By Gautam Naik and Esther Whieldon
This is a modified version of a thought leadership piece originally published on S&P Global Sustainable1. Read the full article here.
Investors aiming for net-zero in their portfolios need to think critically about the way companies are approaching decarbonization, as not every carbon-cutting program is created equal.
To meet ambitious net-zero targets, many companies plan to neutralize a large chunk of emissions by buying carbon offsets – credits generated by projects that are reducing carbon emissions elsewhere.
The idea is that once a company has done what it can to tackle climate change directly, it then can pay someone else to avoid emitting or to remove emissions already present in the atmosphere.
Projects like renewable generation and paying a landowner to prevent deforestation avoid emissions, while approaches like reforestation and direct air capture with carbon storage remove emissions.
It’s a booming business. Growing demand for these instruments could help push today’s annual carbon market, valued at about $400 mn, to anywhere from $10 bn to $25 bn by 2030, according to a study by Trove Research. But because many of the carbon offsets on offer today are outdated, of poor quality or hard to verify, they risk boosting global emissions instead of curtailing them.
What should investors know about offsets? One of the biggest challenges of carbon offsetting is that there aren’t enough high-quality credits to counteract the massive level of emissions businesses produce. What’s more, the world has limited capacity to create new ones.
Critics of offsets say they are not scaleable and don’t go far enough to address the climate crisis.
‘I've talked with enough CEOs who just want to tick the box, write a check to a group once a year and [say], I did my part on carbon,’ said United Airlines CEO Scott Kirby in February. ‘We are not going to solve the problem [this way].’
Another hurdle is that many companies keen to hit their net-zero goals may end up buying outdated offsets (also known as carbon credits) from projects that don’t provide ‘additionality’. If there is no additionality, that basically means purchasing offsets does not reduce emissions beyond business-as-usual.
‘If the credits being bought are coming from projects that would have been built anyway, those purchases aren’t changing the emissions profile of the world,’ says Guy Turner, founder and CEO of Trove and co-author of the study.
The surplus of older credits is significant and growing. ‘Really good firms will think carefully about which offsets they choose,’ says Mark Maslin, professor of earth system science at University College London. ‘There is a reputational risk’ from buying outdated credits.
Fixing the credibility issue for new carbon credits New initiatives seek to help companies pick offsets that are high quality and credible. The American Forest Foundation and the Nature Conservancy have developed a new Family Forest Carbon Program that aims to address carbon absorption efficiency and accurate measurements.
While the program is in its early days, at least one major corporation has signed up: Amazon invested $10 mn into the Family Forest Carbon Program for forest conservation in the northeastern US.
There are groups working to help companies navigate the voluntary carbon market. The World Wildlife Fund, Environmental Defense Fund and European environmental research consultancy Öko-Institut teamed up to work on guidance for buyers, releasing an initial paper that identifies six objectives for measuring the quality of carbon credits.
Carbon offsets ‘can be a powerful tool if they’re done right,’ says Alex Hanafi, the Environmental Defense Fund’s director of multilateral climate strategy, who is working on the guidance project. ‘If they’re not done right, they can be detrimental to climate action.’
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