Carbon Offsets Attract Growing Scrutiny

The voluntary carbon market is a fast growing beast, and that rapid growth has brought scrutiny that has recently grown much worse. Worth some $2 billion in 2021, industry watchers forecast the sector could balloon up to $40 billion by 2030. Yet a recent expose in the Guardian newspaper cites scientific studies that claim up to 95% of carbon avoidance projects verified by leading voluntary carbon credit certification provider Verra do not offer real emissions reductions, especially those associated with deforestation projects. This is a potentially big problem and public relations nightmare for European oil majors that plan to rely heavily on the voluntary carbon markets to meet their scope 1-3 emission targets.

Oil companies are among the big buyers of offsets. Shell has set a rough target of using VCM credits for roughly 120 million tons CO2 equivalent by 2030 for "unavoidable scope 3 emissions from our customers, and, in limited volumes, our scope 1 and 2 emissions from our own operations." A Shell spokesman told Energy Intelligence "none of the projects [verified by Verra and under scrutiny] are ones in which Shell has had any involvement or made any investment." Shell "has also made some tough decisions, pulling out of projects where we could not agree with others involved on issues of quality. We expect this will continue as we develop an increasingly robust portfolio that we are proud of and that meets our customers’ needs and expectations."

Norway's Equinor, which plans to use REDD+ credits for a small percentage of its offset portfolio, told Energy Intelligence last week that it has "established a set of internal principles for responsible use of offsets. And to ensure quality in the credits we use, we conduct rigorous internal assessments. We are committed to purchasing only high-quality credits which includes credits from selected REDD + projects. A minority of REDD+ projects achieve what we consider an acceptable rating, which informs our strong focus on high-quality."
REDD+ refers to Reducing Emissions from Deforestation and Forest Degradation and captures other forestry-related projects that offer benefits for the climate. BP and TotalEnergies declined to comment when contacted last week.

Criticisms and Rebuttal

The article in the Guardian referenced three scientific studies conducted over the period 2020-23, each claiming that Verra used inaccurate or overly optimistic assumptions when calculating deforestation rates and therefore overstated the number of carbon credits these projects should have been awarded. Verra, which has certified more than 1 billion carbon credits since 2009, said the studies were wrong because they used "synthetic controls or similar methods that do not account for project-specific factors that cause deforestation. As a result, these studies massively miscalculate the impact of REDD+ projects."

Verra says "synthetic controls compare a project to a control scenario based on a set of variables that impact deforestation, known as covariates, whereas Verra’s approach for REDD+ projects compares them to real areas," adding that "synthetic controls are used effectively by Verra for certain types of projects, such as Improved Forest Management in North America. However, this approach is not suitable for REDD+ projects because of the difficulty in finding points that match inside and outside the project area at the start of the project."

A recent study from Shell and consultancy BCG found that 91% of respondents to a survey of carbon credit buyers found monitoring, reporting and verification (MRV) of voluntary carbon credits was in their top three requirements. Nonetheless, some 44% of respondents also said concern over the quality of MRV for projects was one of their biggest concerns. "I think that we need urgently to regulate the voluntary carbon markets to generate impactful credits rather than facilitating greenwashing," Roberta Boscolo, lead climate and energy analyst at the World Meteorological Organization, tells Energy Intelligence.

Mark Preston Aragones, policy manager at environmental NGO Bellona Europa, tells Energy Intelligence that the VCM system "is incentivized to produce the highest amount of credits with the smallest amount of money," adding "existing VCM credits are extremely cheap, in the $10/ton range, compared to how much it actually would cost to either displace fossil fuels, abate fossil fuel emissions, or balance out residual emissions, which are closer to the $100/ton range." The risk of cheap credits is that you get what you pay for, namely questionable real-world carbon emission reductions, environmentalists say.

Removal vs. Avoidance

As scrutiny rises over the growing voluntary carbon market sector, carbon credit buyers are shifting their purchases toward carbon removal projects such as direct air capture and biomass with carbon capture and storage rather than avoidance projects such as deforestation and renewables. However, avoidance projects still dominate the market, accounting for roughly 80%. Shell and BCG say this level could drop to 65% by 2030, with removal credits hitting 35% of the market "driven by maturing technologies and methods, improving affordability and net-zero requirements."

"I don’t believe that the oil and gas industry will be able to avoid allegations of greenwashing until they lay down a serious plan to minimize the extraction of fossil fuels, abate the emissions from any fossil fuels they do extract, and agree to balance out any remaining emissions, including from scope 3, with permanent removal of CO2 from the atmosphere," says Bellona's Aragones.

Jason Eden is a reporter at Energy Intelligence specializing in the energy transition. A version of this article originally ran in EI New Energy.