In Short : Sluggish trading in carbon credits is impeding global decarbonization efforts, hindering progress toward a more sustainable future. The lackluster market activity poses challenges to incentivizing and scaling up initiatives aimed at reducing carbon emissions worldwide.
In Detail : Futures fall 90% as effectiveness of carbon offsets questioned
TOKYO/HOUSTON, U.S. : Growth in the trading of emissions credits has hit a snag, with the effectiveness of carbon offset projects, such as forest conservation, being called into question and demand for carbon offsets plunging.
As airlines and other major buyers of emissions credits have begun to shun the market, carbon credit futures have fallen 90% from their peak, making it difficult for the financial instrument to play a major role in global decarbonization.
In October, Shell CEO Wael Sawan caused a stir when he said the oil major had given up a plan to spend $100 million a year on carbon offsets. The British company used to buy carbon credits in private, voluntary markets to offset greenhouse gas emissions generated from its production and transportation of liquefied natural gas before selling the fuel to environment-conscious customers. It had planned to purchase credits worth 120 million tonnes of carbon dioxide equivalent annually through 2030.
There are two types of emissions trading, one led by public entities like the European Union and the other involving credits issued by private project developers. If a business has a cap imposed on it by a public authority, it is required to buy an allowance from legally mandated programs to offset emissions in excess of the ceiling. Companies that have set voluntary emissions reduction targets use private credits to meet their goals.
Shell and other companies have decided not to use private credits because of questions raised about their effectiveness. Carbon credit futures traded on the Chicago Mercantile Exchange have plunged in anticipation of weaker demand, with offset futures that cover airlines’ emissions hitting a post-listing low in November.
Private credits often involve nature-based offsets, such as forest conservation projects. Developers of projects issue carbon credits once their environmental benefits are vouched by private certification bodies. A group of experts, including a University of Cambridge professor, however, recently found that only 6% of such credits had delivered the promised emissions savings, after examining 18 major forest conservation projects.
Carbon credit trading in private markets is still small, totaling $1.9 billion in 2022, equal to less than 1% of the transactions on public emissions trading systems. But private trading had been seen as a complement to the public programs.
While the 2015 Paris Agreement, an international climate treaty, aims to limit the rise in average global temperature to 1.5 C above preindustrial levels, the goal will be difficult to achieve unless use of inexpensive, readily accessible private credits increases, according to experts.
But many businesses have begun to question the effectiveness of private credits in curbing global warming. Climate activists have long urged companies to cut emissions on their own initiative rather than relying on carbon offsets. Some companies have clearly begun to worry about the reputational risk of being associated with credits of questionable quality.
U.S. research specialist Carbon Direct forecasts that issuances of private credits will fall 5% this year from a year earlier. As aviation and energy companies have begun to hold off on purchases, developers appear to be cutting back on credit issuance, or suspending projects, a move that could have a serious impact on global decarbonization efforts.
Yet interest in high-quality carbon credits backed by advanced technologies remains strong among potential buyers. Such technologies include a process known as direct air capture with carbon storage, or DACCS, which collects carbon dioxide from the air for storage underground. But those instruments are expensive: At more than $1,000 per CO2-equivalent tonne, DACCS-based credits cost 138 times more than those based on forest conservation.
If high-quality credits become available at low cost, companies will have more options to pursue emissions targets. But to attract the funds required to make their development possible, carbon credits must inspire investor confidence, and mechanisms to assess their quality must be improved.