The climate crisis has driven businesses and governments to set heady targets to cut carbon emissions over the next 20 years, increasing demand for carbon offsets — a contract that says a tonne of carbon has been permanently avoided or been removed from the atmosphere by paying some money.
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Uncertainties around the supply of credible credits and muddled regulation governing the nascent market means this surge in demand won’t necessarily mean skyrocketing prices down the line.
Supply of offsets has increased by 66 per cent annual since 2018, with a record 250 million offsets issued in 2021 through October, according to data from commodity research provider BloombergNEF (BNEF). Underpinned by a deal to create an international market mechanism signed-off at the COP26 climate talks last year, their popularity looks set to continue in 2022.
Between June 2021 and January 2022, the price of nature-based offsets — such as those created from tree-planting projects — trebled in price from around US$4.65 per tonne of carbon to around US$14.40, according to marketing intelligence firm S&P Global Platts.
Presenting three scenarios in its outlook, BNEF predicts that prices for carbon offsets could be as high as US$120 a tonne or as low as US$47 in 2050, in its inaugural Long-Term Carbon Offset Outlook 2022 published last week.
Current standards allow reduction to come from either carbon avoidance – such as using wind turbines or solar power instead of fossil fuels – or by removing carbon from the atmosphere and storing it.
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We have got to be aware that carbon credits are a virtual commodity. They are worth nothing if there is no integrity.
Albert Lai, chief executive, Carbon Care Asia
If both approaches remain in play, the market will remain oversupplied, BNEF says. Prices will stay as low as US$11 per tonne in 2030, hitting US$47 in 2050.
Currently, an economy return ticket from Singapore to London Heathrow generates 1.70 tonnes of carbon dioxide emissions. To neutralise this with offsets costs a mere US$13 for the passenger. Low prices sustained by voluntary purchases are not doing the market, or the climate, any favours, according to BNEF.
“While such low prices are a desirable outcome for corporations looking to use offsets as a ‘get out of jail free’ card, they offer developers, banks and brokers little financial incentive to support the market,” according to BNEF’s analysis.
The standards applied to govern carbon offsets will dictate the price, according to the forecast. While lax rules could leave offsets “largely worthless”, stringent requirements could push prices to eye-watering levels.
The analysis forsees registries cracking down on energy offset issuance. Groups like the Science Based Targets Initiative (SBTi), a framework for companies to align their emissions with the Paris climate accord, is pushing for the use of only removal offsets to achieve net-zero emissions, relegating avoidance measures.
Less than 5 per cent of offsets remove carbon from the atmosphere, according to an inventory analysis by the Taskforce in Scaling Voluntary Carbon Markets 2020. The removal of all avoidance measures would likely force a scrum for what’s left, pushing prices up substantially.
TSVCM anaylsis shows that less than 5 per cent of all offsets remove carbon dioxide from the atmosphere. The rest are classed as avoidance offsets that are from activities that reduce emissions by preventing their release into the atmosphere.
Industry bodies have meanwhile warned members not to hedge their bets on emerging technology to capture pollution. There are numerous and deep-seated obstacles facing the widespread adoption of Carbon Capture, Use and Storage (CCUS), states analysis by the Asia Investor Group on Climate Change (AIGCC) whose members include asset manangement firms Arabesque, BlackRock and Taiwanese insurance company Shin Kong.
With direct air carbon capture (DAC) technology still in its infancy and only a limited number of nature-based offsets to fulfil demand, the market could become undersupplied. In this scenario, offset prices could skyrocket to US$224 by 2029, before retreating to US$120 in 2050, BNEF predicts.
Given the short supply of projects that remove carbon, in the near-term, avoidance offsets are likely to remain in the market.
“Although carbon avoidance credits cannot counterbalance your residual emissions, they can help to accelerate a low carbon economy,” Albert Lai, chief executive of Carbon Care Asia, a sustainability consultancy told Eco-Business. “Carbon avoidance credits will still have a significant and positive role to play during the transition to net zero.”
A rise in carbon prices—driven by government regulation or market movement—will push up the cost of offsets regardless of supply.
“Our view is that for that voluntary end of the market, whilst it trades at a significant discount to much of the compliance market, that discount will close,” said Todd Warren, head of research for hedge fund Tribeca Investments Partners, which manages US$3.2 billion of assets.
“Particularly for those higher quality, nature-based credits, where there are quite significant social co-benefits that are over and above the obvious environmental aspects.”
Matching quantity with quality
Improved standards will help to create a more solid basis for the growing market in carbon offsets, a key to pivoting the private sector against climate change. However, a medley of voluntary, private-sector standards is undermining trust in the market with growing skepticism over the legitimacy of some projects.
Finnish climate non-profit, Compensate, in April last year reviewed more than 100 carbon capture projects certified with industry leading standards. It revealed that the voluntary carbon market is “riddled with severe integrity issues” with less than 10 per cent meeting its criteria.
Some were found to have serious permanence risks with others causing human rights violations. While some projects have failed to prove additionality — the ability to decrease emissions that would otherwise have taken place.
There are some moves to improve transparency and regulation of the industry. The AIGCC advises that its members use offsets as a last resort, investing in long-term high-quality carbon removal.
“Using offsets may be an ‘easier’ option for purchasers but they are not risk-free. Pursuing the use of poor-quality schemes, including those which have negative social and ecological impacts, potentially creates reputational risks,” an AIGCC spokesperson told Eco-Business. It plans to publish detailed guidance for its members this quarter. Tribeca invests in carbon credits rubber stamped by developers with a proven track record.
Some of the barriers limiting the supply of high-quality credits coming into the market are likely to be removed over the next three to five years, according to Dale Hardcastle, expert partner for Bain, a consultancy, in Singapore. “We expect the pool of project developers will build more experience, and there will be better track record of implementation.”
Emerging markets in Southeast Asia have some of the world’s most valuable investable stock. Bain predicts the potential could be worth US$10 billion in economic activity by 2030.
The big issue, Hardcastle said, is the long lead time for new offsets to start becoming effective. There is also a current lack of expertise to assess the carbon potential of a project at the moment.
Ground-level governance is also a sticking point. While countries like Indonesia pose a significant opportunity for carbon offset projects, its land-titling process is littered with irregularities.
“In many of these countries, the institutions are simply not strong enough,” Lai said. “For carbon project developers in some ASEAN countries, the first hurdle they will likely encounter is opaque land title information. This will make it hard to generate credible and robust carbon credits in line with international standards. Governments can play an active role to improve such conditions.”
“We have got to be aware that carbon credits are a virtual commodity,” explained Lai. “They are worth nothing if there is no integrity.”
