaper than the cost of carbon in regulated systems such as the EU’s ETS, which saw prices rise above €50 per tonne this year.

The cheap availability of offsets is unlikely to persuade companies to make significant emissions cuts, critics say. The “danger” is that even talking about offsetting “has a tendency to take away some of the energy from the carbon-cutting side of the equation”, says Mike Berners-Lee, a university professor and carbon emissions consultant.

The influential Science Based Targets initiative has barred offsets from counting toward corporate net-zero targets, which it says organizations must achieve by cutting emissions.

The Carney task force has emphasized that offsets should only be used to compensate for the residual emissions that organizations cannot eliminate, and not replace decarbonization efforts. Yet, how to police this is unclear: Winters says that deciding who can buy on the new market is “not the mandate of the task force”.


Guilty until proven innocent

Stories of offsetting projects gone wrong, or credits being generated for schemes that do little to tackle climate change, are common. A fundamental tenet of offsetting is that the projects deliver permanent benefits. But this summer, offset-generating trees went up in flames as wildfires ripped across the U.S. west coast, spewing carbon that had been stored in the trees back into the air.

Some of the most abundant offsets are from renewable energy projects developed by well-funded power groups, schemes that critics argue would have been viable in the absence of an offsets market, and should therefore not be counted as “additional”. In December, Bloomberg reported on a number of credits being sold in the U.S. purporting to protect forests that were in no danger of being chopped down.

The task force envisions a system in which offsets conform to a consistently high level of quality, where key requirements, such as additionality and permanence, are assured. The system, it says, will be policed by a new, independent governance body — with the power to define which offsets meet the new threshold for high quality.

Such an oversight body has been sorely lacking, say researchers. Although numerous not-for-profit groups already exist which check and approve offsetting projects, such as Verra and Gold Standard, no third party monitors them. These certification bodies are predominantly funded by the fees they charge for projects to register and generate offsets.

The current lack of trust in the market has driven companies including Microsoft to pay people to find them credible offsetting projects, rather than rely on a stamp of approval from bodies such as Verra.

“There’s a lot of rubbish out there,” says Berners-Lee. A member of his team spent several weeks trawling through hundreds of pages of documents scrutinizing the details of 65 certified projects for beer company BrewDog, and only found five “that were good”. Part of the problem is that “for a long time nobody was asking hard enough questions,” he adds.

Checking that offsetting projects genuinely deliver the benefits they claim is difficult and laborious work. The range of projects is vast, and each has its own unique context and risks.

Verra, Gold Standard, and other certification bodies have developed unique methodologies for assessing projects — complicated rules that are difficult for anyone not familiar with the market to understand. Yet, in the two decades that these groups have been operating, they have been unable to dispel concerns about quality — fears that the certification bodies consider have been overblown.

“We do not see evidence that (these groups) do a sufficient job themselves in assessing the quality of their own protocols,” wrote Barbara Haya, director of the Berkeley Carbon Trading Project, to Sonja Gibbs, head of sustainable finance at the Institute of International Finance, which sponsors the Carney-Winters task force. A system that relies on competing groups evaluating their own rules is unlikely to produce a market of high-quality credits, she added.

In response to the task force’s recent public consultation, Haya said the new governance body “should deem offsets guilty until proven innocent.”

The idea of a governance body has been broadly welcomed. David Antonioli, chief executive of Verra, says an independent arbiter would help standardize quality and generate trust. “It would be beneficial to have an entity that essentially looks under the hood and checks that we do what we say we do.”

In July, Winters said the governance body would be comprised of both independent members and market participants, something green groups have advocated against. “The task force leaves most key issues to a future governance body, and allows active market players to participate in that body,” says Carbon Market Watch’s Dufrasne. “This creates a clear and highly problematic conflict of interests.”

‘From amateur to professional’

The task force hopes to present the bones of the new system before the end of this year, reforms that should upgrade the market from an “amateur to a professional” level, says Carney.

One person involved says the process has been like “herding cats,” despite a consensus among the participants that “the current system generates no trust.” Many are concerned that the work is being rushed, and that some of the thorny questions being asked — such as how to ensure that the carbon benefits are truly permanent — remain unresolved after years of debate.

Growing trees absorb carbon, but is it possible to guarantee that they will remain standing indefinitely? And how to be sure that preventing deforestation in one region does not push it to an adjacent area? “There’s no chance that these questions will all be sufficiently answered” by the end of the year, says Jonathan Goldberg, chief executive of Carbon Direct, the advisory group.

Carney’s initiative wants to standardize contracts for offsets, making them easily tradeable on a market like any other. But valuing the relative benefits of projects that do very different things — trees do not store carbon forever, while a technical solution might, for example — is extremely complex, says Goldberg.

Some existing market players have hit back, contesting Winters’ assertion that the market is plagued by a “surplus” of bad offsets. “What we have today is already pretty robust…We don’t think at all that the current system is broken,” says Renat Heuberger, chief executive of South Pole, which helps develop offsetting projects.

The group’s senior climate policy and carbon pricing expert, Maria Carvalho, says it is “not claiming that the market is perfect and has no problems,” but “(we cannot) let the perfect be the enemy of the good.”

Danny Cullenward, policy director at Carbon Plan, a non-profit organization, stresses the importance of establishing “a culture that allows you to recognize failures.” But, he adds: “You will not find anyone working with the (certification bodies) who acknowledges the presence of bad offsets.”

There are also conflicting views about the consequences of creating a multibillion-dollar carbon offsets market. The stakes are high: done right, it could inject huge sums into underfunded climate solutions; done wrong, the number of poor quality offsets — failing to deliver on carbon savings promises — could proliferate.

Rushing to scale up the market could be “very dangerous,” says Goldberg. Offsetting is “not a donation, it is an exchange of money to emit a tonne of carbon…If you are not delivering a tonne of carbon removal, it’s a very bad deal for the climate.”

Carney rejects the idea that the task force could do more harm than good. The market “has to demonstrably reduce carbon, save carbon,” and if it doesn’t, it will simply not take off, he says. “The consequence of that is that we will all be in a worse position.”

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The Working Forest