Carbon Offsetting, An Opaque And Booming Industry

A Cheap Tool Enabling Companies To Make Dubious "Net Zero" Claims

A carbon offset credit represents a reduction in emissions of one metric ton of carbon dioxide (CO2) or an equivalent amount of other greenhouse gases (GHGs). It is a transferable instrument certified by governments or independent bodies and can be freely traded between organisations on regulated or voluntary carbon markets.

• A carbon offset is a decrease in GHG emissions or an increase in carbon storage (for example, through land restoration or the planting of trees) used to make up for emissions that occur elsewhere
• Under a carbon market, companies have a financial incentive to cut their carbon emissions thanks to carbon credits as those that find it difficult to cut emissions can still operate but at a higher cost

In October 2020, a Total LNG tanker docked in the port of Dapeng in southern China claiming it was "carbon neutral" as the emissions from burning the LNG had been offset by carbon credits bought from a 10-year-old wind farm in northern China.

• The discrepancy between carbon credits' PR and the reality has grown since the carbon-saving projects carbon credits are intended to pay have long been operating without the benefit of these credit sales
• Critics warn of a growing market in out-of-date credits that deliver no carbon benefit for the globe

A Surging Demand For Carbon Credits

Over 5,000 companies have signed a U.N. pledge vowed to reduce GHG emissions or offset them by 2050. According to a Bank of America analysis, around a third of the S&P 500 index's companies have made such pledges, up from 1% in 2018.

• Such pledges have led to a surge in demand as sales of carbon credits in the voluntary market reached nearly $2 billion for the first time in 2021
• According to the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), the carbon credit market may be valued more than $50 billion in 2030

However, the voluntary market remains much smaller that strict cap-and-trade regimes imposed by governments such as the ETS regime in Europe to force major polluters to limit their carbon output.

Carbon Credits Are Funding Profitable Businesses With No Cash Needs

Under the standards set by the UN Clean Development Mechanism program, some renewable projects are labelled as being in need of cash to stay in business while already being largely profitable with strong cash positions and no need for additional external funding.

• This has led to companies buying carbon credits worth thousands of metric tonnes in carbon output to fund projects without cash needs
• The mechanism has been criticized for draining money from projects that need it more

According to critics, voluntary carbon markets lack transparency, making it challenging for purchasers to comprehend which projects would have taken place in the absence of credit issuance.

• “No one should buy any of that stuff anymore,” said Mr. Martins, senior director at the Environmental Defense Fund
• “[The] voluntary carbon market is the ‘wild west’ of carbon markets,” extract from a Credit Suisse report releaded in May, it is a self-regulated market “with poor transparency”

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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