‘Crazy’ Carbon Offsets Market Prompts Calls for Regulation

by Frances Schwartzkopff (Bloomberg/Advisor Perspectives) ... The buying and selling of credits that purport to offset a company’s pollution has become a cornerstone of the effort to limit global warming, and it’s being bolstered by a deal to create an international market mechanism struck at the COP26 talks in Glasgow last year. But the regulation of projects to cut carbon and win those credits is still its infancy, and amid hopes that the market will balloon to some $180 billion by the end of the decade, opportunism is rife.

“The whole concept of ‘I will not pollute and therefore I should get paid’ solutions are likely the worst,” Beyer said. “This will be a crazy market until it is regulated, completely crazy.”

At COP26, global leaders agreed on general principles for projects that generate carbon credits, which include initiatives as diverse as re-forestation, renewable power installation or measures to help household energy efficiency. The guidelines now say that projects which generate credits by claiming to remove carbon emissions must not have been done otherwise; reductions must be long-term and not lead to polluting elsewhere. COP26 also agreed to the creation of a registry, to track credits and the use of proceeds from their issuance.

Skepticism over the real carbon-removing credentials of projects is also growing, and only a tiny fraction of projects actually remove CO2 from the air.

The European Commission took a first step in December, proposing a framework for certifying carbon removal projects as part of a larger plan to create demand for credits that would be generated by European farmers and forestry companies.

For banks, the market represents a way to offset their own emissions and those of companies in which they invest and to which they lend -- and earn fees in the process. So-called “financed emissions” exceed banks’ own direct emissions by as much as 700 times, by some estimates. READ MORE

Excerpt from BloombergNEF: Prices for carbon offsets – verified emissions reductions equivalent to one ton of carbon each – could be as high as $120/ton or as low as $47/ton in 2050, according to research company BloombergNEF (BNEF). The outcome will mostly depend on what types of supply are eligible to meet the rapidly expanding universe of sustainability goals, as well as who the primary customers are in the market, finds BNEF’s inaugural Long-Term Carbon Offset Outlook 2022.

Should all types of offsets continue to be permitted, including those which avoid emissions that would otherwise occur, the market will be oversupplied with largely worthless credits, thereby driving down prices and attracting criticism around quality. A jump in corporate demand, specifically from heavy-emitting industries with no alternatives to offsets, could bridge this gap and lead to moderate increases in prices, but many companies are hesitant to invest further in offsets.

Conversely, if the market is restricted to just offsets that remove, store or sequester carbon, there will be insufficient supply to keep up with demand, causing significant near-term price hikes and damaging liquidity. If the market evolves to primarily help countries achieve their climate targets rather than companies – a possibility outlined at COP26 – it will soften this supply shortfall. Yet, this is still not ideal for the long-term success of carbon offsets. READ MORE