Carbon offset market progresses during coronavirus
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Big corporate buyers — from oil major BP to French luxury group Kering and tech powerhouse Google — have breathed fresh life into the carbon offset market over the past year.
The market, which dates back to the 1970s but picked up momentum after the 1997 Kyoto agreement on climate change, has faced significant setbacks in recent years, including a price crash after the 2008 financial crisis and the closure in 2010 of the Chicago Climate Exchange, a US trading platform.
Many in the sector feared the coronavirus crisis would deal a fresh blow to the offsetting industry, in part by reducing emissions from industries like aviation that were set to become big buyers.
In fact broader corporate demand for voluntary carbon offsets has increased this year, according to the latest report by Ecosystem Marketplace, a non-profit that provides information on environmental markets.
This fresh wave of companies voluntarily opting to offset their emissions — rather than being forced to — reflects a wider commitment to lowering the environmental impact of business operations. And many campaign groups that were previously circumspect about carbon offsetting have come round to the idea that voluntary schemes will be essential to meeting the Paris agreement target of keeping global warming below 2C.
The carbon market falls into two categories. The voluntary market comprises a mix of climate-friendly projects, mostly in the developing world; it involves hundreds of small consultancies and brokerages that sell the carbon credits created by such projects to mostly developed-world buyers.
These are typically businesses that want to reduce their greenhouse gas emissions but are at a point where it is physically impossible or financially unfeasible for them to do so. Buying carbon credits — each equivalent to one tonne of carbon dioxide — enables them to offset those emissions, in effect reducing their net carbon footprint.
The second category is the so-called compliance market, which includes highly regulated national, regional or global programmes such as the EU Emissions Trading System and the UN’s Clean Development Mechanism. There are now 61 such carbon pricing initiatives in place or scheduled for implementation around the world, according to the World Bank, covering around 22 per cent of global emissions.
Boosters and doubters
The voluntary market is currently about a hundredth the size of the compliance market, in terms of the total amount of carbon paid for. But it looks set to make up some of that ground as worries about environmental risk move up the corporate agenda.
Earlier this month, in a move that bolstered the voluntary market’s credibility, former Bank of England governor Mark Carney launched a global task force to scale it up as quickly as possible. Meanwhile the Science-Based Targets Initiative, which campaigns for rigorous carbon targets, included carbon offsets for the first time in its latest guidance on how companies should go about achieving net-zero carbon emissions.
Yet carbon offsetting bodies still struggle to prove their worth to detractors, who liken the market to the sale of Papal Indulgences during the Middle Ages, with companies paying hefty sums to absolve themselves of environmental guilt without fundamentally changing their behaviour.
Ecosystem Marketplace rejects this charge. “Companies that put a price on carbon tend to be the most aggressive at reducing emissions internally, with offsets serving as a way of deepening reductions,” it wrote last week in its latest report.
It points to Google as a good example, which this month announced it would be carbon-free by 2030, but said that until it could reach that goal, it would offset the emissions it cannot eliminate, and also offset its historical emissions dating back to its founding in 1998.
While most people think of tree-planting when carbon offsets are mentioned, the market actually encompasses a wide range of pollution-preventing activities, including renewable energy and waste disposal schemes. Still, forestry and land-use initiatives remain by far the largest sector of the market in dollar terms.
Most projects are based in the developing world, with China, India, Turkey and Brazil together accounting for nearly 44 per cent of active projects in the voluntary market. But the US hosts the single largest number of projects, with nearly 23 per cent of the total.
Some market commentators take issue with the fact that companies are outsourcing most of their emissions reductions to faraway places rather than doing it closer to home, where projects can be monitored closely.
“Why does it all have to be in the developing world? It could be anywhere,” asks Lars Kroijer, chief executive of Allied Crowds, a London-based firm that provides in-depth data analysis of emerging markets.
Mr Krojier, a former hedge fund boss, also raises concerns about pricing discrepancies between projects on the market.
“The pricing is horribly convoluted, and inefficient,” he says. “We’re looking at huge price differences for what should be the same thing.”
For there to be “massive growth in the carbon space”, he argues “you need price transparency and consistency and clarity, like stocks and bonds”. The answer, he suggests, could lie in a futures market — as exists for commodities such as oil — that locks in future delivery of goods at a price set today.
Market participants counter that the range in pricing is not an issue.
“What’s fascinating about the voluntary market is that there isn’t one price,” says Austin Whitman, chief executive of Climate Neutral, a non-profit carbon offsetting body.
He says: “I don’t see an inherent problem to there being a $1 offset, $10 offset and $100 offset coexisting, but I do think there should be strong governance to the market.”
Poor governance has certainly sullied the reputation of the market in the past. For example, a widely reported paper in 2009 found that less than 30 pence in every pound spent on some carbon offset schemes went directly to the emission-reducing projects.
Earlier, in 2006, the case of the so-called “Coldplay forest” had illustrated another problem, that of ensuring projects’ long-run viability. In 2002, the pop band Coldplay announced that it would offset the environmental impact caused by the release of its second album by planting 10,000 mango trees in southern India. But journalists who travelled to the mango grove four years later found that 40 per cent of the trees had died.
Similarly, tree planting projects have faced criticism for focusing heavily on monocultures that can end up damaging biodiverse ecosystems.
“Although it’s improved, it’s not perfect,” Mr Whitman concedes.
“I don’t think the industry has done enough to develop evidence to show that it works — [to] show the actual outcomes of those programmes,” he says. “I think that’s really impeding the growth of the market.”