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Shell to invest $450m in carbon credits as market fears grow

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Shell reiterates its commitment to the voluntary carbon market (VCM) with plans to spend $450 million on carbon offsetting. Concerns are growing though about the type of credits to be bought, as worry about baselines for afforestation credits raises greenwash concerns.

  • Compliance carbon markets more than doubled in value over 2022/21 to $850 billion.
  • The voluntary carbon markets are growing rapidly but remain relatively small with a value of $2 billion.
  • Rapidly increasing corporate commitments to net zero are set to drive CVM growth but supply of high quality carbon credits remains low.

The value of the voluntary carbon market, that allows buyers to purchase carbon credits to help them meet emissions reduction goals, is expected to grow fivefold by 2030. This is according to a joint report from Shell (NYSE:SHEL) and Boston Consulting Group (BCG).

The compliance market soared to an estimated value of about $850 billion in 2021, nearly 2.5 times the value in 2020 while the voluntary market value quadrupled to about $2 billion, the report showed.

In 2022 the use of carbon credits continued to grow across the board, with nearly 166 million tonnes of retirements – a record number of retirements.

“The increase in value and volume, despite the current economic headwinds, is a sign of the growing importance of the voluntary carbon market,” said Nick Osborne, General Manager, Global Environmental Products, Shell.

“We are seeing a concerted effort from businesses to build sustainable carbon credit strategies that they and their stakeholders have confidence in. We want to leverage that focus to help build a highly credible, scaled-up and transparent carbon market that supports a net-zero emissions future.”

Shell has also announced its own plans to invest in the voluntary carbon markets, with a proposal to invest in 120 million tonnes of CO2e credits. The focus of the plan is on nature based solutions – which may well included avoided deforestation credits.

Integrity, additionality and permanence

There are two fundamental requirements for market growth: on the supply side, increased trust in the quality and credibility of carbon credits/offsets and, on the demand side, clear, robust, transparent and well communicated strategies on the part of industry.

Forestry and land use credits have often proved popular with purchasers in terms of sequestering carbon, but have also often proved most difficult to manage, with challenges around emissions measurement, verification, as well as assessing additionality and permanence.

In fact, according to 2020 inventory analysis from the Mark Carney-led Taskforce for Scaling Monetary Carbon Markets (TSVCM), only 5% of existing offsets actually remove CO2 from the atmosphere; most either prevent or displace potential pollution. That is not necessarily a sufficiently strong action to qualify as additional action on emissions for a large corporate.

Key trends in the VCM

Despite the fact that the VCM is exactly that, voluntary, the surveys underpinning the Shell/BCG report show a very different view. Increasingly buyers see carbon credit spending as non-discretionary and anticipate it growing. At the same there are reports that carbon credit purchasing strategies are increasingly being influenced by industry groups

While carbon removals (CDR) are not yet allowed in any of the existing compliance markets, 52% of companies expect removal credits to dominate their portfolio by 2030. This is particularly interesting in light of Article 6 discussions but another thing that came through clearly was that survey participants have limited clarity on the impact of Article 6 of the Paris Agreement and corresponding adjustments.

Finally, and understandably, a reputable monitoring, reporting and verification (MRV) framework is the most important purchasing criterion.

Credibility concerns on the increase

Credibility of verification has taken a hit recently, with reports that afforestation credits certified by Verra had been over-issued. The analysis, published by the Guardian in association with Die Zeit and Source Material, suggested that up to 90% of the credits issued could have had no impact on emissions at all, known as being ‘phantom credits’.

While Verra denied this and insisted there was a misunderstanding on the part of those saying there was a problem with the credits, there is always going to be concern about credits based on what ‘might have been’. Avoided deforestation credits, for example, rely on the project developer setting a baseline on what would have been done if the credits weren’t sold to protect the forest.

Gold Standard, another independent verification group, said in a statement: “It is very difficult to set a defensible baseline of deforestation rates, and therefore emissions, to effectively measure and guarantee the causality and quantity of CO2 reduction. These activities also have difficulty guarding against ‘leakage’, where trees elsewhere are cut down instead. These issues have been a concern in carbon markets since their beginnings. Gold Standard took the decision not to issue REDD+ credits over a decade ago.”

For the voluntary carbon markets to continue to grow, there will have to be far wider education about methodologies and baselines around carbon credits, and greater transparency. Purchasers will be asked which credits they are using and why, and that could become a strategy at risk of accusations of greenwash.

Not only is there a difference between credits generated under mandatory frameworks like the CDM (in the process of being replaced with the Paris Agreement-based Sustainable Development Mechanism) and those generated for the voluntary markets, but there is just as much difference among the available range of voluntary market credits, how they are generated and, of course, whether or not they are verified to a specific standard and by an accredited independent party.

Industry and the carbon markets are still struggling with the extent to which credits should be used to offset emissions and whether or not their use undermines the need to actively reduce emissions, resulting in accusations of greenwash. That creates challenges in understanding just how credible, or not, a company’s net-zero transition plans are.

High integrity credit supply is outstripping demand

The projections in the report demonstrate accelerating demand and a tightening of supply. Where previous projections had shown demand for credits starting to outstrip supply in 2024, data from 2021 shows this may happen even earlier for some classes of credits, thereby driving up demand particularly for nature-based credits.

Anders Porsborg-Smith, Managing Director and Partner, BCG, said: “As the market continues to grow at an accelerated pace, it will become increasingly important to grow with integrity through a high-grading of credit quality. Similarly, as the carbon market infrastructure becomes more complex with competing standards, compliance regulations, and Article 6 – it will be important to ensure this does not create uncertainty and inhibit long-term investment appetite in the carbon markets.”

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