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Voluntary carbon offset market fuelled by demand from world’s top emitters

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Does growth in the voluntary carbon market (VCM) mean decarbonisation? The latest research suggests not as booming demand is driven by some of the world’s highest emissions-intensive businesses.

Credibility of both the structure of credits and how they are used in offsetting emissions will be critical to growth of the VCM. Analysis from BloombergNEF was undertaken to clean, standardise and classify publicly disclosed offset buyers, in order to provide new insights into carbon offset demand. That requires an assessment both of what companies are buying offsets and sorts of offsets – as that brings us some key carbon market issues quality and additionality.

It reported that of the 1,900 voluntary offset projects on the four primary registries that issued offsets from 2015 to 2020, around 54% have issued the amount or more offsets in 2021 as they did the previous year. According to BloombergNEF analysis, the likeliness of registered projects actually issuing carbon offsets has increased nearly fourfold since 2015, “signalling that projects lay dormant until they see a demand signal”.

“Demand is the tinderbox in the exploding voluntary carbon offset market, but [it] is rife with challenges around quality, additionality and geographic accuracy”, said Kyle Harrison, head of sustainability research at BloombergNEF and lead author of the report.

Voluntary offset market set for massive growth

BloombergNEF estimated in a report earlier this year that the global carbon offset market could expand exponentially over this decade, going from $1 billion today to $190 billion in annual value by 2030.

The implications of this massive market boom will be significant for climate action and achieving net zero targets. In a bid to meet net zero and climate commitments, many companies are turning to carbon offsets as a means to bulk up their sustainability strategies.

Leading purchasers of carbon offsets remain  heavy emitters

Nearly 2,100 unique entities self-reported having purchased carbon offsets in 2021, “shin[ing] a light on the decarbonisation strategies of larger corporations” says the report. Two-thirds of disclosed buyers fall under the category of business-to-consumer sectors, a trend that the report sees as highlighting that “the majority of demand is driven by customers, rather than fundamental targets”.

The report finds that the top buyers are a diverse group of heavy-emitters like airlines and oil majors. The top buyer of carbon offsets in 2021 was crypto company Toucan Protocol, purchasing $16.6 million in offsets – more offsets than the next three largest buyers – Delta Airlines (8.6 million), Shell (3.9 million) and Volkswagen (3 million) – combined.

Of the top 10 largest offset buyers in 2021, around 91% of their portfolio came from either avoided deforestation projects (REDD+) (48%) or energy generation projects (43%). Both these type of projects have been under scrutiny for the quality of the offset (ie the real world decarbonisation impact of the project) and lack of additionality (ie the projects would have happened even if the offset had not been purchased).

The interest in energy generation credits is considered particularly concerning due to its lack of additionality. Verra has banned offset creation from energy generation everywhere except for least developed countries, which created just 1% of retired offsets in 2021, but so far this has not yet led to changes in buyer activity.

VCM risks driving climate colonialism

Data in the report also shows that there is a stark North-South divide in the carbon offset markets, potentially fuelling a ‘climate colonialism’ risk. In 2021, 97.7% of all retired offsets were created in Asia Pacific, Latin America and Africa, primarily in developing countries. However, 83.7% of these carbon offsets were bought up by companies in developed markets across North America and Europe.

The glaring geographical supply and demand differences highlight an ongoing issue of developed countries contributing to the lion’s share of carbon emissions, while exporting their carbon emissions and climate risks to vulnerable developing countries.

The United Nations Conference on Trade and Development (UNCTAD) estimates that the carbon footprint of an average person in a developed country was more than 23 times larger than that of an average person in a least developed country (LDC).

Reporting and transparency in the VCM leave much to be desired

However, unlike other aspects of a company’s sustainability performance like target setting, clean energy procurement, or green bonds, reporting and transparency in the voluntary carbon offset market is just like its name suggests – voluntary. This means that the market largely relies on voluntary self-reporting from market participants.

Due to ‘greenwashing’ criticism around carbon offsets, many companies “rarely report on their offset transactions”. This lack of reporting has created an opaque market, which offers little insight into the actual impact of carbon offset markets and its real world impact on reducing emissions.

Credits should only offset no more than 10% of value chain emissions

While the voluntary carbon offset market has the potential to contribute to effective decarbonisation, the lack of regulation has risked giving the world’s largest emitters the ability to fulfil their sustainability requirements on paper, while continuing on ‘business-as-usual’.

The need for transparency and credibility is one of the reasons for the development of the Science-based Targets Initiative. Plans for the transition to a net zero future under the SBTi only allow for 5-10% of emissions to be offset by credits. At the same time there is growing interest in classifying the age of an offset, with 60% of offsets retired in 2021 being created in 2015 or earlier. While consumer-facing sectors like consumer discretionary and communications buck this trend, greater enforcement in areas like age (or vintage), co-benefits and sector are likely on the way from regulators and other third-party initiatives.

Harrison says that the analysis of carbon offset purchases in the report are “a harbinger of the troubling direction the market is taking, highlighting the need for tighter regulation, improved market infrastructure and closer investor scrutiny”.

“It is essential that investors, regulators and NGOs crack this nut before the offset market grows too unwieldly – a very real near-term possibility”, warned Harrison.

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