bneGREEN: Carbon offset market shrinks

bneGREEN: Carbon offset market shrinks
Carbon offset markets have decreased for the first time since 2016, with companies including food giant Nestle, the fashion house Gucci and Shell reducing buying such voluntary offsets. / Saad Faruque, Creative Commons
By Roberta Harrington in Los Angeles September 6, 2023

Carbon offset markets have decreased for the first time since 2016, with companies such as food giant Nestle, the fashion house Gucci and Shell reducing their purchases of such voluntary offsets. 

Studies found several forest protection projects did not deliver the emissions savings that were advertised.

Carbon credits typically are based on buying into projects such as planting trees or other natural vegetation to mitigate the buyer’s climate emissions. Preserving woodlands is vital for achieving global temperature goals and mitigating severe consequences of climate change.

In late August it emerged that the UK’s Advertising Standards Authority (ASA) was scrutinising carbon offsets that may be more greenwashing than helpful in the fight against climate change.

And earlier in the summer, regulators at the US Commodity Futures Trading Commission (CFTC) said that they had convened a new environmental fraud taskforce to scrutinise carbon credits in both derivatives and spot markets, said Bloomberg.

In 2023, carbon credit demand may in fact decline, with companies using fewer credits.

The number of credits used by corporations shrank by 6% in the first half of 2023, the first dip since at least 2016, said Reuters, citing data from BloombergNEF.

The news service also reported that Ecosystem Marketplace showed a sharper drop, of 8%, of credits used over the last seven years.

Prices of carbon offsets traded through the largest spot carbon exchange, Xpansiv market CBL, fell by over 80% over the last 18-20 months, said Reuters.

Additionally, the news service said that CBL’s Global Emission Offset (GEO) contract, which includes projects eligible under a major airlines' offsetting scheme, was around $1.60 per tonne in July of this year, down from a high of $8.85 per tonne in November 2021. CBL’s nature-based GEO contract, recently at $2.60 per tonne, was down from a peak of $11.75 per tonne in January of last year.

"A number of negative studies on carbon credits caused enough concern for some companies to pause purchasing and wait for more guidance on what sort of credits they should buy," Stephen Donofrio, managing director of Ecosystem Marketplace, told Reuters.

"Companies are moving in the right direction, in that there is growing preference for higher quality, more expensive credits," he said.

Concerns have arisen about carbon credit quality, influencing companies to pause purchasing, and improved credits with higher cost are gaining preference.

The voluntary carbon market has faced fast growth driven by net-zero pressure. The market value was $2bn in 2021, and is forecasted to rise by 2030 to $10-40bn.

Critics argue credits let companies feign action while emissions persist. Even real carbon credit projects can take years to come to fruition – tree growth can take years and they can be easily harvested. It is also hard to predict deforestation.

The EU plans to restrict misleading carbon claims, reports Reuters. The EU Parliament will ban using environmental claims based only on carbon offsetting schemes starting in 2024, while the EU’s draft standards for carbon reporting will necessitate companies to report their emissions before carbon credits or ‘avoided’ emissions.

Corporations have hardly been highlighting their scaling back. Gucci deleted claims from its website earlier this year that it is entirely carbon neutral and does not disclose financial information about its offsets, said Reuters. 

"Gucci is in the process of reviewing its climate strategy and commitments with a view to achieving the most positive overall impact," Gucci told the news service in an emailed statement.

Nestle, which has also reportedly not disclosed its offset spending, said it would stop using the voluntary credits and would seek other routes to net zero, said Reuters. Nestle is also abandoning carbon-neutral plans for its popular chocolate bar KitKat.

"We are moving away from investing in carbon offsets for our brands to invest in programmes and practices that help reduce GHG emissions in our own supply-chain and operations, where it makes the most difference to reach our net-zero ambition," it told the news service.

The air carrier EasyJet said a year ago that it was withdrawing from offsets to focus on cutting emissions from its operations. "There's no denying that it's an area that there's been a fair amount of media discussion and uncertainty about," Jane Ashton, the company’s sustainability director, told Reuters.

According to Bloomberg, the oil supermajor Shell – Europe’s largest oil company – has also quietly scaled back what the news service described as the “world’s biggest corporate plan to develop carbon offsets”. The company had previously committed to invest as much as $100mn a year on carbon credits, part of its 2050 net-zero goal. This would have involved “harvesting” 120mn carbon credits a year by 2030 from carbon offset projects involving forests, grasses and other natural resources, many developed by Shell itself.

“It’s really hard to get scale from high-quality credits,” Gilles Dufrasne, carbon policy officer at Carbon Market Watch, told Bloomberg. “The two forces work against each other.”

The decrease in offsets affects poorer nations that rely upon funds from multinational companies. Kenya, for example, aims to be a carbon trading hub, focusing on tree planting to counter emissions.

In January, The Guardian reported on research by the news outlets The Guardian and Die Zeit and SourceMaterial that found that the forest carbon credits offered by Verra, whose credits have been bought by companies such as Gucci, Shell, Easyjet and Disney, were “largely worthless and could make global heating worse”.

Based on scrutiny of a “significant percentage” of Verra’s projects, the research found that over 90% of the company’s rainforest offset credits were likely to be “phantom” and not represent actual carbon reductions. Verra has said it will soon announce updated rules for forest offset projects.

Apart from negative publicity, legal action could occur. The Dutch airline KLM faces a civil suit brought by green groups that allege the airline misled consumers in commercials about its carbon credentials, such as offsets, and had in fact been greenwashing.

KLM said it will argue its case fully in the Dutch court. "KLM is ambitious in its climate approach and wants to involve its customers in the subject," it said." We are always learning and continue looking at our communications to determine what can be better and more transparent."